What is Bootstrapping?
Bootstrapping refers to the process where an entrepreneur starts a company with minimal capital, relying on personal finances or the company’s operating revenues rather than outside investments. It involves establishing and building a company using limited resources without seeking significant external funding.
Key points:
- Bootstrapping is the process of founding and running a company using only personal finances or operating revenue.
- It allows entrepreneurs to maintain more control over their companies but can increase financial strain.
- Entrepreneurs can bootstrap by cutting costs, personally financing operations, scaling back operations, or finding creative short-term financing solutions.
- The term also refers to a method used to calculate the zero-coupon yield curve from market figures for certain bonds.
- Notable companies like Amazon, GoPro, and Facebook started with bootstrapped approaches, demonstrating that successful businesses can emerge from humble beginnings.
Understanding Bootstrapping
Bootstrapping a company occurs when a business owner starts a company from the ground up with little to no external assets. Founders typically rely on personal savings, sweat equity, lean operations, quick inventory turnover, and a cash runway to achieve success. For example, a bootstrapped company may take preorders for its product, using the funds generated from the orders to build and deliver the product.
Compared to using venture capital, bootstrapping can be beneficial because the entrepreneur maintains control over all decisions. However, this form of financing can place significant financial risk on the entrepreneur and may not provide enough investment for the company to grow at a reasonable rate.
Bootstrapping is contrasted with starting a company by raising capital through angel investors or venture capital firms. Individuals who use these means typically have a proven track record or an idea that others find promising and profitable, with the potential for large returns.
In investment finance, bootstrapping is a method used to build a spot rate curve for a zero-coupon bond. This methodology fills in the gaps between yields for Treasury securities or Treasury coupon strips. For example, since T-bills offered by the government are not available for every period, the bootstrapping method fills in the missing figures to derive the yield curve. The bootstrap method uses interpolation to determine the yields of Treasury zero-coupon securities across various maturities.
How to Bootstrap a Business
Bootstrapping a business involves several key steps. Below, we outline these steps to guide entrepreneurs through the process.
Assess Bootstrapping Strategies Early
Before deciding to bootstrap a startup, entrepreneurs should evaluate whether this approach is viable for their business model. Bootstrapping may not be practical for businesses requiring substantial initial capital investments. Additionally, companies with slow inventory turnover might find their cash flow tied up for extended periods, complicating the bootstrapping process.
Create a Business Plan
If bootstrapping appears feasible, the next step is to develop a comprehensive business plan. This plan should include a detailed financial budget projecting cash inflows and outflows over the next few years. Entrepreneurs should also consider how much capital needs to be bootstrapped at different stages of the company’s growth.
Develop a Revenue Retention Strategy
A crucial element of bootstrapping is determining how revenue will be reinvested in the business. During the startup phase, the company may rely entirely on bootstrapped funds until it starts generating revenue. Entrepreneurs need to decide in advance how to allocate this revenue, whether it will be used to fuel business growth or to reimburse initial investments. The primary risk lies in withdrawing cash too early, potentially stunting the company’s development and increasing the risk of financial loss for both the business and the owner.
Resource Origins
To successfully bootstrap a business, owners must determine their resources and the bootstrapping strategies they plan to employ. Potential options include:
- Personal Savings – Using their own cash.
- Personal Line of Credit – Leveraging credit options.
- Time Investment – Dedicating personal time to save capital.
Owners may also need to adjust their business practices to support growth during this period.
It’s important to be aware of the drawbacks associated with each option. For instance, personal capital might be at risk, time invested cannot be recuperated, and limited initial resources could hinder the company’s growth.
Bootstrapping Strategies
Bootstrapping a startup involves various strategies to secure temporary resources until the business becomes self-sustaining. The following are some common strategies.
Contribute Personal Equity
Founders often provide initial capital by investing their own money. This personal equity is crucial in the early stages and may be necessary at different points of growth, depending on the industry and business strategy.
Incur Personal Debt
If founders lack sufficient personal funds, they might have to take out personal loans to finance the business. Unlike the company, founders can often secure loans with better terms depending on their personal financial history. However, this method puts the founder at risk of personal liability and potential asset seizure if they defaulted on the loan.
