Investing has become a paramount concern to most startups globally; businesses undertake the most significant steps to actualize their funding concerns and also meet up the demands of the business in the long and short run. Every business adopts numerous avenues of raising funds for the business and one such avenue is the bootstrapping method.
Most often businesses find it difficult to raise money once an idea is created, this sees the business owners raise funds from varying means to keep the business afloat. This article offers all there is to know about the concept of bootstrapping, how it works, the basic understanding and others.
What is bootstrapping?
Bootstrapping is the process where a business owner kickstarts a company through funds raised from personal sources. When an entrepreneur seeks to fund a business from his personal finance, such is described as bootstrapping.
The concept of bootstrapping has become more significant in the world of investments, especially in recent times. Ordinarily, an investor would be sceptical of investing in a business where the entrepreneurs had contributed little or no form of investment; such action from an entrepreneur leaves the burden of raising funds for the success of the business to the investors, which would be a great risk in the long run. Bootstrapping is necessary to encourage the entrepreneur to build the business and undertake all primary steps to its establishment before undertaking pre-seed funding.
The concept of bootstrapping is significant to the business’s first funding, which is tailored towards business registration, website or app building for the platform or any other form of basic necessity needed for the business to be in existence, at least. The bootstrapping technique also allows the business owner to maintain significant control of his business with little or no scrutiny from investors.
The concept of bootstrapping offers increased control of the business to the entrepreneur. The concept entails the business owner raising funds for the operation and running of the business to gather significant assets for the business. This gathering of assets allows the business to establish a certain value that can be used by the business owner to raise funds from investors.
The concept also places the business at a zero coupon rate allowing the business leverage on cutting costs and using the resources within its reach to undertake the business. For instance, if Jude forms Adina Ltd, which intends to offer food deliveries online, Jude gathers a team of Amaka, Fred and John. To start up the business and have it running would cost 2 million Naira, and each of the founders donate 500 thousand Naira to the business, such is a classical example of bootstrapping.
Some of the biggest companies that adopted the bootstrapping measure include Apple, Amazon, Microsoft and a host of others. In Nigeria, most startups adopt the bootstrapping technique in the first years of getting started with the business. The other means through which investors can raise funding instead of the bootstrap is the angel investors and venture capitalists who take risks in investing in startups in exchange for large equity.
Strategies in bootstrapping
There exist numerous known bootstrapping strategies adopted by entrepreneurs globally. The concept of bootstrapping is a skill that provides business owners with the opportunity to fund their businesses through their personal funds. Below are some of the most vital bootstrapping strategies known.
- Personal contribution: this bootstrapping strategy occurs when entrepreneurs contribute their personal funds to the business. This mostly occurs when the business is recently formed and the capital contributed by the business owner acts as the first capital to start the business. Founders in this strategy often take larger risks in the business and gain control of running the business in the future.
- Incur personal debt: in this strategy, the founder takes up personal loans to fund the business. This offers a higher risk compared to the previous strategy because a failure to clear the debt may see the founder being declared bankrupt. The loan obtained by the founders would be invested into the business and subsequently paid once the business begins gaining profits over time.
- Avoiding costs: avoiding costs is one of the major ways of bootstrapping. Here the founders avoid letting the business attract unnecessary costs by undertaking certain responsibilities of the business personally. For instance, instead of hiring a dispatch rider, the owner may opt to deliver the items to the customers himself using his vehicle.
- Limiting waste: this occurs when a company limits what it produces or the time it offers such service to the general public. For instance, if a business is founded for cloth making, the business may limit waste by ensuring orders are made and paid for before items are made, this helps to reduce waste and save costs.
Why is bootstrapping important
Bootstrapping is vital to businesses today in varying ways, it offers a window for most businesses to explore the option of establishing the business through little or no liability while retaining control of the business.
Generally, over 70% of businesses bootstrap at the first stage of establishment, nonetheless, this feature could also be adopted at the later stage of the business, all the way to an initial public offer (IPO) by the business.
Despite its importance, a major shortfall of the bootstrapping technique is the pressure it gives on the entrepreneur’s finances, with increased risks of the business failing in the future. Also, bootstrapping denies the business the opportunity of getting a wide range of financing for productivity.
Bootstrapping has been in existence since the start of investing and finance, with a series of strategies made over the years. Arguably, bootstrapping is the oldest and the most popular form of investment globally, the investment technique requires entrepreneurs to show how much they believe in a business by taking the risk of investing in it for future growth. This article offers insight into the concept of bootstrapping.
Frequently Asked Questions
No, bootstrapping can be used in all stages of a business, even when a business has long overgrown the startup stage.
No, investments from family and friends are not bootstrap but classify as conventional forms of investment.