What is a Bootstrapped Company?
Bootstrapped is a term used to describe a company that has been built from the ground up with little to no outside capital.
While many startup founders seek external funding from venture capital firms or angel investors, others choose to prop themselves up sans investor backing. The term 'bootstrapping' comes from the idea of 'pulling yourself up by your bootstraps' without outside assistance.
Why do founders choose to bootstrap
There are many reasons a founder may choose to bootstrap their company.
Many founders prefer the minimalist approach of operating a bootstrapped company. As they won’t need to account for the views of outside stakeholders, they can freely run their company in any way they see fit. For example, they can follow their own timeline, without needing to wait for investment funding to come in or get the green light from investors.
Some may have no choice but to bootstrap, as they’re unable to get outside funding for whatever reason. While angel funding and VC funding both have their benefits, it can be difficult to secure. What’s more, it often comes with major drawbacks, including relinquishing some company ownership.
Other founders may romanticize the idea of running a bootstrapped company, and want to take a stab at launching one themselves. After all, there are countless rags-to-riches stories about bootstrapped companies. You can probably picture a few yourself — founders eating instant ramen while working 20 hour days from their parents’ garage.
It’s important to keep in mind that while some companies may initially bootstrap, they may later choose to take VC money.
How do bootstrapped companies fund themselves?
Bootstrapped companies typically rely on one or more sources of internal funding to run.
One of the most commonly used sources of internal funding is the founders’ personal finances. In fact, the majority of startups are initially funded by personal finances.
Other options the founders of bootstrapped companies may leverage include taking out a personal loan, relying on company revenue, using sweat equity, sourcing money from family and friends, and keeping overheads to a minimum.
Bootstrapping offers startup founders numerous benefits. Some of the main ones may include:
- The founders can retain 100% ownership of the company.
- The founders can remain in complete control over the direction of the company.
- The company can grow at its own pace, without added outside pressure and intervention from investors and banks.
- It allows a company to minimize debt and reliance on equity financing.
- There are no loan or equity repayments that need to be made to banks or investors, unless the founder took out a personal loan.
There are also several drawbacks to bootstrapping that should be considered. They may include:
- Bootstrapping requires strong discipline and careful budgeting.
- The founders may work long hours to keep the company afloat.
- It may impact founders’ personal lives, as a significant chunk of their personal finances may be needed to fund the business.
- It can be stressful to manage a company without outside funding.
- It may be more difficult to scale a bootstrapped company versus one that has outside funding.
- Bootstrapped companies tend to have fewer stakeholders invested in their survival.
Examples of companies that started by bootstrapping
While companies that secure impressive amounts of VC funding may make the headlines, there are many well-known companies that got their start by bootstrapping.
Some examples of successful companies that were bootstrapped are:
- Tough Mudder
- Burt’s Bees
As you can see, there is no shortage of companies that bootstrapped themselves to success. Their multi-million and -billion dollar turnovers serve as a testament that bootstrapping can be an effective strategy to launch a company.
Of course, business success is never a guarantee — whether external funding is sought or not. As the aforementioned drawbacks show, bootstrapping a company isn’t easy or foolproof. So before doing so yourself, be sure to keep both the benefits and drawbacks of bootstrapping in mind.
You may also like