Cost-Cutting
Another bootstrapping strategy is to minimise expenses. For example, a founder might personally handle deliveries to save on shipping costs. This approach often involves trading time for money, as the founder invests more personal effort to reduce financial outlays.
Build New Business Relationships
Startups may seek temporary financing from third parties or investors. Short-term agreements, such as selling stock or issuing debt for quick returns, can provide necessary funds. This method involves some risk for the third party but less than long-term investments without clear repayment terms.
Streamlined Business Operations
Temporarily restricting business activities can also conserve resources. Strategies include:
- Proceeding with production only when a client has fully paid their job order.
- Selling within a limited geographical area to reduce shipping costs (e.g. a South East Queensland-based company taking orders only from residents of Brisbane, the Sunshine Coast, Gold Coast, and Ipswich).
- Offering a small range of products until the company can afford to expand.
Company founders must set strategic milestones to determine when to expand operations gradually.
Advantages and Disadvantages of Bootstrapping
Bootstrapping may be a way to add more working capital for your business, but there are factors to weigh in before you ever pull that trigger.
Advantages
In a bootstrapped company, the founders maintain full control over the company’s direction and decision-making, and it also avoids the need to give up equity to external investors.
Even if there are investors willing to help, entrepreneurs are not beholden to their demands or repayment schedules. This gives them the leeway to build a culture of resource management and cost-consciousness.
A successful bootstrapped business can achieve profitability sooner without the pressure to scale rapidly.
Disadvantages
A bootstrapped company may face limitations in terms of resources, hindering rapid expansion. Without significant external funding, growth may be slower compared to well-funded counterparts, as the company will be challenged to have enough funds for moves such as an upscaled operation.
Entrepreneurs running a bootstrapped operation will have to personally bear the financial risk to their savings or assets.
Examples of Successful Bootstrapping
Several Australian companies have successfully bootstrapped their operations to achieve significant growth. The following are a few examples.
Atlassian
Founded by Mike Cannon-Brookes and Scott Farquhar, Atlassian started in a garage, with a $10,000 credit-card debt as starting capital. They would only start accepting outside finances in 2010 with US$60 million secondary capital from Accel Partners. The company has gone on to become a global leader in collaboration and productivity software.
Canva
Founded by Melanie Perkins, Cliff Obrecht, and Cameron Adams, Canva began as a bootstrapped startup in 2013. It is now a unicorn company valued at billions of dollars, offering a popular graphic design platform.
Campaign Monitor
Co-founded by Ben Richardson and David Greiner, Sydney-based Campaign Monitor initially operated without external funding. A $270-million infusion from American VC firm Insight Venture Partners in 2014 gave it further power to grow. It has since become a successful player in the email marketing industry, with over 100,000 clients in 170 countries.
Envato
Married couple Collis and Cyan Ta’eed, and Jun Rung bootstrapped Envato, an online marketplace for creative assets, in 2006 using $90,000 from family funds, sponsors, and loans, then ran the operation from a garage at Collis’ parents-in-law’s home. The company has grown to serve millions of customers worldwide, capped off with a May 2024 sale to Shutterstock for $375.2m cash.
SitePoint
Opened by Mark Harbottle and Matt Mickiewicz, SitePoint started as a bootstrapped platform for web developers. It later expanded into various web-related services and publications.
FAQs
Is bootstrapping bad?
Bootstrapping is not inherently bad, but it can foster resilience and discipline within a company. However, it may limit rapid expansion compared to businesses that secure significant funding. The approach requires careful planning and resource allocation to ensure sustainable growth.
Is bootstrapping sustainable?
Yes, bootstrapping can be sustainable. When executed effectively, it allows businesses to maintain control over their operations and finances. However, it requires a strategic approach and a willingness to adapt to market changes.
Conclusion
Bootstrapping is a viable and pragmatic approach to building and growing a business in Australia. By carefully managing resources, focusing on profitability, and staying true to their vision, entrepreneurs can achieve success while retaining control and independence. While bootstrapping may come with its challenges, the stories of successful Australian companies that have chosen this path demonstrate its potential for long-term growth and sustainability.
DISCLAIMER: This article is for informational purposes only and is not intended to serve as official business advice. AVANTE PARTNERS has no business relationships with any company and does not endorse or disparage bootstrapping as a sound business practice. Please consult your business coach and finance adviser.
