Taking on debt or investors isn't the only way to finance a new business. Bootstrapping your enterprise can be an effective strategy – that's how the founders of Spanx, Patagonia and Mailchimp started their businesses. Here's what you need to know about financing your business yourself.
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What is bootstrapping in business?
Bootstrapping is when you use your own money to fund your small business – there are no loans to repay with interest or investors to tell you how to operate. According to Gallup, 77% of small businesses rely on personal savings for their initial funding.
There are two schools of thought when it comes to funding a startup. Some say a startup founder should always use other people's money to finance a business, while others recommend going it alone. The latter is classic bootstrapping.
How to bootstrap your business
There are several ways to start a business without taking on debt or investors. Using personal savings is the most common path. Other options include selling an asset like a vehicle, freelancing on the side to shore up cash, or tapping a 401(k) plan. Some entrepreneurs even use low-interest credit cards, being mindful to pay off their balances each month.
The goal of bootstrapping a business is to avoid being beholden to anyone so you can maintain full autonomy over your business. This method appeals to countless business owners, including Katie Palencsar, venture studio lead of the Female Innovators Lab at Anthemis., who successfully founded and exited a technology company through a combination of bootstrapping and outside investment. She sold her car and used her credit cards to grow her enterprise.
"I didn't come from a traditional business background," Palencsar told business.com. "I was a first-generation college graduate and worked in education. I knew I was on to something, and I knew that, to get to certain inflection points, I needed small amounts of capital."
Pros and cons of bootstrapping your business
Like any funding source, bootstrapping has both pros and cons. Before you make the leap, you need to understand the risks, especially if you plan to pour your life savings or 401(k) account into the endeavor.
"Businesses generally don't generate a profit for two, three or four years," said Craig Steinhoff, a certified public accountant and member of the American Institute of CPAs' Consumer Financial Education Advocates. "The majority of small businesses don't make it. People need to know that going in. You may not generate a profit for years. You have to plan for that."
Pros of bootstrapping your business
Despite the risks of bootstrapping your startup, there are significant advantages. Here are three:
1. You're in control.
Many people launch small businesses because they no longer want to answer to someone else. If they seek investors for their business, they must give up some of that control. But if they use their own cash – especially in the early stages of their business – they get to run the entire show.
2. Operations are lean.
Using your own money means starting small and DIY-ing as much of the business as you can.
One of the problems with accepting a loan or investment is the pressure to grow quickly – which might lead you to take on staff and other expenses before your business starts making money, resulting in cash flow problems and difficulty repaying the loan.
By bootstrapping the business, you won't have to worry about paying back any debt. Nor will you have to contend with an angry investor if things go south.
3. You have freedom to experiment.
Very few small businesses are overnight successes. It often takes several iterations of a business idea to figure out what works – which can be frustrating if you have an outside investor or some form of equity funding.
If you bootstrap, you have leeway to tweak the product or service and figure out how you want your business to grow.
Cons of bootstrapping
Bootstrapping requires you to be scrappy and frugal. You have to watch every penny, since it could take a long time for your business to start bringing in money. This requires you to grow slowly, which means it may take longer to reach profitability than if you had a lot of cash or outside funding. Here are other disadvantages of bootstrapping to consider.
1. It may hinder your business's growth.
Startup funding is just part of running a business; you also need working capital to support operations. When you bootstrap a business, you might face cash flow or capital constraints that prevent your company from growing. It might also mean you miss an opportunity to reach new customers, expand, or pivot when necessary.
"Bootstrapping a business is a great way to maintain control and ownership of a business, but the lack of access to working capital can often be an inhibitor to growth," said Dan Brames, an executive vice president at FIS. "As we also saw recently during the COVID-19 [pandemic], a significant cause of stress when shutdowns or supply chain issues mean tough decisions when paying your people or suppliers."
2. It's time-consuming and stressful.
Raising venture capital takes time and work, but once you land the funding, you have a team of experts at the ready to provide advice and help you grow revenue. That's not the case when you bootstrap a business. You're going it alone. You won't have a venture capitalist to bounce ideas off of. Nor will you have cash in the bank that allows you to test a theory. Everything falls on you, which adds to the pressure and stress.
"If you are bootstrapping, it doesn't leave much time for anything," Sadej said. "There's also a higher risk of burnout."
Examples of successfully bootstrapped companies
Despite the risks of bootstrapping a business, there are many success stories business owners can draw from. These three companies are just a small sampling of startups that eschewed outside investors and successfully forged ahead on their own.
In 1998, Sara Blakely needed a smooth undergarment for cream-colored pants and found it by cutting the feet off a pair of nylons. That quick and ingenious fix spawned an idea, a product and a company.
Blakely didn't seek investors or help from family and friends. She used $5,000 in personal savings, found a manufacturer to make her product, and inked her first major deal to sell Spanx at Nieman Marcus – all within two years.
Now, Spanx is over 750 employees strong and Blakely is a self-made billionaire. Thanks to Blakely's drive and determination, Spanx achieved profitability in its first year, reportedly bringing in $4 million in sales, which has grown to an estimated $400 million annually. The company is still 100% owned by Blakely.
Patagonia's commitment to climbing equipment is steeped in history, dating back to 1957. That's when founder Yvon Chouinard, at the age of 18, began teaching himself how to blacksmith, with an eye toward making his own mountain climbing equipment. Less than pleased with what was on the market, he turned his homemade climbing gear into a retail empire using his own money. Chouinard Equipment went on to enjoy years of success as the leader in mountain climbing gear.
In the early '70s, Chouinard expanded into climbing apparel and renamed the company Patagonia. Today, Patagonia reportedly has around $800 million in sales annually. Chouinard never brought on investors, enabling him to pursue his focus on the environment.
Ben Chestnut and Dan Kurzius created Mailchimp as an add-on for their web design business. The two launched Rocket Science Group in 2001, providing web design services to large companies. In response to demand, Chestnut developed a program for customers to market to their own customers. The duo targeted small businesses, maintaining this as a side project until 2007, when they closed the web design business to focus solely on Mailchimp.
From the outset, Chestnut and Kurzius agreed not to bring on investors. They bootstrapped the business and still own 100% today. Mailchimp has an estimated $700 million in annual sales and is among the leading email marketing companies in the U.S.
Tips for developing a bootstrap strategy
Bootstrapping your business isn't going to be easy, but you can employ certain strategies to make the process a little smoother. For starters, it behooves you to think long and hard about the type of business you want to create and the capital required to run it. Only then can you come up with ways to access the necessary funding to cover the startup costs.
Next up is planning. A business plan is a must – even if you aren't seeking a bank loan or investment capital – because it helps you prove your concept and think about all aspects of the endeavor. Steinhoff said it should be detailed and account for potential hiccups and growth opportunities.
It's important to be open to other funding sources as your business grows. While $5,000 or $10,000 in startup capital may be enough initially, as the business becomes bigger and more complex, you may want to consider bringing on investors or securing financing.
"As SMBs grow, so do their borrowing requirements," Brames said. "The complexity of running their business increases, and the level of sophistication and feature/functionality they need increases, along with the challenge of control. Bootstrapping doesn't mean ruling out lending in the future."