Bootstrapping Basics: Starting Small, Dreaming Big

Key Takeaways

• Bootstrapping is the process of building a company from the ground up without the assistance of outside capital.

• Prior to the beginning of bootstrapping, founders should determine whether the business model would work for their operations.

• One advantage to bootstrapping is that the startup does not start off owing banks large sums.

In the financial world, those who seek to build a business from the bottom up by themselves are known as “bootstrappers.” Not everyone is cut out for it, yet some must engage out of necessity. But what is bootstrapping? Keep reading for the ins and outs.

What is Bootstrapping?

Bootstrapping is the process of building a company from the ground up without the assistance of outside capital. 

Also called self-funding, bootstrapping is used by startups and small businesses, and is characterized by limited financing sources.

Where Does the Name Originate?

Now that, what is bootstrapping? The term “bootstrapping” originated in the 18th century. Back then, the phrase, “to pull oneself up by one’s bootstraps” referred to tackling an impossible task. At length, it came to refer to something along the lines of, making something out of nothing.

Why Does a Company Bootstrap?

There are various common reasons why a company bootstraps, including:

• Lack of expertise or skills. Often, founders may lack the experience to establish business plans. Or, they may not be skillful at product promotion or developing supplier relationships.
• Unable to raise funding. Some entrepreneurs do not know how to gain financing. Others do not want to search for investors.
• Does not wish to share or spend time with investors. Investors usually provide capital in exchange for an equity stake in the company. They also may require some change in control regarding voting, board membership, finances, and ownership.

How to Bootstrap a Business

There a steps one can take to bootstrap their company, including:

• Plan early. Prior to the beginning of bootstrapping, founders should determine whether the business model would work for their operations. Companies that require a lot of upfront capital may be too much to bootstrap, for example. Also, if inventory turnaround is slow, bootstrapped money could be tied up longer.
• Create a business plan. While it may not be presented to investors early on, a plan will help the founder stay on track financially. It outlines expected cash inflows and outflows.
• Create a revenue plan. The owner must decide early how revenue from customers will be used. Extracting cash too soon could leave the company and owner vulnerable to loss.
• Plan for raising resources. Whether from personal savings, line of credit, or adjusted business practices, the entrepreneur must determine where resources will come from.

What are Different Bootstrapping Strategies?

Varying bootstrapping approaches include:

• Personal equity. With startups, upfront capital is often required. The founder commonly uses their own capital as an initial company investment.
• Take on personal debt. If savings are insufficient, the business owner may need to take out a personal loan. This is risky, as personal assets could be seized.
• Cutting/avoiding costs. Particularly early on, the founder may wish to limit spending. For example, rather than pay for delivery services, the entrepreneur may deliver goods to customers themselves.
• Networking. To help with short-term operations financing, the founder may bring in investors or other third parties.

What are the Stages of Bootstrapping?

Bootstrapping involves different phases, such as:

• Beginner stage. This is when the founder starts out, using savings or money borrowed from family or friends. They may even still be working their main job while beginning their business.
• Customer-funded stage. Now, the business is operating and starts to grow using money from customers. 
• Credit stage. Here, the company takes out loans or seeks venture capital to expand. It will also need to pay for new equipment and staff members and the like.

Advantages and Disadvantages of Bootstrapping 

As with most anything in the business arena, there are benefits and drawbacks to bootstrapping. 

Advantages

1. No business plan required right away. Later, as capital is sought from banks or investors, a strong plan will be necessary.
2. No early debt. Another advantage is that the startup does not start off owing banks large sums.
3. Founder only risking their money. So, should the business fail, the entrepreneur will not wind up having to pay off loans. And if the business succeeds, the owner can save capital and lure investors.
4. Can make decisions independently. The new business owner is not beholden to investors.
5. Attracts future investments. Demonstrating the ability to create a business’s financial foundation independently can bring in venture capital or other investments.

Disadvantages 

1. May be difficult to scale up. Demand could surpass the company’s ability to produce products or services. That could render business growth challenging.
2. Founder assumes all the risks. While this can also be viewed as an advantage, the downside is that there are no investors to share risks.
3. Limited capital. It can be difficult to act on one’s ideas with insufficient resources.
4. Possible mental health issues. It can be very stressful for founders to know they are on their own when inevitable problems arise.

Bootstrapping Examples 

The founder of the adventure camera company GoPro moved back in with his parents to save money to start up his company. These days, GoPro is valued at more than $1.3 billion.

Then there is the e-commerce giant Shopify, which started when the founders of a snowboarding company wanted an improved shopping cart. They commenced to create their own. Shopify went six years with no external funding. Today, it is worth more than $166 billion.

Alternatives to Bootstrapping 

If a business wishes not to bootstrap, there are possible alternatives:

• Loans. There are business loans and startup business loans available, but borrowers must meet credit and other requirements.
• Crowdfunding. While there are several types of crowdfunding, it generally involves asking a large number of individuals to invest in one’s startup.
• Venture capital. A form of private equity, venture capital is employed as a type of financing provided to startups and small businesses.

How to Invest in Venture Capital

Not only can venture capital be used by startups, but people can invest in it for exposure to potentially high-growth startups with prospects for high returns. These are young companies, so there is risk. However, they also tend to be disruptive and innovative.

The leading alternative investment platform, Yieldstreet, has among its broad selection of private-sector offerings a venture capital program. Retail investors are exposed to private companies that are either shaking up sectors or forging new ones. Note that as these companies ramp up commercialization and allow for scale, they typically experience high growth.

In addition to prospectively strong returns, investors in venture capital also achieve all-important portfolio diversification. Diversifying one’s holdings — building a portfolio of varying asset types — can reduce overall risk and even improve returns.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

When starting a business, choosing the best funding path is crucial. Not only can that save time and money, but it could make all the difference, in terms of business success. Many times, companies are forced to engage in bootstrapping. Other times, it is a choice. In any case, there are benefits and drawbacks to bootstrapping.

Alternatives include venture capital, which investors can take positions in for potentially high returns and portfolio diversification.