SmartCompany explainer: What is bootstrapping and why should I do it?

The concept and practise of bootstrapping is something often talked about and lauded in business circles, but there’s likely many current or aspiring startup founders and business owners who don’t have a full grasp on what exactly the concept entails.

‘Starting a business with no external investment’ is a fairly standard definition, and one that serves well when explaining the concept to someone outside of the business space. But when it comes to actually doing the bootstrapping, there are a few extra things that need explaining and clarifying.

So if you’re wanting to get a solid understanding, sit back and relax because this SmartCompany explainer will fill you in on the what, why, and how of bootstrapping.

What is bootstrapping?

Unlike most pieces of startup or business jargon, the term “bootstrapping” actually has some modicum of sense about it. As StartupAus’ Alex McCauley describes it, to bootstrap means to “literally pull yourself up by your bootstraps”.

“It’s the classic garage startup model: keeping your spending low, eating ramen every night, doing whatever you can to make ends meet with a plan of driving growth through revenue and customers,” he told SmartCompany.

For a more clinical definition, a study from 2006 on bootstrapping in American small businesses defined the term as: “a collection of methods used to minimise the amount of outside debt and equity financing needed from banks and investors”. Basically, a way to start and grow a business or product without needing to find a bank loan or rely on investors.

Though McCauley’s definition explicitly refers to startups, bootstrapping is exceedingly common in the world of small business. But it’s probably less likely to be referred to by its startup-y name; in fact, many small business owners would probably call bootstrapping just ‘starting a business’.

This is what the Productivity Commission also found when it investigated the in a barriers to starting a business in 2015; its extensive report revealed that over 90% of new SME owners marked personal savings as a minor or major source of funding for their business.

Additionally, a further 50% said personal credit cards were also a main source of funding. On the startup side of things it’s much the same. The 2017 Startup Muster survey found 43% of startup founders had never raised funding; 67% said their own cash was the only way they had funded their business; and only 6.6% had received a bank loan.

What are the benefits?

So all the cool kids are doing it, but why?

There are some obvious advantages of bootstrapping, the main one being founders that bootstrap are not beholden to anyone or anything while building their business. There are no investors to answer to, nor bank loans to repay.

This can be an advantage if the business heads downhill, or fails, as the only thing founders are set to lose in that situation is their own money.

According to McCauley, bootstrapping also forces a certain sort of mindset in founders, bringing a focus on profitability and revenue to the fore.

“It makes businesses think about things from a customer-first and utility point of view,” he says.

“Plus when the going gets tough and funding isn’t as prolific, the strongest companies are the bootstrapped ones.”

Bootstrapping also provides a viable alternative to those seeking funding in an environment like Australia, where access to capital for SMEs and startups has notoriously been lacking.

What are the downsides?

The biggest downside to bootstrapping your business is that it’s hard. Really hard.

Running a business in the first place is generally regarded as pretty difficult, but bootstrapping one is doubly so. You have no safety net of backup funds, no runway, and one essential staff member leaving can literally kill your business.

So buyers beware, there’s nothing sexy about bootstrapping. You won’t have a huge million-dollar funding round or swathes of cash to splash. In fact, you’ll be lucky to draw a salary at all.

You’ll also have limited time, as being the founder of a tightly run bootstrapped business means you’re probably doing the work of three employees. Weekends are a rarity, and holidays are completely out of the question.

Cash flow not only becomes king, but judge, jury, and executioner. One poor spend or unexpected cost can throw your plans out of whack, and see your business grinding to a halt.

How much do I need?

If you’re not totally put off the idea of bootstrapping, you’re probably wondering just how much cash you’ll need to back your business until you start breaking even through revenue. Unfortunately, the consensus is varied, with business owners starting ventures with as little as $300, or as much as $40,000.

A study from accounting software company Intuit of small businesses in the US found the majority (64%) needed just $10,000 or less to start their business, and 75% used their own funds to do so.

For startups, analysis firm CB Insights calculated it now costs just $5,000 to start a startup, compared to $5 million in the year 2000, and $50,000 in 2009.

But there’s no hard and fast rule on the amount of money you need, as some estimates even go as low as $400 to $1000. Effectively you need to consider all costs associated with the business and go from there.

Great, I’ve got the money, where do I start?

Whacko! You’re all ready to bootstrap a business, you lucky duck. The next thing you’ll need is a business idea that’s (ideally) scalable, innovative, adaptive, and attractive to employees.

Unfortunately, there’s not much we can do to help with that, though you can check out this list of five business ideas that made millions for a little inspiration.

But if you have an idea and you’re all set, here’s a choice piece of advice for bootstrapping from McCauley.

“The top thing to keep in mind is that it’s difficult to move through business phases quickly as a bootstrapped business, and it’s even more difficult maintaining a bootstrapped company in big cities in Australia,” he says.

“Maintaining a bootstrapped company over a long period of time can wear founders down, so you need a laser focus on your values, and where the needs of your customers are.”

NOW READ: How MyDeal founder Sean Senvirtne bootstrapped his way to build a $30 million online retail business