When to bootstrap and when to ask for outside help
Should you self-fund your business idea or should you get outside funding and capital? Here’s everything you will need to make an informed decision for your business.
What is bootstrapping?
Bootstrapping, also known as self-funding, is the process of starting a business with little or no money. This is typically done by using personal savings, loans from friends and family, or credit cards. However, relying on credit cards is a very risky way to ruin your credit score and can lead to sinking money into interest payments when cash flow is tight.
Bootstrapping can also involve bartering goods and services instead of cash.
For example, let’s say you have an idea for a new restaurant. You could start by creating a business plan and pitching it to local investors. If you can’t find any investors, you could start cooking meals in your own kitchen and selling them to friends and family. Once you’ve made some money, you could use that to open a small restaurant. Bootstrapping allows businesses to get started with very little up-front investment.
But bootstrapping isn’t just for small businesses. For example, Patagonia quite literally started in the backyard of Yvon Chounard’s parents house. He would sell his climbing gear from the back of his car. Many years later, Patagonia’s sales is fast approaching $1 billion.
Some of the biggest household brands started off with no outside capital. These include GoPro, BigCommerce, Dell, Facebook, Apple, Coca Cola, Braintree, Hewlett-Packard, Microsoft, Cisco, Patagonia, Burt’s Bees and Oracle.
As you can see, bootstrapped companies come from all industries.
Advantages of bootstrapping
There are many advantages to bootstrapping a new business idea instead of getting outside funding. Here are just a few:
- You maintain control of your company: When you take on outside investors, you are giving up some control of your company to those investors. With bootstrapping, you keep total control of your company and its direction.
- You can be more flexible: Bootstrapped companies are often more nimble and agile than their VC-funded counterparts. This can be a big advantage when it comes to making decisions and adapting to changes in the market.
- You have less pressure to grow quickly: investors often want to see exponential growth from their investments, which can be very stressful for entrepreneurs. Bootstrapping gives you the freedom to grow at a sustainable pace that makes sense for your business.
- You don’t have to give up equity: One of the biggest advantages of bootstrapping is that you don’t have to give up any equity in your company. This means you get to keep 100% of the profits (and losses!).
Disadvantages of self-funding
There are several disadvantages to bootstrapping a new business idea.
- It can be difficult to get started without any outside funding. For example, if your business idea requires a physical presence, a retail fitout and lease requires significant cash investment upfront (a new retail fitout can cost $2100 to $2600 per square metre).
- It can be hard to grow your business without additional resources. Most entrepreneurs wear many hats – this is the reality of starting a business from scratch. However, this is often out of necessity rather than for growth reasons and in order to grow, additional headcount is needed. For example, you may start off doing your own bookkeeping, however, the time you spend each week or month reconciling receipts and expenses could be better spent working on your business. By remaining bootstrapped, you may be restricting your ability to focus on the tasks that help you earn more business.
- You may have limited options for expanding your business. Similar to the previous point, expanding to a different geographical area or in another business vertical requires significant financial resources. By remaining self-funding you may not have the capital required to expand in complementing areas.
- You may lack connections that outside investors may provide.
What are the alternatives to bootstrapping?
There are a few ways to finance your business idea if you don’t have the personal funds to do so. You could take out a business loan, seek investment from venture capitalists, or apply for various government grants that are applicable to your industry.
Taking out a loan is one option for financing your business. You could go to a bank and apply for a small business loan, or you could look into alternative lenders, such as peer-to-peer lending platforms. However, it’s important to remember that taking on debt can be risky, and you’ll need to make sure you can afford to repay the loan plus interest.
Another option is to seek investment from venture capitalists. This can be a great way to get the funding you need to get your business off the ground, but it’s important to remember that venture capitalists will want a stake in your company.
Finally, you could look into government grants. There are a number of programs available in your local area that can provide funding for small businesses. For example, these are grants available for businesses operating in Australia, these are grants available in North America, these are grants available for businesses in the UK. However, it’s important to remember that these grants are often competitive and you’ll need to have a strong business plan to be successful.
No matter which option you choose, it’s important to remember that self-funding is not the only way to finance your business idea. There are a number of options available, and you should explore all of them to find the one that’s right for you. You can also start your company bootstrapped and like many others before you, seek external funding when the time is right.