Bootstrapping: The Advantages and Disadvantages to Your Startup

Posted by Mo Rassolli on Jul 26, 2021 08:08: AM
Mo Rassolli

It takes money to get a company off the ground. The very reason why many entrepreneurs are focused on getting funded by investors.

But if startup founders choose to bootstrap their business, are they at a disadvantage or not?

This article aims to guide young and starting entrepreneurs and help them by giving them tips on how to bootstrap their business.

Bootstrapping

Bootstrapping is starting your business from the ground up with nothing but your funds and, perhaps, the initial sales revenues. This is accomplished without the use of venture capital or even significant angel investment

With bootstrapping, you won't have to pay interest on a loan or divide potential profits with other investors if you bootstrap your business.

However, there are still some disadvantages involved.

When personal funds are used to launch a new business, you risk losing both your time and money.

However, if your startup succeeds, you will save money and be able to recruit investors. As a result, your startup will reach new heights. It will also enable you to develop fresh market ideas and demonstrate innovative thinking.

Bootstrapping Funding Stages

A bootstrapped business usually goes through three rounds of funding:

Beginning Stage

This stage usually begins with personal savings, borrowed or investment money from your friends and family, or as a side business—you keep your day job while starting the firm.

Customer-Funded Stage

In this stage, your customers' money is used to keep the business running and, eventually, funds growth. Growth will accelerate after operating expenses are met.

Credit Stage

During this stage, you must concentrate on obtaining funds for specific activities such as upgrading equipment, hiring staff and more. For expansion, you take out loans or may even seek venture financing at this point.

Advantages of Bootstrapping

There are various advantages of bootstrapping. These includes:

Low Cost of Entry

Bootstrapping is low-cost, and working with your own money necessitates extreme efficiency. You become more aware of the costs associated with the day-to-day operation of your business and begin to manage it on a "lean" business model.

Ownership of Your Business

As a solo entrepreneur, bootstrapping means keeping 100% ownership of your company. Even if you have a co-founder, your part of the equity will be far more significant than if you go through numerous funding rounds and keep diluting your ownership. 

Control Over The Company 

Since bootstrapping doesn't involve outside funding from investors, you won't have to deal with external pressure and responsibility to satisfy other people's interests. 

If you want to test an alternative product design or business idea, you won't have to worry about getting permission from anyone else. This allows you to concentrate more on laying a solid foundation and perfecting operations through trials rather than worrying about mistakes, leading to more sustainable growth.

Being Forced to Make Things Work 

You're your boss, and you have to figure things out. You're in charge of making all crucial decisions about your startup's operations and growth. This can ensure that your startup moves in the direction you desire, according to your vision and cultural values.

Disadvantages of Bootstrapping

Although there are many benefits regarding bootstrapping, there are also some disadvantages.

These disadvantages include:

Risk of Failure

Although bootstrapping gives you more control and gives you ownership of the earnings, it also comes with a higher chance of losses and failures

Some bootstrapped businesses fail because of a lack of revenue: profits are insufficient to cover all costs.

Starting a business frequently means putting in long hours to keep it running, let alone that there is often no monetary reward for your efforts.

Because hiring employees is not frequently an option, all problems are your responsibility; consequently, solutions are restricted to your abilities or the abilities of friends and relatives who may be ready to assist you.

Cash Flow Issues

If your company doesn't generate the capital it needs to develop products and grow, problems can arise due to a lack of money and cash flow.

You can create a great, much-needed product or service that people adore.

However, if you’re in a crunch for only a month or two, you may never achieve your startup's full potential. To keep your startup running, smart budgeting will be required.

If your budgeting indicates that outside capital is necessary, then be prepared to make a pitch deck with 10 to 15 slides with your story ready to persuade investors swiftly. 

Stress

When unforeseen problems happen, your ability to handle stressful situations is tested regularly.

If you plan to finance your startup with debt from others, such as family and friends, you'll need to develop skills in dealing with stressful situations. Understanding what is required of you and conveying it clearly to others might help you manage the stress.

Staying Focused 

Staying focused is required to maintain market leadership. 

To stay ahead of the competition, you must keep innovating in all aspects of your product line. Otherwise, your startup will quickly become obsolete.

Bootstrapping Tips

Here are six bootstrapping tips to help you establish and build your startup.

Build key partnerships

It will help your startup obtain credibility if you align yourself with a well-known brand

Choose a business that you're enthusiastic about, preferably one with complimentary services so that you may refer business to one another. You could certainly create a referral fee on both sides to provide a financial incentive in addition to the new business partnerships that each of you will bring.

