Advertising, production, staff, material – starting a business can be expensive, which is why many resort to external financial aid. Bootstrapping is different: Here, founders only use their own funds to get the company off the ground. But how does it work without outside capital? We explain what is behind bootstrapping, what requirements it needs and how the implementation succeeds.
What does bootstrapping mean?
Bootstrapping is a form of financing in which the founding of a company is self-sufficient. The financial challenges are mastered through their own efforts and without outside help. No loans or financial assistance from outside. Founders do not go to the bank to invest several tens of thousands of euros in outside capital in the project. Those who become self- employed with bootstrapping therefore usually realize their business idea with a small budget.
The term “bootstrapping” (also “bootstrapping” or simply “bootstrap” is used synonymously) comes from the American usage and literally means boot strap. In the business context, however, it is less about the boot strap and more about a idiom from the English-speaking world. “Pull yourself up by your bootstraps” or “pull yourself over a fence by your bootstraps” means something like pulling yourself up on the belt.
It’s about reaching your goal through your own effort and getting by without outside help.
Bootstrapping in other disciplines: Bootstrapping is also used in other disciplines. In statistics, for example, bootstrapping describes a method for calculating confidence intervals. In computer science, this describes a process in which a simple system sets a complex one in motion. Of course, this article is about the form of financing.
This is how bootstrapping works
Founding without any additional money? That seems almost impossible. After all, some expenses have to be made at the beginning before sales and profits can even be generated. However, bootstrapping is not done out of necessity because there are no external funds available. Rather, it is a conscious decision .
And it can work, because outside capital is no guarantee for the success of a company. Rather, it is these seven principles that make successful bootstrapping possible:
1. Fast entry into the operative business
If you have a tight budget, you cannot wait, plan and prepare forever, but have to get into the operative business as quickly as possible. This means the core business with which you generate sales. If you want to sell something, you have to do it as quickly as possible so that money can flow into the company. Side businesses that are more secondary and the strategic business should be of very low priority in the beginning.
2. Reaching the break-even point quickly
A core goal of bootstrapping must be to reach the so-called break-even point at an early stage. This is the break-even point where costs and revenues are equal – so there is neither loss nor profit. In the further development of a company, after reaching the break-even point, profits can be expected and you start to make real money.
3. Offer quality products or services
In order to successfully implement bootstrapping, it is helpful if the founding idea is based on high-quality products or services. As a founder, you can then become active yourself in many areas and carry out different tasks in the company. The founding members should take over the distribution themselves if possible.
4. Careful decisions in human resources policy
When it comes to bootstrapping, you should rely on young talent. Of course, experienced experts bring a lot of knowledge with them, but they can hardly be paid for with the limited financial means. Top talents, on the other hand, have the necessary know-how and intrinsic motivation with lower salary expectations. You can develop with the company in the long term.
5. Be careful with rapid growth
First of all, it seems great when a young company is faced with great growth opportunities. Positive acceptance of your own offer and huge demand offer great potential. Due to the tight budget for bootstrapping, however, the growth should be approached a little more slowly, since the costs can also increase quickly and get out of control.
6. Enable always available liquidity
The most important thing about bootstrapping is that you are financially liquid at all times. This can only work if expenses are minimized as much as possible and income is maximized on the other hand. This does not mean that no investments are made at all. It just requires founders to make smart investment decisions. That they make the right investments and put the money they have in the right places to get the maximum benefit.
7. Practice good networking
Even if the basic idea of bootstrapping is to avoid borrowing, it may be necessary at a later stage of the business. As a self-employed person, you should therefore maintain good contacts with banks if you do consider a loan at some point.
Requirements and who bootstrapping is it suitable for?
There is no ideal way of founding and financing a company that applies to everyone. Means: Bootstrapping is not automatically the path to success for everyone. For some founders, bootstrapping may even be the completely wrong decision because it doesn’t fit their personality and the planned career in self-employment.
In addition, some requirements must be met for bootstrapping to work:
Some equity is essential for bootstrapping. In the course of time, however, it is usually topped up by further financing options. The classic: grants from family and friends. Supplier loans and public subsidies help to realize the dream of having your own company.
