By Emmanuel Otori
The term “Bootstrapping” is derived from the phrase “to hoist oneself up”. It is a method of starting one’s own business utilizing one’s own resources.
A bootstrapped startup is a business that began and grew without the help of outside investors. Bootstrapping a business does not imply that the company will not seek outside funding. In fact, a bootstrapped firm could be self-funded or wholly funded by its founders and founding team. These businesses do not solely rely on outside investors such as venture capitalists to support them. Bootstrapped businesses are usually slower than funded businesses because they often start and scale without the intervention of investors.
Process of Bootstrapping
➔ Customers/audience – are usually the hope of bootstrapping businesses as they seek to provide services and sales to the customers needs. Businesses offer quality and services of value to establish a customer base.
➔ Organic growth – customers are used as a way to grow the business as hinted earlier. Its growth does not have to be fast as It is more focused on bringing customers into contact with the business rather than acquiring capital from venture capitalists.
➔ Cash flow – the cash spent and received in the period of operation makes its cash flow. Future investors can look at the books of its cash flow to have a glimpse into the business history.
➔ Reinvesting in the business – revenue generated in the course of running the business is ploughed back to generate more for growth and expansion purposes.
➔ Viable business model – at this point, the business takes a structure that is realistic, feasible and solid worthy of investing in.
➔ Improved customer base – loyalty is earned when the customers can rely on the business, hence, growth kicks off.
Sustainable ways of Bootstrapping
- Debt and owner financing – putting your own money into the company.
- Sweat equity – putting a significant amount of effort yourself rather than employing people to run the operations. It is not sustainable in the long run, but a good approach to raising your business from the ground up to make some headway.
- Cost management – Bringing your operating expenses to a bare minimum.
- Income-based financing – earning early revenue through the sale of services and products, the cashflow can be used to fund the business continually.
Pros and Cons of Bootstrapping
- Flexibility – this cannot be over emphasized as founders have the liberty to carry out business operations in ways and manners that suit the process of growing it. This means being able to adjust swiftly to new situations as they emerge. Business owners can adjust their strategies to negotiate or overcome unexpected challenges.
- Growth mechanism – Bootstrapped businesses take the risk of growing from scratch without money being pumped into it. Such businesses solidify if it thrives through the hurdles of raising from the ground up.
- Business perception – Customers, revenue and profit are the main focus to keep the business going rather than scalability. In as much as Bootstrapped businesses want to scale, usually the founders concentrate on unit economics, considering the company’s revenue and profitability. Profits are what will allow the company to grow and scale, especially because it is a self-funded venture. A bootstrapped business will be more successful and long-lasting in the long run unlike funded startups as they are more concerned with rapidly accelerating their businesses and expanding at 5 to 10x pace than with profit or a long-term business strategy.
- Business control – Bootstrapped founders have 100% control of the startup vision and operations unlike funded businesses that lessens its ownership by external support.In a shared ownership business, founders are likely to lose their own companies due to investor funding, even at an early stage. Bootstrapped businesses have the power to make full decisions in regards to the business.
- Slow scaling – Due to insufficient funds, bootstrapped businesses must rely on revenue and profits to scale their operations. This affects the growth level unlike funded businesses with full access to capital and only have to keep the business running more on a faster pace. Bootstrapped businesses must contend with slow growth in their early years until they accumulate enough customers, revenue and profits for fast growth.
- Limited network connections – Bootstrapped businesses are oftentimes faced with the challenge of limited to no network connections unlike funded businesses who get introduced to other venture capital companies. These companies connect their investee companies to other venture capital companies for collaboration which fosters a more rapid growth.
- Risk taking – Bootstrapped businesses bear all the risks there is to raising a business from the ground up. The operational risks rest on the founding team who takes responsibility for whatever goes on in the growth process. They bear the financial risks also as there are no investors yet.
One can consider running a rapid growing or slow scaling business. Rapid growing businesses often use funding from venture capital. Here external investors can provide capital, security, scaling speed, and advice/network, but they can also exert influence over you based on their preferences. Whereas, slow scaling businesses using bootstrap have complete control over the rate at which the company expands.
However, even if you want to raise venture capital, bootstrapping is a great way to get your business started.
Emmanuel Otori has over 9 years of experience working with 100 start-ups and SMEs across Nigeria. He has worked on the Growth and Employment (GEM) Project of the World Bank, Consulted for businesses at the Abuja Enterprise Agency, Novustack, Splitspot and NITDA. He is the Chief Executive Officer at Abuja Data School.