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Advantages and disadvantages of bootstrapping your startup

Posted by Kanika Sinha

August 1, 2016

No matter what business model you leverage, it takes seed money and a consistent cash flow to get a business idea off the ground. So whose money should new businesses use to maximize their long-term growth potential?

Let's take a look at the biggest bootstrapping advantages for startups—and the financial risk that comes with these self-funding strategies.

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What is a bootstrapped company?

The term "bootstrapping" comes from the old phrase, "pull oneself up by your bootstraps," which was first used in the 20th century by author James Joyce. The basic idea is that a bootstrapped startup is built from the ground up, using your limited funds, so you can maintain greater control of every growth stage.

In the business world, bootstrapping means starting a self-funded business, often using your personal savings, without outside capital, external funding, or investor support. Without the help of independent business funding or angel investment, the bootstrapping strategy requires you to generate sustainable growth on your own, by investing your own sweat equity and profits back into your company, until it reaches the point of self-sustained growth.

Why is bootstrapping becoming a common business model?

With fewer and fewer startups obtaining venture capital funding these days, bootstrapping is becoming increasingly common. Not only are there multiple no-debt business advantages, the flexibility in self-funding makes this business model particularly appealing for owners and co-founders alike.

Let's look at the advantages and disadvantages of bootstrapping your startup: Bootstrapping Advantage #1: No relying on venture capital firms

One of the best self-funding benefits in business ownership is the freedom to grow, direct, and control your business, your way. The advantages of retaining control over every aspect of your business are endless, from creating your own goals and growth metrics, to choosing your best-case exit strategy when you're ready. With full financial control in bootstrapping, you don't have to answer to angel investors or venture capitalists—so you can build the company you're dreaming of.

Bootstrapping Advantage #2: You pick the focus

Another of the best benefits of not seeking external funding is that you can determine your own set of key performance indicators (KPIs). To attract investors and venture capitalists, startups must prioritize the KPIs that matter to those external funders. But when you own a self-funded business, you can focus on the KPIs that matter most to you.
Plus, by bootstrapping your startup, you can focus on doing what you do best without having to worry that you're taking your company in someone else's prescribed direction. Ultimately, bootstrapping gives you creative control of the direction of your company and goals. You won't get bogged down by others trying to navigate the course of your business performance.

Bootstrapping Advantage #3: Greater profit retention in self-funding

When you rely on outside funding, your investors can lay large claims on the profit your company generates. But when you're the sole investor in your own company, you can save on capital costs and keep more of what you earn. Without investors, capital costs, and personal loans, self-funded companies can enjoy all the cost-efficiency of bootstrapping, without sacrificing a portion of their profits along the way.

While the advantages of self-financing are clear, it's not without a few drawbacks

For many companies, the increased freedom, profit potential, and equity control in self-funding is worth the work. But for other startups, the following drawbacks may outweigh the pros of bootstrapping.

Bootstrapping Disadvantage #1: Personal financial risk

Entrepreneurs who use their own money or personal assets to get their startup going incur a huge financial risk, especially if the business fails. Bootstrapping means your entire startup rests on you and the enthusiasm of your potential customers. If your company takes off and the profits start flowing in, you're a success story! But if your startup struggles, you have few backup options to rely on. Plus, if your startup is your only source of income, you may have to do without a paycheck for a time, while the company grows. While there is the potential for sustainable growth in self-funding, it's not without great personal financial risks. That's why bootstrapped companies must have a clear plan for profitability from the start.

Bootstrapping Disadvantage #2: Lack of networking

Venture capitalists and investors are usually very well-connected. You've heard the saying, “It's not what you know, but who you know.”
Customer-focused bootstrapping puts business owners in front of a lot of great customers, but not as many fellow business owners. As a result, these startup leaders may miss out on valuable network connections, partnership opportunities, and meetups that could open new markets for your business—or increase your brand's visibility. With limited resources, support, and networking potential, it can be difficult to build a rich support community around your startup.

Bootstrapping Disadvantage #3: Slow growth potential and cash flow

Capital can be an incredible accelerator for new startups. An infusion of cash can help you get your product manufactured more quickly, launch an effective marketing campaign, or target a new audience. But when you're relying on your own funding, and operating with limited resources, it can take a while to get your venture off the ground.
While capital can turn your business idea into a fully fledged product in a matter of months, when you're depending on your own savings, it can be hard to maintain your long-term vision in bootstrapping—without getting discouraged or giving up along the way.

Should you start raising capital, or bootstrap your business idea?

Today, there are a number of innovative bootstrapping solutions that can help self-funded startups get off the ground. Options like pre-sales, crowdfunding, bartering, and grants can all help bootstrapped companies grow, without incurring expensive capital—or losing control over their business model.
So, is bootstrapping your startup worth the potential risks? You'll have to weigh the pros and cons. Many bootstrapped companies are highly successful. Why? These startups are forced to be careful, resourceful, and accountable to themselves. They're often highly focused on one profitable product. And they know how to build customer loyalty while maintaining a strict budget.
The key to finding the best model for your business is weighing each path carefully before launching your business idea. It's up to you to decide which strategy works best with your overall goals and long-term vision for your company. 
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Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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