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What is Bootstrapping in Business?

What is bootstrapping in the context of business? In this piece, we define what it means to bootstrap a company, with examples and the steps for how an entrepreneur funds such a company. We point out advantages and disadvantages.

What is Bootstrapping? A Bootstrap Definition

Bootstrapping means getting into or out of a situation using your own resources. A bootstrapped business is a company without outside investment funds.

Entrepreneurs refer to bootstrapping as the act of starting a business with no outside money — or, at least, very little investment. Bootstrapping means launching a business without the help of venture capital firms or even significant angel investment. Bootstrapped companies are not the kind that draws media attention from huge funding rounds.

The founding entrepreneur, known as the bootstrapper, is the one sole investor in the beginning. The founder’s only investment capital might be personal savings – and of course, the time he or she spends working for free to get the business up and running. Bootstrapping requires plowing the money earned from customers back into the business. In other words, the bootstrapping entrepreneur relies on cash flow to grow their business in the place of outside capital.

You’ve heard the old saying about “pulling up by your bootstraps”. When it comes to startups, the bootstrap definition means to do something on your own.

How Do You Bootstrap a Company?

You bootstrap a company by starting with a small number of your own funds. As the business gets going, you re-invest revenue earned from customers back into the business to finance daily operations, development, and expansion plans.

It takes three steps to bootstrap a company:

1. Find Seed Money

Start with personal savings, or perhaps some “friends and family” funding to get going. This is called seed money or a startup stake. A related technique at this stage is to start out with a side business, where the founder continues to work a day job to keep body and soul together. The founder then uses day-job earnings to fund the side business. In short, the founder manages to scrape up enough resources to get the business off the ground. The business is launched on a shoestring budget.

2. Launch a Minimum Viable Product or Service, Fast

Release a minimum viable product as soon as possible. For a software company, online business, or any business requiring advanced product development, launch as soon as you have a viable offering. Fast is better than perfect. The faster you get going, the faster you get to the next step.

3. Use Customer Funds to Grow

Get money from customers quickly, and use it to fund operations and expand. That customer funding is pumped back into the business. Therefore, it is essential to close sales early and fast. Sales revenue keeps the business operating and, eventually, finances growth.

Growth is often slow because the company first has to meet its operating expenses to stay in business. But committed entrepreneurs find ways to increase sales, which in turn gives them more capital to invest in their business.

What Bootstrap Funding is NOT

Bootstrapping does not mean giving up a chunk of equity in exchange for bringing on investors.

Bootstrapping does not mean going out to get a big loan to start a business, either. Yes, some startups may take on loans or lines of credit along the way. Others lean heavily on credit cards. A few may even get microloans or small local grants.

But credit is typically a short-term fix to fund specific growth activities such as buying equipment or smoothing out cash flow dips. In a bootstrapped business, credit often comes later, not immediately upon starting up.

Getting credit at some point is a proven technique for companies to spread out the demands on their cash, through monthly payments. The trick to this technique is to seek credit only when revenue streams are finally reliable enough to ensure you can make the loan payments. Remember, the founder still has to pay the monthly payments or debt service out of funds earned in the business.

In other words, DO use credit wisely in targeted ways such as to even out seasonality or expand. DON’T saddle yourself with a big honking loan as the main source of funds to start the business.

Bootstrapping is Minimalism Applied to Business

Starting a bootstrapped business is a litmus test for an entrepreneur and a challenge for everyone involved in running the business. So what does it really take to start a business this way?

The Merriam-Webster Dictionary defines minimalism as follows:

…a style or technique (as in music, literature, or design) that is characterized by extreme spareness and simplicity.”

When companies use this approach for their business culture, they are practicing bootstrapping. Such businesses avoid spending except where absolutely necessary and work within their means, finding ingenious ways to get by with less.

What Are Some Examples of Bootstrapping?

There are some famous examples of bootstrapping. Think of all the stories you see on social media of a famous billionaire launching a business in a garage. That is a boot-strapped story. Let’s look at a few examples:

• Spanx – The Spanx bootstrapped story starts with a brilliant idea. Unable to find the right undergarment for a party, Spanx founder Sarah Blakely took scissors and cut the feet off a pair of pantyhose. The rest, as they say, is history. Blakely used $5000 from savings to develop the products using her mom and friends to test her prototypes. With no money for a fancy office, she ran the business out of her apartment. She also controlled costs by being a sales and marketing department of one

• Apple – The Apple bootstrapping story is just as inspiring. Entrepreneurs Steve Jobs and Steve Wozniak founded this powerhouse company in 1976. But the original headquarters where Wozniak hand-built the Apple I wasn’t on some Silicon Valley tech campus. It was in a bedroom at the suburban home of Jobs’ parents. Eventually, the company moved to the garage when they needed more space.

• Dell – Entrepreneur Michael Dell founded the iconic brand that now bears his name from his dorm room at the University of Texas at Austin. There, Dell built and sold computers made from stock components. He eventually dropped out of school as the business grew. In 2019 Michael Dell was ranked 18 on the Forbes 400 list of billionaires.

HP, Cisco, eBay, Oracle, and Microsoft are other popular examples of companies that started from humble beginnings and grew. Other names are not quite as big, but still impressive. Braintree, TechSmith, Envato, Litmus, iData, BigCommerce, and Campaign Monitor were all started with “boots strapping”.

You can find a list of companies that started with little or no outside investment, grew organically, and posted $1 million-plus in revenues in 37Signals’ Bootstrapped, Profitable and Proud series.