Ever thought of how to bootstrap a startup or what it means?
Funding is a crucial aspect of building a business. Even though there are other variables that are required in building a great business like having the right idea, the right team, the perfect timing and a proven revenue model, yet without money you will struggle to turn any idea into a business. But the good news is that there are a couple of funding options available to you as an entrepreneur. And it is not all of them that have to involve getting millions of dollars.
Broadly speaking there are seven funding options available to you. They are:
- Raise money through Angel Investors.
- Raise money through Venture Capitalists
- Take a bank loan
- Crowdfund the idea
- Win a grant or a major competition
- Government intervention programmes
- Start with your personal savings
This article is about how you can bootstrap a startup. And when we say bootstrap a startup we are referring to how you can skip the first 6 options and launch your startup using your personal funds.
Even though it can sometimes be challenging owing to the availability of limited funds yet bootstrapping a startup has many advantages.
Here is a complete guide on how to bootstrap your startup to unicorn status.
Because this is a very rich and comprehensive guide it is a bit lengthy, but you have the table of contents as a guide. Feel free to jump to any section you need.
WHAT IS STARTUP BOOTSTRAPPING?
Bootstrapping is the process of building a business from ground zero with resources coming ONLY from personal savings or support from family and friends but NO external investment. The keyword in bootstrapping a startup is that the business does not rely on the usual funding models like bank loans, Angel Investors, Venture Capitals or even crowdfunding. The business is completely self-funded. They plough back the money made from sales into the business. And that is the expansion strategy of any startup that is bootstrapping.
STAGES OF BOOTSTRAPPING
There are principally three stages of bootstrapping a startup. They include:
Stage One – Personal Fund
This involves launching your startup purely from your own money. In this stage it is also possible that the entrepreneur can get some additional fund from close friends and family members. But usually it comes as a soft loan. At this stage of bootstrapping it is also possible that the entrepreneur is still in an employment position elsewhere and building the startup as a side business.
Stage Two – Customer Fund (Profits from the business)
In this second stage the establishment task is over. The business now focuses on operations and modifications where necessary. The money used in running the business at this point are gotten from sales from the business. This is the stage where the owner receives money from customers for service rendered or products sold. It is a portion of the profit from those services or products that the entrepreneur invests back at this stage of bootstrapping the startup.
Stage Three – External Fund
At this stage the business outlook looks good enough. The entrepreneur wants to expand, deploy or upgrade technology, hire some experts and maybe fling the parachute by resigning from every other commitment to focus fully on the business. For this to happen substantial amount of money will be needed. At this point the entrepreneur has a decision to make. Whether to go ahead at the current scale or seek eternal funding.
Most times for the sake of ease and speed of scalability the entrepreneur goes for external funding. And this will require diluting the bootstrapping process to allow investors in. This stage is also called the ‘Credit Stage’. However in a situation where the entrepreneur decides to take this stage 3 option it is usually very easy to secure funding either from venture capitals or angel investors because his model is more or less proved already.
But it is also very important to know that this stage is actually optional. There are many known startups that bootstrapped to unicorn status without ever moving to stage 3. Others though yet to attain unicorn status but have proved successful without the need of stage 3.
STRATEGIES FOR BOOTSTRAPPING
Bootstrapping a startup can be a very long path to success but it is doable nonetheless. To be successful with bootstrapping a startup one must be very strategic and intentional about it. Here a few strategies I would like to recommend for successfully bootstrapping a startup.
1. Validate your idea
It will not make any sense sacrificing your hard earned money on something you have not validated. Before you go ahead to bootstrap a startup the first step should be to subject the idea to a serious validation exercise. Oftentimes a business idea comes by discovering a problem in the society. Solving it in a profitable way is what becomes a business. But before you start putting money into that idea in a bid to solve the problem be sure to check the size of your projected target market. Fortunately there are some innovative ways of validating an idea without spending so much money.
You can use online survey
A broadcast questionnaire
A face to face interview
Share with friends
Sale of a prototype
2. Pick a Team of Members with Complementing Skills
You choose bootstrapping as your preferred funding option. So my assumption here is that you know what is involved. And for this reason one way of saving the limited finance available to you will be to choose co-founders or partners with complementary skills. If you are a tech expert it makes little or no sense to get another tech guy into your team. You should be able to perform all the tech related functions. So get an accountant, a marketing expert or someone with a completely different skill set as your first team member. This way you won’t have to spend money hiring people for such roles.
