Bootstrapping tends to fall off a founder’s radar once their ventures are off the ground. The reason is that after the seed phase, start-up leaders are primed to look outside their businesses for their entire financial strategy or to solve cash flow gaps. With investor capital harder than ever to source, we’re exploring how start-up founders and leaders can extend their runways and grow their businesses without rushing to secure external capital. And we unpack the scenarios where bootstrapping could be a better option for start-ups in the short and long term and how to optimise it in your funding mix.
What is bootstrapping?
When we’re talking about business, bootstrapping describes a particular type of funding. In a nutshell, bootstrapping refers to the personal finances invested into the business and sweat equity (effort) of the company’s founders and owners, as well as revenue generated from the venture’s operations.[1] For that reason, in entrepreneurial circles, bootstrapping is synonymous with the resilience, sacrifice, creativity and resourcefulness of the founders. It’s the amount of money they can drive into the business without resorting to external capital such as debt and equity funding.
Where to find bootstrapping
Bootstrapping is much more than raiding your piggy bank for seed funding. While bootstrapping is often the go-to funding source when you first launch a new venture, it can remain relevant long after you start trading. And if you want it to, it can serve as a quiet workhorse helping to fund your venture as it grows.
Here are the main sources of bootstrapped funds.
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Personal savings
Usually self-limiting or finite during the non-revenue days of your business, personal savings are typically used as seed money to get your venture off the ground. But you can extend the role of personal savings as bootstrapping, if you have more than one co-founder or by reinvesting your personal savings into the business once you start making sales and can pay yourself a salary that you plough back into your venture.
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Sweat equity
It’s the one type of bootstrapping all founders engage in regardless of whether they ultimately seek external funding. Sweat equity is what Winston Churchill referred to in his first speech as Prime Minister in 1940 as, “blood, toil, tears and sweat”.[2] It’s the unpaid mental and physical effort along with the time founders invest into their businesses to bring their ideas to life.
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Running a tight ship
Keeping your operations lean and lengthening your runway by reducing your burn rate while you’re creating a minimal viable product is another way to bootstrap your start-up. However, keeping costs down and being efficient is one bootstrapping habit you can, and should, keep long after you’ve left the starting blocks behind. For more information about how to cut your burn rate to extend your runway, read our article, How to slow your burn rate and extend your runway. Keeping an eye on your inventory ratio will let you know how efficiently your business is using its inventory as it grows. To calculate it, choose a time period, for example a month, then divide the cost of goods sold by the company’s average inventory value for that period. Remember, inventory ratios vary from industry to industry, so benchmark your inventory ratio against your sector averages.[3]
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Creating funding alternatives
Start-ups with a bootstrapping mindset can get creative to make the dollars they have go further or effectively secure funding without borrowing. Examples include bartering services with other businesses or securing pre-sales from engaged customers to boost cash flow.
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Strategic growth to scale
With bootstrapping, founders focus on building a stable and robust revenue stream and achieving profitability before expanding and beginning to scale. Known as self-financing growth, it’s another important string to your venture’s bow, beyond savings alone, which are rarely adequate to bankroll a scale-up journey. Read our recent article The cash KPIs for scale-ups every founder should know for more on this topic.
To bootstrap or not to bootstrap
Looking at bootstrapping, it’s clear that some types, such as cost-cutting and self-financing growth, can continue to belong to your funding mix long after you launch your start-up. Whether you lean into bootstrapping will depend on two overriding factors: your product/service and sector and your personal preferences.
Product, service and sector
The type of innovative product or service you’re creating will have an outsized influence on how much you bootstrap your business beyond the seed stage. Some innovations require capital-intensive R&D and manufacturing to meet their customers’ needs, for example, mining innovations or pharmaceuticals. So bootstrapping can only take some start-ups so far. In these capital-heavy sectors, where it can take decades to get to market, you will need external investment in the form of equity or debt funding to continue to grow and scale. In other sectors with lower costs and fewer regulations, such as software, bootstrapping your way to a minimum viable product and into the market may be a feasible option.
Personal preference
The founder’s personal preference and comfort with debt or investor influence is another deciding factor in the funding role bootstrapping plays for a start-up. Some founders have their eye on the investor prize from the outset and plan for a capital raise early on. And other founders will be more comfortable with debt financing (borrowing).
