An Introduction to Bootstrapping

In today's fast-paced and dynamic business landscape, the media spotlight often shines on companies that secure massive capital raises, making headlines and sparking envy among aspiring entrepreneurs. However, it's important for startup founders to understand that not all businesses are destined for venture capital, and raising external funds may not align with every founder's vision or business strategy. As the renowned investor and Shark Tank personality, Mark Cuban aptly says, "raising venture capital isn't an accomplishment; it is an obligation to your investors." In fact, avoiding the obligation and oversight that comes with outside capital is one of the primary reason that founders look to bootstrapping as a compelling alternative for their businesses.

Bootstrapping is a unique and empowering approach to building a company from the ground up without the help of outside funding. Unlike businesses that seek external funding, bootstrapping involves utilizing your own hard work and creativity to build and grow your new venture. By maintaining complete control and avoiding the need to work with external investors, bootstrapped entrepreneurs can chart their own course and carve a unique path to success. This control means a founder can set their own pace, take the time needed to build a solid foundation, and make informed decisions without the anxiety of meeting investor expectations or facing abrupt changes in direction.

Moreover, bootstrapping nurtures a unique connection between founders and their ventures. By investing personal funds, sweat equity, and endless hours, entrepreneurs become intimately invested in the success of their businesses. This deep sense of ownership fosters unwavering dedication, as they are not just building a business but creating a legacy they can be proud of.

In this article, we will delve deep into the practicalities of bootstrapping a business. We will explore effective strategies all early stage companies should consider, success stories of prominent bootstrapped companies that have found incredible success, and a thorough comparison between bootstrapping and venture capital ("VC") funding.

Should Every Startup Consider Venture Capital?

In a recent discussion on the Cashing Out podcast with 30-year software industry veteran, Greg Head, he says "Venture capital can be a great way to grow your business, but it's important to make sure that you're ready for it. You need to have a clear business plan and a strong team in place. You also need to be prepared to give up some control of your company." So before diving into the world of bootstrapped startups, let's first understand the reasons to consider venture capital as a funding source.

Pros of Raising Venture Capital

• Injection of Capital: Venture capital funding provides startups with the financial resources needed to scale rapidly.

• Expertise and Network: VCs often bring valuable expertise and industry connections to the table, helping startups navigate challenges and grow.

• Accelerated Growth: With ample capital and support, venture-backed companies can achieve fast-paced growth and market dominance.

Cons of Raising Venture Capital

• Relentless Pursuit of Growth: Instead of a more steady approach to profitable and sustainable growth, VC-backed companies are traditionally focused on extreme revenue growth at all cost. This approach can lead to businesses with oversized expenses that limit success if immediate success isn't found.

• Loss of Control: Accepting venture capital means ceding some degree of control to the investors, as they become stakeholders in the business.

• Investor Pressure: Venture capitalists expect high returns on their investments and may exert pressure on the company's direction and decision-making. This can be an issue during the early growth stages of a business, but also as an opportunity for exit arrives.

• Dilution of Ownership: As more rounds of funding occur, the founder's ownership stake will decrease as equity is distributed among new investors. This dilution becomes especially painful at exit, as significant portions of the financial upside is paid to the investors that traditionally hold preferred shares in the business.

How To Bootstrap A Startup

At its core, bootstrapping embodies the entrepreneurial spirit of self-reliance and resilience. Founders who choose this path harness their creativity, resourcefulness, and relentless work ethic to grow their businesses organically. Instead of relying on injections of capital from investors, bootstrappers rely on their ability to innovate, adapt, and seize opportunities in their respective industries.

The bootstrapping journey may not always be smooth sailing, but it allows founders to navigate their ventures through their own convictions and principles, free from external pressures or investor demands. However, one of the biggest open questions for a startup founder to address, is how will their new venture be funded. Traditionally, there are five areas of focus and financial opportunity to focus on when building your new company without the help of outside capital.

Low Operating Expense:

One of the most crucial aspects of bootstrapping is cutting unnecessary costs. Look for creative ways to save money, just like Craig Newmark did when starting Craigslist. By initially operating the platform as a simple email list and side project, he avoided high development costs and managed to bootstrap Craigslist into the global phenomenon it is today.

