Raising funds is sometimes one of the most significant hurdles faced by early stage startups. To circumvent this issue, some startups choose to self-fund their ventures. This process is known as bootstrapping. Bootstrapping is a term that refers to the process of running a business entirely with personal savings, including borrowed or invested funds from family or friends, as well as revenue from initial sales. Self-funded firms do not rely on traditional sources of finance, such as investor backing, crowdfunding, or bank loans.

Bootstrapping, though it provides more freedom of execution, increases financial risk among the founders. It can be one of the numerous impediments to the success of a startup. In bootstrapping, entrepreneurs are more likely to exercise complete control over all facets of the firm, including but not limited to sales, marketing, and operations. However, it also means that the startup won’t have the expert counsel of investors.

Bootstrapping has its own share of disadvantages. It might make it more difficult for a corporation to secure backing from reputable investors, not just in terms of money, but also in terms of other facilities like infrastructure, network, etc. In this article, we’ll deep dive into bootstrapping and understand its merits and demerits to startups.

Merits of Bootstrapping

• It allows entrepreneurs to keep complete control of their company. When investors back a company, they do so in exchange for a share of the company’s ownership. Bootstrapping allows founders to maintain complete ownership of their company’s stock.
• It gives a sense of achievement. For some entrepreneurs, constructing something from the ground up without the assistance of others is a reward in and of itself.
• It keeps the direction in the hands of the owner. Taking on outside money entails accepting external pressure and responsibility to meet the needs of those investors. While traditional funding models have solutions for this, bootstrapping allows business owners to keep complete artistic autonomy and control over decisions.
• With all eggs in one basket, it forces the founders to perform well at any cost. Moreover, bootstrapping also ensures that the founders spend their funds wisely. In general, bootstrapped teams are good at executing large scale projects on a shoestring budget.

Demerits of Bootstrapping

• Self-funded enterprises are more likely to run out of money and struggle to scale as their needs grow. This can make it difficult for a startup to attain its full potential.
• It restricts resources and opportunities. Traditional funding approaches unleash networking chances with top-level aid, such as board members, shareholders, and influencers, in addition to bigger amounts of funds. When you start a business on your own, you have fewer resources and opportunities.
• It necessitates a lot of planning. Self-financing entrepreneurs must be vigilant about keeping their records in order, lest problems surface later.
• It takes a lot of effort. Bootstrapping entrepreneurs must work harder and take on more duties in the beginning because they may have limited resources and connections. For some people, the extra effort may be well worth it.

Should You Bootstrap?

The venture capital industry exploded in popularity as a consequence of a few unicorns and fantastic success stories originating from these sectors. Suddenly, there was too much money chasing too few brilliant ideas, resulting in the overfunding of several enterprises. Certain entrepreneurs returned investor’s cash, saying that the money received was in excess, and not needed for the current milestones. Certain individuals continued along the road of excessive spending without accomplishing anything until they crashed and burned.

In hindsight, many of those overfunded enterprises might have survived as minor operators in their area, with earnings sufficient to keep the founders happy and affluent, transitioning into lifestyle businesses. However, these returns were inadequate to justify their massive investment, and they were obliged to die an expensive death.

Building a business with funding or via bootstrapping, both has its pros and cons. However, one of these, or a hybrid of both will be optimal for a startup. How does a startup decide what’s best for them?

In general, a startup should choose to bootstrap in its early stages, till it reaches a critical stage, i.e. has a clear product vision, has evangelists who love your incomplete solution, etc. Roping in investors at an early stage would mean loss of significant equity, which will prove too costly in the future. Onboarding investors after significant progress would mean that the startup can raise funds at higher valuation and reduce loss of equity ownership.

Moreover, investor’s expertise also becomes invaluable in the later stages of startup, i.e. scaling, early customers, etc. Investors bring in their network, experience of industry, etc. to the team. Their counsel would prevent startups from committing any costly mistakes. This means that adding investors after significant progress from ideation stages would be valuable for a startup.

However, it’s not necessary for every startup to follow the same approach. For example, a startup working on research might need funds from its early stages. Likewise, for a software startup with limited scalability, they might not need funds even at a late stage. The optimal choice for every startup will vary depending on their requirements and their end goal. 

In the Final Analysis

Though funding a startup via bootstrapping provides more autonomy to the founders, it might not always be the best choice. It’s possible that bootstrapping will constrain the rate of growth of the startup. And, if the market is highly competitive, the startup might even lose their customer base and run out of business sooner than imagined. 

In general, a startup should try to strike a balance between bootstrapping and fundraising. Bootstrapping in the early stages reduces loss of equity, while venture funding in the later stages will give enough resources and expertise to face the competition head on and achieve your milestones.  

However, this approach may not work for every startup. Every startup has different funding needs, and bootstrapping may not always be possible. A startup should spend time to decide the best course of action for their needs and plan their course of action accordingly.