Debt financing is a loan that is repaid with interest within a set period. It can take the form of secured or unsecured loans. Secured debts tend to be for larger sums and require founders to put up collateral which the lender can seize if the founder defaults. While some founders may be relaxed about borrowing as much as possible as early as possible to get to market faster, other founders may have a different view. They may be drawn to bootstrapping, or smaller unsecured loans instead. Additionally, some founders and their businesses may lack assets to secure big loans against. So they will need to take a more measured and staged approach to debt finance.
Advantages and disadvantages of bootstrapping your business
Like any type of funding, bootstrapping has its benefits and its drawbacks. So let’s consider what they are.
Advantages
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Ownership and control
With bootstrapping, founders stay in control. There’s no need to trade control for investor dollars or provide collateral to secure borrowings which must be repaid within a set timeframe. With bootstrapping, you bear the risk. But you will reap the rewards from a business you have worked hard to build.
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Efficiency and necessity
With investor money in the bank, start-ups can get slack and ignore the need to generate a profit long after they could. Uber is a prime example. It finally posted a profit in 2023, 15 years after launching.[4] But if your start-up is a devotee of bootstrapping, then this is a luxury you really can’t afford. From the get-go, start-ups that are entirely bootstrapped need to be highly efficient and resourceful to create a business model that works. And if they’re successful in hitting those viability and profitability milestones early on, it will ensure they’re viable in the long run. They say necessity is the mother of invention. The limited funds of the bootstrapped founder fosters ingenuity and sustains an innovative mindset in their businesses long after the start-up’s early-stage era.
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Focus and flexibility
With no external investors to court and then please; or lenders to answer to, your start-up has the flexibility to focus on its R&D and pleasing its customers instead. Bootstrapped businesses by their nature will be hyperfocused on reaching that all-important product-market fit as soon as possible. Their customer-pleasing ways make them more likely to secure more sales faster too.
Disadvantages
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Financial constraints
Sidestepping external capital can hurt your start-up’s ability to scale and capitalise on new opportunities. And a lack of funding flexibility can also create cash-flow problems if your business experiences a curveball that dents your financial position. Ultimately, it could lead to you having to close the doors when investor funding or a bridge loan could have given your business some breathing space to regroup and succeed. Although you may have complete freedom on how you run your business, without external funding, you may well run out of runway and lack the capital to turn your ideas into action.
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Less runway and fewer resources
While you can use bootstrapping to extend your runway, you won’t reach the instant long runway lengths an investor could deliver. While the resourcefulness and creativity that bootstrapping can spark can have its upsides, it can be exhausting too. There’s no way to sugarcoat it: a lack of resources in the form of staff, equipment and training can slow your start-up’s growth.
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Financial risk
While the relative financial risks for bootstrapped businesses and their founders are lower than for highly geared businesses, they still exist and should be considered. With an appropriate business structure in place, bootstrapped founders won’t lose their assets (personal and otherwise) to business creditors if their business fails. But bootstrapped founders still have to put their personal savings on the line. Depending on their personal (and business) circumstances, bootstrapped founders may be able to use their existing lines of personal credit such as personal overdrafts, credit cards, home loan equity to get their businesses off the ground. If their business fails, they may not necessarily face bankruptcy, but they will most certainly face financial hardships, especially if they lack other income streams and invested significant sweat equity.
Optimising bootstrapping in your funding mix
In reality, few start-ups rely entirely on bootstrapping. It’s often a stepping stone on the road to obtaining debt financing or capital raising. But bootstrapping is certainly a source of funding that’s worth exploring and leaning into for more start-ups. And when it comes to debt financing, it’s worth looking at self-resolving debts such as revenue-based or R&D financing in the first instance or as a middle ground. The key takeaway here is rather than only looking at bootstrapping as seed funding, see where you can add it to your capital stack wherever you are on your scale-up journey. It could help your innovation as well as your balance sheet, and that can only be a good thing.
[1] Business Victoria. (2019). Bootstrapping vs raising capital investment. [online] Available at: https://business.vic.gov.au/learning-and-advice/hub/bootstrapping-vs-raising-capital-investment
[2] International Churchill Society. (1940). Blood, Toil, Tears and Sweat. [online] Available at: https://winstonchurchill.org/resources/speeches/1940-the-finest-hour/blood-toil-tears-sweat/.
[3] Fernando, J. (2024). Inventory turnover ratio: What it is, how it works, and formula. [online] Investopedia. Available at: https://www.investopedia.com/terms/i/inventoryturnover.asp.
[4] Hawkins, A.J. (2024). Uber ends the year in the black for the first time ever. [online] The Verge. Available at: https://www.theverge.com/2024/2/8/24065999/uber-earnings-profitable-year-net-income.