- Willingness to take risks
Entrepreneurs who choose bootstrapping as a form of financing need the necessary willingness to take risks . If you are afraid of using your money and investing in your own independence, you are not in good hands with bootstrapping.
- Willingness to compromise
With bootstrapping, compromises have to be made at one point or another in order to get by with the limited financial resources. Perhaps the optimal solution is not possible in every area, but you have to find the best possible compromise . Founders who can make the best of every situation and don’t get bogged down in ideas of perfection have an advantage here.
It is important that you are able to handle many tasks yourself. There is simply not enough money to pay an expert for every area . In advance, you should inform yourself accordingly and educate yourself further. The more you can rely on yourself, the better bootstrapping suits you.
At the same time, it is necessary for you to be self-critical about your own work and performance . You have to do a lot of things yourself when bootstrapping – but you can’t possibly have core competence in all areas. It’s not efficient if you spend endless hours tediously programming a website only to end up with a bad result. Think about what you can do really well yourself and where the investment in specialists pays off.
Examples of bootstrapping
Many examples show that bootstrapping can work. Numerous companies have built their success on self-financing without many being aware of it. Various computer and programming companies such as Microsoft, Dell, Apple and SAP are examples of self-financing. But there is also bootstrapping in other areas, such as GitHub where version control software for software development projects.
Benefits and risks of bootstrapping
Bootstrapping picks up on values and ideas that can also be observed in minimalism and frugalism : not spending money with both hands (which, strictly speaking, you don’t even have). Instead, use the few resources that are available in a resource-oriented manner. Bootstrapping is also a form of modesty : start small, grow organically.
Instead of making expensive purchases on credit to fool potential customers (and competitors), self-employment is promoted step by step in a very down-to-earth manner. This has some advantages – but of course there are also risks and disadvantages if you decide to self-finance the start-up.
- You are debt free.
Your company is not in debt from the start. You don’t have to pay back huge amounts of money to banks over the years. At the same time, this does not mean that borrowed capital will have to be dispensed with in the future. Later loans are still possible.
- You gain reputation.
Doing it on your own strengthens your self-confidence . But it also impresses others. In this way, you will develop a good reputation in front of customers and business partners.
- Your area of responsibility is manageable.
As a rule, you are initially only responsible for yourself. If founding a company via bootstrapping doesn’t work, you don’t have to give anyone notice.
- The profits stay with you.
Bootstrapping founders often benefit from the fact that no shares have to be sold, as is the case with investors, for example. This means that profits made remain entirely in your own pockets.
- You learn how to act efficiently.
You have to focus on the essentials right from the start, making smart financial decisions. At the same time, you have to use very scarce resources sparingly, yet effectively and profitably. In addition, great effort and personal commitment are required – a good tool for successful founders.
- You are independent.
Bootstrapped funding means no one can talk you into how you do things. So you can try out the implementation of your visions. In the case of borrowed capital, on the other hand, the investors have a say. And: There are certain deadlines to be met when the first installment has to be repaid.
- The beginning is difficult.
A lack of investors often means not having any support for questions and problems, for example from an experienced investor and industry expert. The knowledge could be very useful, especially in difficult times.
- The company is growing slowly.
Overcoming the first hurdles can be difficult when bootstrapping. Scarce financial resources make immediate purchases difficult, instead you have to wait. This requires more patience until you can achieve really big sales. At the same time, there is a risk that others with a similar business model will pass you by and your own company will have to accept disadvantages.
- You deviate from the plan.
If financial resources become scarce, concessions are necessary that were not previously planned. Under certain circumstances, however, such deviations can also result in opportunities.
- You carry a double burden.
It is not uncommon for companies to set up part-time. Because while your own company is not yet making any money, the running costs have to be covered. This leads to double taxation.
- You alone bear the risk.
With bootstrapping, you have to keep an eye on yourself and your activities at all times. It is your own capital that you are putting at risk. If the hoped-for success does not materialize, you are left with the costs alone. Founders cannot afford to make several mistakes. If something goes wrong, this is often the end of self-employment.