Additionally, when you decide to hire employees, you should build key partnerships with them.

As your employees are your business's greatest asset, when they're satisfied and productive, your startup thrives. 

Make your team members a high-priority item in your budget. When your employees know they'll be rewarded for good work, they'll put more effort to help your startup succeed.

If your startup has a solid financial year, your employees should enjoy an excellent year, too, primarily if they worked long hours to make it happen.

Do your market research

Conducting market research and learning all about the dynamics that your business venture will be involved in reduces the risk of failure. 

You need to know who your competitors are and what they're doing to keep their business on track. It's also crucial to grasp what methods they're employing today and what commercial tactics they're likely to implement in the future to stay up with the ever-changing market.

According to Michele Levy, keeping track of who your rivals are, what people are saying about them, and what they are telling themselves can help you differentiate your business and stay ahead of trends that could affect your business.  

Be creative with branding and marketing

People build opinions of companies based on what they say and do, how they perceive and think of them, and how you assess their decisions and course of action. It serves as a general indicator of whether or not they will like your brand.

The goal is to take steps in branding and marketing (while being creative) to ensure that your target audience has the best possible impression.

Presell the product

For both new and existing businesses, preselling is an effective bootstrapping strategy. Sales not only indicate people's interest in your new product, but they also serve as a source of funding for its development.

Get your name out by getting outside

When you're bootstrapping, your connections can make a big difference. 

Great connections can be your most vital resource when you don't have significant investors backing you up. Begin networking to identify possible clients, collaborators, mentors, and others who can assist you in spreading the word about your startup. 

Let your customers create your buzz

Allow your customers to spread the word about your product or service and sell it for you.

According to Zendesk, after one unpleasant experience, 50% of customers will switch to a competitor. When more than one unfavourable encounter occurs, the percentage rises to 80%. 

This is why treating your customer nicely is in your best interests. Your customers are the ones who will spread the word about you to their friends and on the internet.

Go beyond creating an excellent product and giving great service. Give your customers stellar assistance, and build great relationships to make them want to come back for more and recommend your business to their friends and family.

Successful Bootstrapped Companies

Bootstrapping is part of many business owners' success stories.

Here are examples of companies that made it big with bootstrapping.

GitHub

GitHub, a web-based hosting service for version control using git, was founded in 2007 by Tom Preston-Werner, Chris Wanstrath, and PJ Hyett. It's mostly used in computer code.

GitHub began as a weekend project after Tom Preston-Werner presented his concept for a git hosting site to his co-founders at a local programming group.

The goal was to create a git hub where users could share code and quickly learn how to use git. The company had been operating on its own for four years before raising funds.

GoPro

When Nick Woodman's entertainment and promotions website FunBug went bankrupt in 2001, he took a surfing trip to Australia and Indonesia to clear his thoughts. Inspiration struck when he noticed that the camera the surfers were wrapping around their wrists to film their adventures kept breaking loose. 

Woodman founded GoPro (formerly known as Woodman Labs) in 2002 with only his savings and a loan from his mother. The company was on its own until 2012, when Foxconn, a Taiwanese electronics firm, invested. 

Kayako

Kayako, a help desk and customer service software, enables organisations to be more efficient and loyal to their customers.

Varun Shoor started Kayako in 2001 in Jalandhar, India. The company's headquarters were then relocated to London, England.

Kayako hasn't received any outside funding, unusual for a Software as a Service (SaaS) company. It now has over 131,000 customers.

Craigslist

Craig Newmark began his eponymous classified ad site as an email newsletter in 1995 to keep friends informed about intriguing events in the San Francisco area.

People began requesting him to post jobs and offer stuff for sale as word spread. By 1997, Craigslist had reached a million monthly page visits, but Newmark kept it as a side project and didn't include it until two years later. He didn't take any outside money until 2004primarily when eBay bought a 28% stake in the company for $32 million.

Summary

Bootstrapping is the process of starting a self-sustaining business, marketing it, and growing with limited resources or capital. It remains to be an attractive option for startup entrepreneurs.

Although it's not easy to do, and entrepreneurs who built their businesses from the ground up are rare, it's gratifying. 

Just be aware of the risks, apply the tips suggested in this guide, and you may pull it off and get various benefits. 

If you want to learn more about bootstrapping your business or have any questions about your startup, you can make an appointment with us to learn more. 

Rest assured that someone from our team will get in touch with you to answer all your questions.