While it’s a great time to be an entrepreneur, there are still plenty of small businesses operating without outside cash. Take Spanx for example; founder Sarah Blakely bootstrapped her business, using only $5000 in personal savings to get the company started. Today, she retains 100 percent ownership of what’s become a very profitable enterprise. How can other entrepreneurs follow this model? Well, in this post we’re going to cover one way that businesses can acquire financing; through bootstrapping.
What Is Bootstrapping?
The term bootstrapping comes from the phrase “pull yourself up by your bootstraps,” which is a self-help reference to footwear of an older era. Bootstrappers did things on their own, without the help of outside sources. In a business sense, bootstrapping means starting a company using only personal savings or company revenue. You don’t have investors supplying capital or banks eagerly lending you money. When bootstrapping, founders rely on their own cash (and ingenuity) to build their business.
Sound scary? It can be, but many of today’s successful businesses
thrived using bootstrap techniques. If you think you have a business idea that can be bootstrapped into prosperity, it might be worth the risk to forgo traditional funding methods. However, this isn’t a decision to make on a whim. Make sure you know all the pros and cons of bootstrapping before applying it to your startup.
The Pros of Bootstrapping Your Business
Bootstrapping gives you several advantages as a business owner, especially if startups costs
can be minimized. Below, we’ll highlight a few things you can enjoy as a bootstrapping entrepreneur.
Autonomy from Outside Influences
If your business gets in influx of capital from investors, they’ll likely want a stake in your company. You still might have freedom to make your own decisions, but now other people are depending on you to make their investment worthwhile. When this happens, you lose true autonomy of your business and now must act in the best interests of other stakeholders.
Retain Complete Ownership
Ownerships has its perks. Coming up with high levels of capital inevitably means making concessions from an ownership standpoint. Diluting a business’s ownership puts a lot more hands in the cookie jar and founders don’t reap the full reward of their profitable ideas. If you keep your 100 percent stake and bootstrap your business, you’ll get 100 percent of the profits.
The Cons of Bootstrapping Your Business
Bootstrapping gives you the freedom to operate your business independently, which is highly appealing to many entrepreneurs. Still, going it alone has drawbacks too, and you’ll need to consider them carefully before starting a business with your own savings.
Founders Wear Multiple Hats
If you’re bootstrapping, you’ll need to keep costs down as much as possible. You can’t afford to pay a full staff or outsource work, so your job title won’t just be owner - it’ll be owner, marketer, accountant, manager, and so on. To successfully handle all of these responsibilities, you’ll need to dedicate extensive time and mental energy, which could lead to burnout. Your family and social life will take a firm backseat to your company, so you’ll need to ask yourself if this is a sacrifice you’re willing to make.
There’s No Margin of Safety
Founders who bootstrap are putting more than just their reputations at stake. When all your own capital is invested into a new company, failure can be devastating to both your business and personal life. Losing an investment from a venture capital group is bad for a business but losing personal savings can cripple the entrepreneur them self. If a bootstrapped business fails, the founder can’t go back to the drawing board, because the drawing board is now gone, along with possibly the house and car!
Bootstrapping a business can be a great choice, especially for aggressive entrepreneurs willing to log the hours and make necessary sacrifices. While a successfully bootstrapped business can make its founders very, very rich, but it’s important to also know the risks. You have no safety net when you bootstrap, and the price of failure might be more than you’re willing to pay. Every company is different, so it’s up to you to decide if bootstrapping your business is worth it.