3. Start Small
I am of the opinion that if you want to bootstrap your startup then you should be a big fish in a small pond. And not a small fish in a big pond. Start with a micro-niche and establish authority there. Remain focused on that micro-niche and gain as many loyal customers willing to pay you immediately before you think of expansion.
4. Don’t focus on personal gain at the very early Stage
Even if you are making money from the business try as much as you can not to spend them on yourself. Take as little as possible from the business for sustenance. Place yourself on the least possible salary monthly. I usually advise that you place yourself on the minimum wage applicable in your country. Don’t withdraw more than that.
The assumption is that the minimum wage will be enough to take care of your most basic needs while you focus on building the business. This will enable you invest back most of the proceeds into the business. And with this you fast-track the bootstrapping period.
5. Learn as many skills as possible
This is clear enough. Try and be as resourceful as you can possibly be. As good as it sounds to be a specialist and focus on the key demand of the business. But the more skills you have the more money you save for the startup you wants to bootstrap. Try and be versatile. Multitask as much as possible. If you can learn graphics design do and stop spending the little you have paying for designs. If you can learn bookkeeping do and stop paying for that. Learn Facebook Marketing and social media management in general. The good news here is that every skill is learnable. Spend few extra hours on YouTube or google and you will learn almost any skill your startup needs as you bootstrap.
6. Be Creative
When it comes to resource allocation you need to be creative. Learn or discover alternative and more cost effective way of achieving the same result. Question the status quo. Always ask if there are other ways. Don’t assume that the default is the only available option. Think deep, think wise and think as the box does not exist.
7. Develop a good revenue model
Funds at hand for a startup that is bootstrapping finishes faster than you want to believe. For this reason you have to develop a revenue model that can generate you profit as fast as possible.
8. Reduce Operating Cost by working Remotely
By now you already know that in order to bootstrap a startup whatever you can do to reduce cost is highly encouraged. One of such things I strongly encourage and recommend is to work remotely. Sit down in your house and work. There is no need rushing to rent big and fanciful office. It will save you extra time you can invest in learning new skills. It will as well save you some extra cash in form of operating cost. And if you must get an office then go for a coworking space. You can discover some awesome coworking spaces in your area here. And if you wish to know why renting a big and fanciful office is a bad idea for a startup that is bootstrapping I have written a blog post for that here.
9. Adopt frugality as part of your company values
No one should make you feel guilty about this. In fact you should be proud to to say it that frugality is a core value in your startup as you seek to bootstrap. There are many ways your frugality can come into play. Reuse papers when it comes to printing especially internal memos. I save so much on the cost of buying paper from this. Put on your generator only when it is absolutely necessary. With this you save money on fuel.
In the mid-1990s when Amazon was just getting started, Jeff Bezos and crew worked on the floor in a 400-square foot warehouse. Bezos and his team decided that they needed desks. But being the frugal and resourceful entrepreneur that he is, Bezos decided to build desks out of doors and four-by-fours rather than purchase expensive office desks.
If Jeff Bezos who is now the second richest man in the world know the importance of been frugal as a bootstrapping startup I don’t think you should feel any shame about that.
10. Prioritise profitability over growth
You probably have heard the saying that Africa ecommerce giant Jumia is still running at a lose. And that is despite the company been the first African startup to attain unicorn status. The same thing applies to Uber. At a point Uber was valued at $91B but it was not yet making profit.
What does this tell you? Most global brands you see today operated for many years without making profit – and guess what? They didn’t care. Yes, they didn’t. Their focus was purely on increasing growth and valuation.
They know it is just a matter of time and the profit will start flowing in.
They could afford to do that ONLY because they received millions of dollars from investors. So sometimes they have enough money to spend for the next 5 years even if they didn’t make any profit.
But as one who is bootstrapping your startup you can’t afford that. For this reason you should reverse the process – prioritise profit over growth. You can aim for growth when you get to the 3rd stage of bootstrapping your startup.
11. Take advantage of tax breaks
Check what is obtainable in your country. Some governments offer tax breaks to some startups during certain times of the year. Don’t be too busy to miss out on this. Do well to apply, it might just ease off some pressure and help you save some more money to add to your burn rate so as to increase your runway.
