Starting your own business is not for the faint-hearted. Not only does it require your time, energy and determination, but it also needs money – and often a lot of it.
Every new startup founder has to weigh up how they will fund their business idea. There are lots of options for financing a business, from taking out a business loan to securing angel investment.
One of the most popular routes is to “bootstrap” a business. In this article, we’ll explain what bootstrapping is, and some of the benefits and risks involved.
What is bootstrapping?
Bootstrapping means funding the business yourself. Rather than relying on financing (like investment or a loan), you’ll use your own savings and the money you make from your business’s sales. Occasionally, you might also use cash borrowed from friends and family.
While investment is a common route for many startups to scale at speed, bootstrapping is a preferred route for businesses who want to avoid the terms set out by investors.
The benefits of bootstrapping a startup
Be in control of your startup finances
One of the most popular reasons for bootstrapping is maintaining a level of control that you wouldn’t have with investors.
Angel investors will receive equity in return for their investment, which tends to be between 10% and 25%, but could be as much as 40%. They will also bring their own ideas to the table – this can be incredibly useful (as we’ll touch on later), but it can also change the way your business is run and even the direction it takes.
If staying in control and doing things your way is a priority, then bootstrapping is one of the only funding routes which will give you the freedom to do that.
Keep the profits and re-invest
Bootstrapping your business also means that the profits are all yours to enjoy, rather than having to be shared with investors or going towards loan repayments.
You may even choose to have a profit-share setup with your team, which can help you to attract talent in the early days of your startup.
Improve focus and efficiency
Bootstrapping provides the additional motivation of wanting to make the business work because your own money is on the line, rather than that of a sometimes-distant investor.
If the buck rests with you, quite literally, you’re more likely to really keep an eye on costs and avoid unnecessary distractions. Instead, you can stay focused from day one on what will bring in revenue quickly.
As Jack Horton, CEO of Whites Group, puts it:
“[With bootstrapping], you answer to yourself, look to outdo your own heady expectations and make sure every penny spent is driving the business forward as efficiently and effectively as possible.
“In my experience, the appreciation of seeing those first sprouting seeds of profit in one’s own bootstrapped venture is what ultimately drives every entrepreneur, and makes the many sacrifices worthwhile.”
The cons of bootstrapping a startup
Smaller teams and slower growth
One of the limitations that comes with bootstrapping is that it often means smaller teams and slower growth. It’s up to you how much of a challenge you see this as, but it does mean that any hires have to be essential and able to hit the ground running.
You want a team that is lean yet highly engaged and productive, and who are happy to work together to achieve the business goals in a challenging environment. While some people will share your values of going it alone, others will see it as a bit too risky to come on board before you have a more stable income.
Slower growth may mean some missed opportunities if you don’t have the resources necessary to take advantage of them, and it can limit your ability to get out of sticky situations. Agility and innovation can be a challenge when money is tight.
With great responsibility comes great risk
Shouldering the weight of self-financing the business adds more pressure to your role as a founder too. Building a business is tough enough without also having the personal liability of what happens if the bank comes calling.
If you are planning to self-fund until the business can pay for itself, you need to recognise the toll this could take on relationships and your personal wellbeing. Staying focused and motivated may be tough at times, so it’s important that you can remind yourself and the team what it is you’re striving for.
Whites Group’s Jack Horton sums it up perfectly:
“Bootstrapping a new business is a baptism of fire. Constantly juggling funds, brainstorming the next best move and gradually building a viable company for the future is complex. But it is also hugely rewarding. The ultimate control, excitement and idea of eventually turning that precious profit are what keep entrepreneurs striving, even in the harshest of business environments.
“In the end, the blood, sweat and, in many cases, tears shed along the way are fundamental reasons why eventual success has a smell just that little bit sweeter.”
Mentoring vs learning from experience
One of the biggest downsides to bootstrapping is that you can miss out on the valuable guidance and connections of an experienced investor.
This makes it even more important to build a strong network of peers, business advisors and mentors. You need to make sure that there are people you can talk to when the going gets tough, or reach out to if you need unbiased advice.
Read more about bootstrapping and funding your startup
Still not sure about whether to bootstrap your business or seek external investment? Here are some useful resources to help you decide:
- Read: The top five ways to get money to start a business
- Read: A beginner’s guide to obtaining grant funding for UK startups
- Read: Looking for angel investors? Here’s everything you need to know
- Watch: How did you find the right investor for your business?
Want to build your network and get more advice on funding your startup? Enter The Pitch 2023 for the opportunity to meet investors and mentors, connect with other founders and pitch at regional and national demo days.