Bootstrapping is a term that is often heard in the startup world, but what does it actually mean? Bootstrapping, simply put, is the process of funding a business with its own resources. This can be done in a number of ways, including self-funding, borrowing from friends and family, or through revenue generated by the business itself.
Bootstrapping has become increasingly popular in recent years as startups look for ways to avoid giving away large chunks of equity to investors early on in the life of their company.
What is bootstrapping in business and why should founders consider it?
Bootstrapping is the process of funding a startup by using personal savings, friends and family contributions, loans, or revenue from operations. Equity is not given up in exchange for funding, so there is no dilution of ownership.
The advantage to bootstrapping is that it allows the founders to retain complete control over their company. They are not 'indebted' to any outside investors and can make decisions based on what they believe is best for the company, rather than what will please shareholders.
Additionally, bootstrapping forces founders to be frugal with their resources, which can help a startup become more sustainable in the long run. For these reasons, bootstrapping is an attractive option for many startups.
How bootstrapping can help save equity?
For many startup founders, the goal is to grow their company as quickly as possible and achieve a successful exit. However, this can often come at the expense of equity. In the early stages of a startup’s lifecycle, equity is often the most valuable commodity that founders have to offer.
By bootstrapping their company, founders can avoid giving up equity too early. Instead of taking on outside investment, bootstrapping companies rely on their own resources to fund their growth.
While it can be more difficult to grow a company without outside investment, bootstrapping can be a powerful tool for saving equity in early-stage startups.
As a startup founder, you know that giving away equity is one of the biggest sacrifices you can make. And when bootstrapping is an option, it's often the best way to preserve your equity and keep control of your company.
Benefits of bootstrapping vs outside investment
For many startups, the question of how to finance their operations is a critical one. Should they raise funds from investors? Or should they bootstrap their way to success? There are pros and cons to both approaches, but for many early-stage startups, bootstrapping can be the best option.
For startups, bootstrapping can be a great way to develop a stronger understanding of the businessand build a more efficient operation. When founders are forced to work with limited resources, they quickly learn what is absolutely essential to the success of the business. This process of trial and error can help them to dentify inefficiencies and find more efficient ways of doing things.
In addition, bootstrapping can help startups to build a strong organizational culture. With everyone working together towards a common goal, startups can develop a strong sense of camaraderie and team spirit.
As a result, bootstrapping can be a powerful tool for preserving equity and helping startups succeed. If you want to learn about other sources of funding, you can check out our guide to early-stage startup funding.
Another advantage of being a bootstrapped startup is that self-financed companies can have more bandwidth when it comes to granting employee equity.
>With no large investors (or no investors at all), bootstrapped startups and their founders can have more freedom when deciding to grant equity to employees and be able to attract top talent without spending precious cash.
While having an employee equity plan would dilute the owners of bootstrapped businesses, the impact would not be as significant as if the outside investors were the company's stakeholders.
If you want to learn more about employee equity plans, such as an employee stock option plan (ESOP), make sure to check out our extensive guide here.
Examples of successful bootstrapped startups
There are many examples of startups that have been successfully bootstrapped, meaning they were started with little to no outside funding.
One notable example is Basecamp, a project management software company founded in 1999. The founders, Jason Fried and David Heinemeier Hansson, bootstrapped the company for its first seven years before finally taking on investment.
Other examples of successful bootstrapped startups include Buffer, a social media management platform, and Mailchimp, an email marketing company. In both cases, the founders were able to grow their businesses to a point where they were attractive to investors without giving up a large equity stake. This is a testament to the power of bootstrapping in the early stages of a startup’s life.
Bootstrapping can be a powerful tool for saving equity in early-stage startups. By avoiding outside investment, founders can keep more control of their company and avoid giving away a large chunk of equity.
Bootstrapping can also help startups to build a strong organizational culture and develop a better understanding of their business.
How you can start managing your equity
While bootstrapping may sound like a great option for early-stage startups, there still is a need to keep yourself, your team and the stakeholders in the loop when it comes to company's equity.
At Capboard, we aim to make equity management easy, fast and secure, so you can have a single source of truth when it comes to your company’s equity. Learn more about how you can digitalize your equity management at Capboard here.
And if you are planning to have a new funding round and want to see how your ownership can get diluted (check out our equity dilution calculator article) or if you just want to keep every stakeholder on the same page (co-founders, employees, lawyers, early investors): Start here.