Taking a good idea and turning it into an actual business requires ample time, effort, and money. Time and effort can be self-generated, but money? That will require a little more work. Getting funded can be nearly impossible when your product doesn’t exist yet, which is why many entrepreneurs take the bootstrapping approach.
What is Bootstrapping?
Bootstrapping is starting a business with no venture capital or angel investment. It’s using the resources you have available to get your business off the ground. For many founders, this looks like using personal savings, loans, and relying on family and friends for financial support until you’ve reached a point where you can responsibly begin raising a Seed round.
The Benefits of Bootstrapping
While bootstrapping is certainly no walk in the part, for many startups, it’s the most viable option while they’re trying to build out their core product or service.
You’re in Charge
In the early days of your business, having a single centralized sense of direction and focus can help keep you on track towards your goals. Not to discount the benefit of having additional shareholders when the time is right, but this is a formative time when too many cooks in the kitchen may do more harm than good.
Another added benefit of retaining control early on is the deferment of dilution. Dilution is a normal part of raising capital, but it’s prudent to avoid it minimize it when possible. If you wait to pursue external funding, you may also be able to get better terms from your investors.
It stands to reason that people tend to be more careful with their own money. Bootstrapping forces you look closely at your finances. The more informed you are about how money is being spent and what it costs to make a sale, the better equipped you are to cut and reallocate expenses where needed. By running a lean startup, you may be better positioned to attract investors when the time comes.
Deeper Understanding of the Business
To start, founders must wear many hats – marketing, sales, customer service, and more. While it’s nearly certain that you won’t excel in all of these areas, being forced to perform all of these different functions can be beneficial for a couple of reasons:
- It can give you an unfiltered view of your customer and their experience.
- It offers better insight into what your business requires for day-to-day operations.
Creative Problem Solving
Having less funding means you’ll have to get creative when it comes to problem solving. In the startup world, many call this being “scrappy.” A scrappy mindset will help you approach problems with a DIY attitude, forcing you to seek out creative, cost-effective solutions. Not only does this save money, but it encourages out-of-the-box thinking that can really make your startup stand out.
Building a Resilient Attitude
Having low cash reserves can be scary and stressful for a business owner. There will be ups and downs, and part of being a strong leader is being able to handle the downs gracefully and with a level head.
The Drawbacks of Bootstrapping
Although bootstrapping is a highly common practice in the startup world, it is inherently risky and requires a lot of commitment.
Many startups fail, and one of the top reasons they do so is because they ran out of cash. Founders who use their own money to launch their startup are assuming a significant amount of risk, considering that running out of cash is a very real possibility.
Revenue is Critical
Another major hurdle involved in bootstrapping is making revenue early on. This should always be a focus, but it becomes especially important when you need that revenue to stay afloat.
Potentially Slow Growth
For companies looking to bootstrap past the point at which a Seed round could be a viable pursuit, growth may come much slower. One of the main reasons startups seek outside funding is to grow and scale. By avoiding outside funding, you are limited to what you can manage on your own, potentially stunting your growth.
It’s Hard Work
Bootstrapping is difficult work, and it’s not always an option for everyone. If you can bootstrap your company before pursuing outside funding, there are many advantages; however, there are also heightened risks that you should be aware of.
If you have bootstrapped your company and you’re now looking to raise outside capital, you could be eligible to raise on MicroVentures. Apply for an offering today.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.