Bootstrapping is a way to internally finance a new company, the new business using profits from its own investments or from its founders to set up the company; this is as opposed to using external capital. The business will then continue to run without external financial input from outside influences and can be compared to a self-sufficient person who lives off the land. While it isn’t explicitly stated, there is an underlying theme to bootstrapping that gives the impression that those doing the bootstrapping are doing something very difficult, and working extremely hard.
Bootstrapping is also used in computer technology, the term usually being shortened to booting. Booting refers to the loading of software onto your computer after a reset or power-on operation, the programs loading by themselves without any external input from yourself.
When bootstrapping, profits are not likely to come as quickly, but it does begin building a long-term cost management mindset. By eliminating outside influences from investors, bootstrappers can relax and focus entirely on building relationships with customers and vendors.
Owners of bootstrapped companies do not have to worry about diluting their ownership interests in the business. The company can remain personally held, and there is no need to issue equity. It also allows the founders to experiment more with their product or service, since they don’t have the pressure of investors who want immediate results. Instead they can experiment and tweak their product or service until it is just perfect.
This also serves to increase the risk of the startup, since the founders need to micromanage their capital as well as the business itself. If there is too long a delay in releasing a product the whole company could end up out of cash. Generating revenue is often a key focus for the bootstrapped company, a necessary requirement to keep the business afloat. Founders must find an operational growth model that leads to profitability if they want to survive. This can sometimes take the company in unintended directions. It’s also possible that the growth of the business will be stunted without capital from outside investors.
In order to expand the team and to market effectively a certain amount of revenue will be necessary, otherwise it could take longer than expected to reach certain milestones.
One further downside to bootstrapping a business is the lack of credibility at the start. The lack of investors could hurt the credibility of the company at the start, since people might believe that there are no investors because no one was interested in investing. Backing from respected investors often gives potential customers the added confidence needed to try the new product or service on offer, while bootstrapping could serve to highlight the lack of experience of the team.