How ironic that it seems like more than 90 percent of the online information on startups is about getting financed—but more than 90 percent of startups are bootstrapped.
What does bootstrapping mean? Here’s what Investopedia says:
“A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.”
The bootstrapping founder takes all the risk
Which means, said simply, that you take all the risk. But, you also take all the reward.
How many startups are bootstrapped?
Well it turns out that in an average year only about 70,000 startups get angel investment, and fewer than 5,000 get venture capital. And banks mostly lend to startups via SBA-guaranteed loans, often requiring things like your house as collateral, and only lent to just over 50,000 business in 2013. Meanwhile, almost 500,000 new businesses startup every month, according to the Small Business Administration (SBA).
Which proves that the general idea that startups get funding is off base; the vast majority of startups are bootstrapped. And that’s my argument for startup funding as an oxymoron (yeah, it’s a stretch, but fun to suggest).
And where does the money come from?
Bootstrapping doesn’t necessarily mean starting from nothing, with no money whatsoever. Although definitions vary, most people call it bootstrapping when the startup founder takes the risk and borrows from credit cards, or mortgages a home, or pledges some other personal assets to borrow the money.
That was my case, in the early years of Palo Alto Software. As we grew to revenues greater than $5 million in the early days, we had no outside investment, but my wife and I had three mortgages along the way, and $65,000 in credit card debt at one point. I call that bootstrapping because the risk was all on us (and do as I say, not as we did; see below, the final point).
The best way to bootstrap is to lever up from early sales, or even promises of early sales. Kickstarter is a mecca for bootstrappers because they can use it to get pledges or promises to buy, with pre-orders, before they finish the product.
Many consulting businesses start with a big engagement from a first client, which is essentially a promise to pay. We did one product at Palo Alto Software that was funded by a letter of intent from a big distributor, promising to buy 1,000 copies as soon as we finished. And I know people who have funded a startup with prepayments from enterprise clients for a service business. It happens. Actually, it happens way more often than you’d think if you guessed from reading all the blog posts about getting investors.
While we’re on that subject, consider this: Read my post on 10 Good Reasons Not to Seek Investors for Your Startup. Not that I’m against angel investors—I’m a member of Willamette Angel Conference, a group of angel investors—but there are a lot of good reasons to bootstrap.
How much money does it take?
The bootstrapper is spending her or his own money. So, we tend to spend less than when we’re funded by investors. We tend to add value through work, often for free, instead of paying salaries.
We also tend to spend less—and spend what we do more carefully—when we’re bootstrapping. Here are some points from my post 10 Lessons Learned in 22 Years of Bootstrapping (without the explanations that followed):
- We spent our own money. We never spent money we didn’t have.
- We used service revenues to invest in products.
- We minded cash flow first, before growth.
- We put growth ahead of profits.
- We hired people slowly and carefully.
And that’s pretty much how it goes.
I found it no surprise a few years back when I discovered a small business study, sponsored by Wells Fargo Bank, that found that the average cost of a startup, in the U.S., in 2006, was $10,000. That’s bootstrapping territory.
The bootstrapper gets all the reward
It’s only fair, after all. The bootstrapper takes all the risk, so she or he gets all the reward too.
If you manage to build a company without outside investors, you end up owning it all yourself. You don’t have investors as bosses (you do have customers, but that’s a different post). You can make your own decisions. You may or may not have a board of directors, but if you do, it’s not a threat to your continued employment. You eat what you kill, so to speak. You control your own destiny.
That’s a good feeling. I can speak from experience. I’ve had the hell of the multiple mortgages and the taste of impending doom, and I’ve had the satisfaction of building a company that remains family owned.
However, I don’t want you to underestimate what it means to take all the risk. Bootstrapping can ruin your life if it goes bad. Please do what I say here, not what I did.
Plan more carefully. Don’t get yourself into a deep hole. Don’t bet money you can’t lose. Don’t get relationships you can’t afford to lose. In my case, my wife was with me in all the key moments, and shared the risk. If I hadn’t had her on board, I wouldn’t have done it.
Do you have experience bootstrapping, or did you receive outside funding for your business? Let us know about it in the comments.