Owner Financing:

Nick Woodman's entrepreneurial journey is a shining example of owner-financed bootstrapping at its finest. After facing the setback of his entertainment website, FunBug, Nick decided to clear his head on a surfing trip to Australia and Indonesia. During this adventure, he observed surfers struggling with cameras attached to their wrists, sparking a brilliant idea. With a renewed entrepreneurial spirt and a $35,000 loan from his mother, Woodman took the leap and founded GoPro (initially known as Woodman Labs) in 2002. He self-funded the San Mateo, California-based business for a decade until 2012, when tech giant Foxconn recognized its potential and invested $200 million. Just two years later, GoPro went public with a staggering $2.96 billion valuation, marking an extraordinary triumph in the world of bootstrapped ventures, as reported by Bloomberg.

Owner Debt:

In some cases, founders opt to take on personal or owner debt instead of seeking outside investment - this can come in the form of credit cards, dipping into personal savings, or using a home as collateral. Without overlooking the personal risk to a founder's credit score, it enables the entrepreneur to maintain complete control of the business without diluting ownership.

Sweat Equity:

Instead of hiring multiple employees, entrepreneurs (especially bootstrappers) often choose to work exceptionally hard, investing their own effort and hours into building the business for months or years. By doing so, they save on payroll expenses, and can use the funds for other critical aspects of growth.

Revenue-Based Financing:

Revenue-based financing (RBF) is a type of financing that allows businesses to access capital without giving up equity or taking on debt. With RBF, businesses receive funding based on their future revenue. This can be a great option for bootstrapping entrepreneurs who want to retain control of their business and avoid the burden of debt.

There are a few things to keep in mind when considering RBF:

1. the amount of funding you can receive will be based on your projected revenue. So, it's important to have a solid business plan and a clear understanding of your market.

2. RBF typically comes with a monthly fee, so you'll need to make sure that you can afford the payments.

Is Bootstrapping The Right Path For My Startup?

There are several pros and cons to consider when deciding whether or not to bootstrap a business.

Pros of Bootstrapping A Business

• Control: Bootstrapped companies are typically 100% owned by the founders, which means that they have complete control over the business.

• Freedom & Flexibility: Bootstrapped businesses are not beholden to investors, which gives the founders more flexibility to build and grow their business as they see fit.

• Less dilution: Bootstrapped companies do not have to give up equity to investors - this means that when a business is sold, the founders are able to capture all of the financial upside of an M&A transaction.

Cons of Bootstrapping A Business

• Limited capital: If the founding team has limited access to capital, it can be extremely difficult to grow the business to a point of real profitability.

• Time commitment: Bootstrapped businesses require a lot of hard work and dedication from the founders, as they must wear many hats and do a lot of the work themselves.

• Risk: Bootstrapped businesses are more personally risky than venture-backed businesses, as they may not be able to find product market fit fast enough to generate paying customers.

The Bootstrapping Playbook

1. Know where your money is coming from. If not from an outside source, how will you access the necessary funds to support you and your business while you're getting it off the ground.

2. Target customers that are willing to buy your service and spend money. As a bootstrapper, you don't have the luxury of burning money in the theme of customer acquisition

3. The product or service should be something that you have experience with, a core and differentiated point of view, or a focused improvement on a product you use or know. Bootstrapping shouldn't be seen as an undefined experiment.

4. Pre-sell. Don't overcommit yourself to build out a full product suite before you know if the market will accept it (product market fit). Understand the customer first, ideally get a paying customer early, and build your product or service with key paying clients in mind.

5. Focus on profitability and cash flows - if you are not making profit by selling your product or service, you have a very limited path to a healthy cash flowing business.

Conclusion

Bootstrapping is a unique and empowering approach to entrepreneurship that allows founders to build and grow businesses on their terms. By using their own resources, creativity, and hard work, bootstrapped entrepreneurs maintain complete control and can focus on long-term sustainability and success.

While bootstrapping is not without its challenges, the rewards of maintaining ownership, making independent decisions, and building a venture on your own terms can be immensely fulfilling. Whether you choose to bootstrap or seek venture capital, understanding the advantages and disadvantages of each path will help you make informed decisions as you embark on your entrepreneurial journey. Ultimately, the key to success lies in finding the approach that aligns with your vision and values as a business owner.