June 29, 2023
#BackToBasics
Bootstrapping is a highly effective business starting method for those with the financial means and determination to pursue this startup strategy.
In our previous blog, From Bootstrapping to Bank Loans: Exploring the Best Financing Option for Your Startup, we cover what bootstrapping is and how it differs from other methods of financing a business, namely fundraising, bank loans and crowdfunding.
However, bootstrapping isn’t for every startup. With benefits come risks. In this blog, we’ll outline the benefits of bootstrapping while identifying some of the known risks and how founders can mitigate them.
Benefits of Startup Bootstrapping.
Bootstrapping has proven to be a highly effective strategy, allowing startups to establish a foothold in the market with limited resources. These benefits include.
#1 Low cost.
Bootstrapped startups are often cash-strapped; They don’t have the resource in $$$, knowledge and workforce to do everything they’d like.
While this might appear a disadvantage on the surface, this encourages a working philosophy that borrows from both agile and lean management, allowing the company to make the most of their limited resources.
As a result, bootstrapped startups prioritise revenue generation from the outset and must adopt a customer-centric approach, identifying and satisfying their target market’s needs to generate sustainable growth. This emphasis on profitability ensures a solid foundation for the business and reduces the risk of relying solely on external funding rounds.
#2 Control and flexibility.
Bootstrapping allows founders to avoid the burden of debt (bank loans) or the pressure to meet investors’ expectations (fundraising). By relying on personal savings or revenue generated from initial sales, founders can maintain control over their business without incurring external obligations.
Moreover, because there are no external stakeholders with conflicting interests to appease, decisions can be made quicker. This agility is particularly advantageous in the early stages of a startup when experimentation and pivoting are necessary.
#3 Creativity.
Doing more with less is the bootstrapping founder’s mantra. Because bootstrapped startups often operate under resource constraints, founders are driven to find alternative solutions, think outside the box, and leverage their existing resources in unique ways.
Moreover, the necessity of being resourceful and creative fosters a culture of innovation within the startup. With a shared mindset of finding inventive solutions, team members are encouraged to think critically, collaborate, and contribute their unique perspectives.
This emphasis on creativity and innovation can lead to disruptive business models, differentiated products or services, and a competitive edge in the market.
#4 Investability.
Bootstrapped startups showcase the founders’ self-initiative and entrepreneurial drive. By successfully getting their business off the ground without relying on external funding, bootstrapped founders demonstrate their resourcefulness, determination, and commitment.
Investors often seek entrepreneurs who have proven their ability to navigate challenges and drive initial traction independently. Bootstrapped startups have already demonstrated their potential to generate revenue, acquire customers, and build viable products or services. These early indicators of traction can instil confidence in investors as they see evidence of market demand and the startup’s ability to execute its business model effectively.
Risks of Startup Bootstrapping.
While bootstrapping can be a viable startup strategy, it is important to consider the potential risks involved. These include:
#1 Limited resources.
One of the benefits of bootstrapping is also one of its greatest challenges. With limited resources and cash flow, startups may struggle to fund essential operations, hire skilled talent, or invest in marketing. As a result, a lot hangs on the ingenuity and determination of the founder(s) and early team members to find creative ways to deliver results on the cheap.
#2 Slow growth rate.
Bootstrapped startups often face a slower growth trajectory compared to their venture-funded counterparts. Limited resources can hinder scaling and expansion efforts, making it more challenging to compete with well-funded competitors.
#3 Distributed equity.
Because money is tight and talent expensive, bootstrapping founders often offer equity in the business as a “benefit”. Over time, this leads to equity being largely distributed among employees, making it harder for the business to make decisions and reducing its desirability to investors.
#4 Sweat equity.
Founders who choose to bootstrap their startups must be prepared for personal sacrifices. Launching and growing a business with limited resources requires dedication, long hours, and a willingness to wear multiple hats. Furthermore, founders may need to balance personal finances with professional obligations, as their personal savings may be at stake.
Strategies to mitigate risks and maximise benefits.
In order to navigate the challenges associated with startup bootstrapping, various strategies can be employed to minimise risks and capitalise on the advantages it offers. These include:
#1 Building a solid network.
Networking plays a crucial role in bootstrapping success. Founders should actively seek connections and build relationships within their industry. These connections can lead to strategic partnerships, access to mentorship and advisory support, and potential opportunities for collaboration, funding, or exposure.
#2 Adopting Agile practices.
By adopting agile practices, bootstrapped startups can streamline their product development process, respond quickly to customer feedback, and make informed decisions based on real-time insights. This iterative approach allows them to deliver incremental value, gather early user feedback, and adjust their strategies accordingly. Moreover, the emphasis on cross-functional collaboration and a culture of learning enables teams to optimise their limited resources, minimise risks, and increase their chances of success in a competitive landscape.
#3 Exploring Alternative Funding Options.
Bootstrapping doesn’t necessarily mean complete self-funding. Founders can explore alternative funding options that align with their bootstrapping philosophy. Crowdfunding platforms and pre-sales can provide early-stage capital while validating demand for their product or service. Additionally, founders can consider bootstrapping with revenue.
Bottom Line.
In conclusion, bootstrapping offers numerous advantages and risks for startups. While it may not be the right approach for every entrepreneur, it presents unique opportunities for those with limited financial resources and a strong drive to succeed.
The benefits of bootstrapping, such as low costs, control and flexibility, fostering creativity, and demonstrating self-initiative, make it an appealing option for founders looking to establish their businesses on their own terms.
However, it is essential to consider the potential risks, including limited resources, slow growth, distributed equity, and the demands of sweat equity.
By adopting strategies such as building a solid network, embracing agile practices, and exploring alternative funding options, founders can mitigate risks and maximise the benefits of bootstrapping.
*Wowzers.io is the idea, goal and project management solution that helps busy business owners identify the activities that move the money needle. One tool for all your work and teams. Tried and tested on our own businesses. Learn more.
