September 6, 2017
These days we seem to be bidding farewell to the American Dream and the belief in the self-made man. Today’s entrepreneurs shun the practice of starting a business on a shoestring without solid capital of one’s own or a reliable investment back-up.
Yet, history shows that almost every enterprise that achieved long-term prosperity was fully bootstrapped before it turned to venture capital.
What is bootstrapping?
Pull oneself over a fence by one’s bootstraps or Pulling oneself up by one’s bootstraps. These are two popular sayings that vividly capture the meaning of the word bootstrapping as a hard work done on one’s own, rendered almost impossible at times.
The bootstrapping business definition stems from popular wisdom, too. Bootstrapping means establishing a self-sustaining company, driven by internal financial input as opposed to venture capital or angel investment. This is why bootstrap startup is often used as a fixed expression.
Bootstrap financial strategies
A bootstrap startup follows a number of debt reduction strategies to ensure healthy growth. To avoid raising external capital, the company recurs to owner financing, subsidized financing, personal debt, or sweat equity. Other viable methods include driving operating costs to their lowest, minimizing inventory, and taking on a cash-only approach in selling.
Bootstrap growth mechanisms
The bootstrapping process of a company’s development has three distinct phases: the beginning, customer-funded and credit stages. As a bootstrap startup enters the beginning stage, the company pays off its operating expenses with owner financing and personal debt. At the next stage, the company switches to customer funding, that is, it receives enough profit to pay off its operating expenses. Following the customer-funded stage, the company reaches the credit stage, when the entrepreneur succumbs to external financing.
Bear in mind that not every company is fit for bootstrapping, the process takes time and financial flexibility. Bootstrapping might be an appropriate strategy for you if you’re running an early-stage business that does not demand a heavy cash inflow, or alternatively, if you’re looking for an investment opportunity.
Bootstrapping pros and cons
On the bright side, the bootstrapping approach is lean and highly cost-efficient. In the absence of external financing, bootstrappers are forced to become more cost-conscious and resourceful in their operations. This approach allows for maintaining total control over the company and bringing internal operations into sharp focus. Banks and investment funds are more likely to back a bootstrap startup, too, for in order to succeed this far, it must have developed business acumen skills before reaching the credit stage.
On the dark side, bootstrapping loopholes include higher risks, irregular cash inflow, lack of experience and know-how, potential imbalance of power between founders, and no clear-cut distinction between the company’s and personal funds. Furthermore, bootstrappers suffer from greater stress than common entrepreneurs. And, they tend to feel lonely in the face of growing debts and ever-increasing responsibilities.
The arrived bootstrappers
The awe inspired by the following companies becomes even greater at the thought that they all started from scratch: Dell Computers, Facebook Inc., Apple Inc., Clorox Co., Coca Cola Co., Hewlett-Packard, Microsoft, Corp., Oracle Corp., eBay Inc., Cisco Systems Inc., SAP and Business Objects, etc.
Some names that immediately spring to mind include that of Bill Gates, Steve Jobs, Richard Branson, Michael Dell, and Mark Zuckerberg.
What did these bootstrap startups do right?
The aforementioned startups seemingly did the impossible – they grew from literally nothing into global corporations bigger than nations. Their success kit features risk tolerance, cost-efficiency, focus on profits, but first and foremost – a bright idea at their very core.
Ann Andrushkevich is a content manager at Capital.com, a global investing space, consisting of a trading platform, learning courses, financial glossary and personalized financial content.