Bootstrapping: Finance Your Startup From the Ground Up

Lot’s of people tell me that they have great ideas for a startup, but don’t know how to obtain investment funding to get the business off the ground.  Indeed, these days it’s hard to qualify for a bank loan and private equity investors with an open pocket are hard to come by.  Even when money is rolling, investors of all varieties are more likely to invest in startups and businesses that have generated real, hard numbers that verify their business model predictions.

This leaves many startup owners in a catch-22: to startup one requires capital, but to obtain capital one requires business performance data.  Not to fret, for the most part, we all play by the same rules.  The issue isn’t how to obtain private equity funding, but rather how to startup without private equity funding.  This is where bootstrapping your startup comes in.

Bootstrapped startups take whatever money their owners can raise from friends, family, and their own pockets, and use that as the basis for the company’s financial foundation.  It situations where very little money can be raised through the channels, bootstrappers may opt to take on personal credit card debt to help get the company off the ground.  Regardless of how its done, bootstrappers have one common goal: launch the startup and grow it to the point of profit generation for as little money as possible.

For many, getting the company to the point of profit generation is all that is needed - the money made fuels further growth.  For others, bootstrapping is a way to prove the principle concept of the business to a private investor.  Regardless, so long as your idea is well thought out, bootstrapping is a rewarding, challenging, ‘put your money where your mouth is’ means of running your startup.

In a future post, I’ll discuss general tactics a bootstrapped startup owner can employ to help make money go further, but let’s first consider the benefits of bootstrapping:

1. Minimal debt

Taking out a bank loan to fund a startup can be a good way to get up and running, but also decreases the profit margin of the company while the debt is being paid off.  Those bootstrappers that stay out of debt during the startup process, on the other hand, do not have their revenue shackeled by debt.  Those that use credit cards as a source of funding end up spending money only on the essentials.  This means less financial waste and a more efficient bottom line.

2. Does not require giving up a stake in your startup

Startups that receive external, private investment end up giving away large shares of their company as the investors take on the bulk of the financial risk.  Oftentimes, this can even require that the owners give up a controlling stake in the startup!  At best, the investors will be getting a huge piece of the pie (and rightly so), but at worst, your ability to execute will be subject to the whims of investors.  Bootstrapping avoids this conflict by sidestepping the need for external startup capital.

3. A relatively cheap way to obtain a proof of principle for other investors

Let’s be honest - ideas are a dime a dozen.  Granted, private investors are interested in good business ideas, but they are equally interested in your ability to execute the idea.  Startup owners that successfully bootstrap their company to profit have already demonstrated their ability to execute (and on a minimal war chest, to boot).  When the time comes to take your startup to the next level, having started company financing with bootstrapping can do wonders in terms of enticing a private investor to fund your company.   If you can turn profit on a minimal budget, just think of what you can do with private equity funding.

Of course bootstrapped companies operate on the cheap, so growth tends to be a bit slower given marketing budget constraints.  For example, because your marketing tactics are constrained by the amount of money you have at your disposal, bootstrapped startups rarely execute large scale advertising campaigns.  This doesn’t mean you can’t advertise, it just means you’ll have to do so very wisely (a subject we’ll discuss in a future post).  But wisdom and patience can pay off if you’re ensured that the burn rate isn’t so great that you run out of cash before turning a profit.

So don’t let the lack of bank and private equity funding keep you from pursuing your startup dreams.  If you have an idea you believe in and are confident you can pull it off, get it started by bootstrapping the business from the ground up.  If you’re successful, the money will come.

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