Bootstrapping Your Business: Strategies, Benefits, and Challenges

What Is Bootstrapping?

Bootstrapping is a method where entrepreneurs start companies with minimal capital, using personal finances or operating revenues instead of external investments. This approach allows business owners to maintain control but comes with increased financial risks due to limited resources.

Unlike entrepreneurship that relies on venture capital or angel investors, bootstrapping requires innovative strategies to manage finances and operations effectively. This term also pertains to a financial method for building yield curves from market data.

How Bootstrapping Works in Business

Bootstrapping a company means starting it from scratch with little to no assets. Founders often use personal savings, sweat equity, lean operations, quick inventory turnover, and a cash runway to succeed. For example, a bootstrapped company may take preorders for its product, thereby using the funds generated from the orders actually to build and deliver the product itself.

Compared to using venture capital, bootstrapping can be beneficial because the entrepreneur can maintain control over all decisions. However, bootstrapping can increase financial risk for the entrepreneur and may not offer enough investment to grow the company quickly.i

Bootstrapping is contrasted with starting a company by raising capital through angel investors or venture capital firms. Individuals who use these means to start their businesses typically have a proven track record or an idea that others may find profitable and promising, with the potential for large returns.

Special Considerations for Financial Bootstrapping  

In finance, bootstrapping is a method for creating a spot rate curve for zero-coupon bonds, filling yield gaps for Treasury securities. This methodology is essentially used to fill in the gaps between yields for Treasury securities or Treasury coupon strips.

For instance, bootstrapping is used to calculate missing yields when T-bills are unavailable for every period. The bootstrap method uses interpolation to determine the yields for Treasury zero-coupon securities with various maturities.

Essential Steps to Bootstrap Your Business  

There are a few steps that entrepreneurs can follow in order to bootstrap a business. We highlight them in this section below.

Assess Bootstrapping Strategies Early

Before bootstrapping, business owners should assess if it suits their operations. Companies needing high upfront capital might find it unfeasiblethe.

Some businesses may also have a slower turnaround of inventory, meaning bootstrapped cash may be tied up for a longer period.

Create a Business Plan

If bootstrapping makes sense, an early step for a business owner is to form a business plan. The business plan should have a budget detailing cash inflows and outflows for the next few years.f

A business owner may decide that at different stages of company growth, a varying amount of capital needs to be bootstrapped.

Determine Revenue Retention Plan

A critical aspect of the bootstrapping plan is to determine how revenue will be cycled through a company. Initially, operations might rely entirely on bootstrapped cash until customer revenue starts.

An owner should decide upfront how that revenue will be used, such as to channel business growth or to reimburse the owner. The main risk is extracting cash too soon, not fully developing the company, and leaving both the company and owner at risk of loss.

Identify Where Resources Will Come From

To bootstrap, an owner needs to decide where resources will come from and what options of bootstrapping they want to pursue. For example, the owner may decide to use their:

• Own cash
• A personal line of credit
• Time to save capital

They may also choose to adjust business practices to accommodate the growth period.

Each option has drawbacks: capital might be lost, time can't be recovered, and limited business could hinder growth.

Effective Bootstrapping Strategies for Entrepreneurs

Not all bootstrapped operations employ the same strategies. There are different opportunities that startups can use to temporarily get the resources they need until operations are more robust. Here are some of the more common bootstrapping strategies.

Contribute Personal Equity

A company often needs upfront capital in the initial stages. One of the most common forms of bootstrapping is for the business founder to contribute personal capital as an initial financial investment into the company.

A founder might need to provide capital at different times early on, depending on the industry and operating strategy.

Incur Personal Debt

If an owner or founder doesn't have enough capital on hand, they may decide to take out personal loans to finance the company. The company likely can't receive a loan (or receive nearly as favorable loan terms) because it does not have the same established financial history as the founder.

Because this bootstrapping method results in personal debt, the owner is personally liable and may have personal assets seized should they go bankrupt and default on the loan.

Cut/Avoid Costs

The owner may bootstrap during the early days of the company by limiting spending. For example, the owner may personally deliver goods to customers in their local area instead of paying extra for delivery services.

In this bootstrapping strategy, the owner is not limited to what is done. Rather, it is limiting how things are done. Most often, this strategy results in a trade between capital and time. This means the owner is willing to sacrifice their time as capital may be low.

Form Business Relationships

A company may also decide to pull in third parties or other investors to help with the financing of the operations. Though this is often a more permanent, long-term investment, sometimes owners rely on short-term agreements to temporarily finance the business.

For example, a third party may buy stock or issue debt to earn a short-term return. Though this agreement puts the third party at risk, it is less of a risk than a long-term investment without defined payback or liquidation terms.

Limit Business Operations

Companies often bootstrap by temporarily limiting what the business can do. For instance, it may only:

• Manufacture items upon a paid order
• Sell to a specific geographical area due to shipping constraints
• Sell specific goods for a defined time until it has the capital to sell more profitable and expensive goods

A founder must be strategic in the benchmarks it hopes to achieve before unlocking other aspects of the business operations.

Pros and Cons of Bootstrapping for Entrepreneurs

Advantages

Bootstrapping often allows an owner to retain control over the company. Though one of the options is to pursue short-term financing from a third party, most forms of bootstrapping rely on just the owner's resources. This means the owner doesn't need to sacrifice long-term flexibility due to short-term constraints.

This strategy may lead to greater short-term profitability as the owner is hyper-conscious of costs. For example, the owner may intentionally avoid costs in the short term, though these expenses like software and infrastructure are necessary in the long term.

An owner usually also has a lower barrier of entry into an industry when they bootstrap as an owner may not have all of the capital needed upfront. Instead, the owner can slowly build resources through resourcefulness and deliberate actions relating to the business.

Disadvantages

Not all aspects of bootstrapping are great, especially in the long term. Because the financing of the company may not be 100% secured, there is an increased risk that the business may fail, especially if a large unforeseen expense arises. As there are many areas a company may fall short, such as a supplier not following through or equipment breaking, a company may find it needs capital sooner than it may originally expect.

By definition, bootstrapping means that a company operates with limited resources. This may prohibit how much a company can reinvest into the company as opposed to paying back the owner. The owner simultaneously tries to raise business for the company and return its capital, both of which compete for the same capital.

Another pitfall is that a company may face short-term branding and image issues. Consider a company that self-delivers its products by driving around town. Since this is untraditional, some prospective buyers may feel it demonstrates the small scope of the operations. Investors and suppliers may resist interacting with the company due to the heightened risk of interacting with an immature company.

Examples of Bootstrapping

Many companies start with humble beginnings and limited resources. One example is Jeff Bezos' personal software development for Amazon (AMZN), which operated out of his garage with just a handful of employees when it sold its first book in 1995.

Other founders take even more nontraditional routes to finance their companies. GoPro founder Nick Woodman reportedly borrowed $35,000 from his mother and went as far as to use her sewing machine to craft early designs of GoPro devices.

A more popular and sensationalized means of bootstrapping was Meta's (META) humble beginnings. Mark Zuckerberg launched the social media site in 2004 from his college dorm room.

The Bottom Line

The best-case scenario for many new companies is to have all of the resources it needs on their first. Unfortunately, that's usually not how things go. Businesses must often bootstrap or temporarily come up with creative, resourceful solutions to make sure their business needs are being met. Whether relying on personal capital, cutting costs, or limiting business operations, owners have an array of strategies to bootstrap but also face a number of potential downsides.