Most of us don't have rich parents who can fund our startup ventures, nor do we have an incredible entrepreneurial track record that allows us to easily raise money from external investors.
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We have to start our businesses with next to nothing, without any external funding.
This exercise is called bootstrapping, and it is a truly amazing entrepreneurial phenomenon.
In simple terms, bootstrapping means you start a business without an infusion of external capital. You scrape by until your cash flow becomes positive.
Everything is done on the cheap. You don't rent office space – you work out of your home. You run up your credit cards to launch the business. You buy pizzas for your web designer friends in order to get them to build out a website for you.
Bootstrappers treat every penny as sacred. In a perfect world, the bootstrapper gets to positive cash flow and, from there, the business takes off.
Let's take a look at the pros and cons of bootstrapping.
Advantages of Bootstrapping
Some key advantages of bootstrapping are:
- No outside investors. Outside investors can be a huge pain for business owners. They may try to influence the direction of the company, often at a detriment to the business. In an even worse case, they may try to take over the company. It's not to say that outside investors are inherently bad, but sometimes it's nice to be able to focus on your business, without any input or pressures from outsiders. Of course, not having investors also means that the entrepreneur gets to take home more in the event of a company exit because he or she doesn't have to share the pie with investors.
- No foolish spending. When you have money, you tend to spend it, even if the purchases don't make sense. The nice thing about bootstrapping is that you don't have excess money to spend so you tend to spend wisely. This financial discipline is great to have, even once the company finally does have excess capital. It will also serve you well in future startups that you pursue.
- Motivation. If other people's money is at stake, you are likely to be less motivated than you are if your own personal money is at risk. A bootstrap entrepreneur runs up his own credit cards to get the business going. If the business fails, all of his personal assets are at risk and he may face the stigma of having had to declare personal bankruptcy. If the bootstrap business doesn't succeed, the entrepreneur faces personal financial ruin in the long run and an inability to live comfortably in the short run. Believe me, bootstrap entrepreneurs are highly motivated to succeed, much more so than their funded counterparts at other startup companies.
Disadvantages of Bootstrapping
Disadvantages of bootstrapping are:
- Pain. I've bootstrapped a company when I had a fairly new wife and kid, and I can tell you that it's very painful to bootstrap. With no external capital, you may not be able to pay yourself enough to eke out a decent living. Money is extremely tight when you bootstrap, and that is no fun at all. Moreover, you can actually ruin your personal finances, if you lose the money you used to bootstrap your company.
- Not Appropriate For Some Businesses. Not all businesses can be bootstrapped. Some businesses simply, by definition, require a large amount of capital to get started.
- Competitive Disadvantages of Bootstrapping. Suppose you are bootstrapping up a business but your main competitor goes out and raises $10 million to compete with you. They will hire tons of staff and invest in marketing while you limp along on your credit cards. You can quickly find yourself out of the race just as the race is getting started. (Mind you, you can still win the race, even if you are bootstrapping. That's happened on countless occasions. Remember that fable about the tortoise and the hare?)
Entrepreneurial Bootstrapping: Key Takeaways
The bottomline on bootstrapping is that it's not for the faint of heart, but if you can pull it off, it's a truly amazing thing. It's the fire of entrepreneurship. You can do amazing things with it, but it's also very easy to get burned.