What Is Bootstrapping? Business Law, Enterprenuership, Ethics, Finance, General, Operations, Strategic Management
What is it?
When an entrepreneur decides to create a new business, how to achieve financing for the business is one of the most important elements in their business plan. Over 80% of all new businesses are funded by personal finances or bootstrapping. (Investopedia) Bootstrapping is when a new company is funded by the entrepreneur’s funds or with company revenues. Private funding comes from savings or credit cards. Bootstrappers may choose to use company revenue to support the business and grow at the rate possible with the revenue. There are many well known large corporations that started by bootstrapping. For example, DELL computers and the world’s most popular soft drink started out with the bootstrapping method.
How do you do it?
To start, the company founder uses their own savings to create the business. Also, personal credit cards might be utilized. Once the company generates revenue, the revenue can be used to continue business growth. This allows the company to grow at a rate that makes needing outside funding unnecessary. $10,000 is reported to be the median for start-up capital. (Investopedia)
What are the advantages?
There are several advantages to bootstrapping. It allows the founder to have complete control of the company. They do not have to answer to investors or dilute their ownership in the enterprise. This allows creative freedom and for the owner to work at a comfortable pace. The founder can try out ideas without needing other’s approval.
What are the disadvantages?
Bootstrapping may not be the best funding option for all entrepreneurs. A disadvantage is that the founder will need to be able to manage their personal funding being repaid as well as managing the company’s finances. If an entrepreneur’s business venture fails, they have the potential to have a massive personal financial loss. Also, when bootstrapping the company may have slower growth due to the start-up money being less than a company may have gotten with an injection of outside funding. Another disadvantage is that outside investors often bring experience and contacts that a founder may be lacking.
Why should you do it?
Bootstrapping is a great way to start a company if the following describes you:
You have personal funds readily available to use to start your new business.
You want to own 100% of your company and do not want to give up any of your equity.
You have time to let your business grow at a pace that is based on the company’s revenue, which might take longer than if you received a greater amount of funding from an outside source.
You want creative freedom to try out ideas and work at your own pace without having to answer to other’s expectations.
Bootstrapping is a common way to make an entrepreneur’s dream a reality. If you have the time, money, and financial organizational skills needed to make it work, you too could be a big player in the computer market or the founder of the world’s next most popular soft drink.