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Startup experts call it bootstrapping when an entrepreneur starts a new business without outside investment. This is the norm, not the exception.
But, you wouldn’t get that idea from the relative abundance of online startup information focused on getting outside investment, and seeming scarcity of information about starting without the investment. Statistics are spotty, but I’m pretty sure that more than 90 percent of business startups are bootstrapped.
Bootstrapping definition
What is bootstrapping?
Entrepreneur defines bootstrapping as “to finance your company’s startup and growth with the assistance of or input from others.” Investopedia says it means “to build a company from personal finances or from the operating revenues of the new company.”
Some experts say it’s still bootstrapping when somebody uses borrowed money (loans) backed by their own personal assets, so they keep the entire risk and the entire ownership.
The bootstrapping founder takes all the risk
If you’re self-funding your business, you take all the risk. If your business goes under, you lose your personal investments in the business. But, if you succeed, you also take all the reward.
In contrast, when you take investment from venture capitalists or angel investors, you’re reducing some of your personal risk, because you’re financing your business growth with someone else’s cash. But you’re also usually giving up some equity in your company.
Giving up equity or some percentage of ownership generally means that someone else shares the payout if your business scales successfully and is then acquired. Keep in mind that venture capitalists and angel investors are usually only looking to invest in businesses that have built in an exit strategy—they get paid when you sell your high-valuation business. So do you, but not as much as if you owned 100 percent of your company.
That’s one of the things that makes the personal risk of bootstrapping so appealing. You retain complete ownership and decision-making power within your business. If you want to own and run a healthy business for the next 50 years—you can do that.
Most startups don’t actually receive outside funding
In the real world, the vast majority of U.S. new businesses are bootstrapped.
Statistics are sketchy, but experts generally agree that about 6 million new businesses start up in the U.S. in an average year. Of those, only about 70,000 startups get angel investment, and fewer than 5,000 get venture capital. And banks lend SBA-guaranteed loans to fewer than 100,000 startups per year, often requiring things like your house as collateral.
These relatively low numbers support the general idea that in reality, most startups and small businesses don’t get outside funding—the vast majority are bootstrapped. Some would say that the common phrase “startup funding” is an oxymoron, since so few startups actually get outside funding.
So, 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 a founder uses credit cards, or mortgages a home, or pledges some other personal assets as collateral 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 the final point below).
How to make bootstrapping work for your business
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’ve done more than a dozen angel investments as a member of a local angel group—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 article 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.
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 article). 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, when it works. It can be hell when it doesn’t. I can speak from experience. I’ve had both the hell of multiple mortgages and the taste of impending doom, and 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 bet 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 on Twitter @Bplans.
Editor’s note: This article was originally published in 2015. It was updated in 2019.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