12. If you must hire, hire top talents
First I don’t encourage any startup that is bootstrapping to start hiring staff from day one. This is another mistake I was guilty of when I started HTS Business School and I would like you to avoid it. Perform as many of the tasks as possible on your own. And even when you must hire do well to hire top talents. What I mean is for you to hire those that are exceptionally skillful and can add real value to your startup.
I know what you are thinking in your mind right now. Yes, I do. You are saying, ‘but top talents comes at a very high cost and a bootstrapping startup surely will not be able to afford them’. Maybe you are right. But there is a way and I will show you that. Explain your vision carefully. Present a good picture of where the company is likely to be 5 years from today. Top talents are futuristic and most of them will be willing to accept stock option in place of high salary. This therefore becomes a short term strategy to retain more cash as you work to bootstrap your startup.
13. Create and monetise quick contents
Is it possible to create some short term alternate products that could bring quick money while you continue to work on the main idea or your star product?
During the early days of Airbnb, the company was struggling and urgently in need of cash. Their idea was still at a developmental stage and no money was going to come from it for a while. The business was under threat. Then, founders Brian Chesky, Joe Gebbia and Nathan Blecharczyk came up with a side project to make some quick cash.
During the 2008 presidential campaign, Airbnb released Obama O’s and Cap’n McCain’s — cereal boxes that were sold for $39 apiece. The company managed to sell 1,000 boxes of the commemorative cereal. And from there they made enough money to continue working on the business. As at 2021, Airbnb is valued at $113 billion.
If you are a creative entrepreneur seeking to build an online TV. While you work on creating contents and growing the audience you can decide to use same camera you have to start running commercial photography and short documentaries for clients to raise short term cash.
Cash strapped companies can consider creating an on-brand side project that allows the business to create cash flow while helping to spread awareness of the company’s main product offering.
Think about this. It may just apply to your business one way or the other.
ADVANTAGES OF BOOTSTRAPPING
To bootstrap a startup has so many advantages.
1. You have more control of the business
When you bootstrap a startup it means you are practically not answerable to anyone but yourself. You take decisions you feel is best for the business at all times. Unlike venture capitalist-backed startup that has to receive approvals from investors before any major decision is taken.
2. You retain more undiluted equity and ownership
It is your company. Your money is all that is in the business. With this you owns 100% of the share capital most of the times. And even when you give equity to cofounders or partners you retain a higher share. And this is an advantage if you choose to seek external funding in the future.
3. Motivation to turn in profit as fast as possible
You already know that if you operate for long without making profit your burn rate will be gone and you will land in trouble. So as a startup who wants to bootstrap your motivation for profit is at an all-time high. That is the only way to remain in business.
4. You have more time for the business
If you want to know the truth let me tell you. Most of these startups you hear that get millions of dollars from Angel Investors or Venture Capitalists have little or no time for the business they claim to run. Instead, they spend almost all their time attending meetings with investors. Of course they are answerable to the investors who calls the shot. So they have little time for both the team and the business. Surely you know the implication of that. But for you that wants to bootstrap your startup you will have no such problem.
5. No debt burden
I see many startup entrepreneurs running around looking for where to take bank loans for their businesses. It may be sweet to see yourself having some millions to spend as a startup. But when the chips are down those guys don’t sleep.
In building a business nothing is more of a burden than commercial bank loans. But if you plan to bootstrap your startup you are free from such burden. You enjoy near absolute peace of mind and grow at your pace.
6. You become better in financial management
Since your resources are limited it forces you to become a better financial manager. You become very careful what you spend on.
7. You focus more on the product and the customers
Since you know that the business depends on the money that customers bring they become your number one priority. Fortunately you are not chasing investors so you spend that time thinking on how to improve your products to satisfy your customers the more. And once this happens your customers will become an extension of your marketing team.
8. It forces you to become more creative
If you want to bootstrap a startup then you must be creative. There are many things you want to do that you can’t easily afford. So you are forced to think deeply and by so doing you learn new ways of doing things.
If for example you need showrooms in different locations to display your products but can’t afford that, you can think of partnering with existing outlets at each of your preferred locations. You display your products in their outlets and give them a percentage of the profit on each sell.
We used this to a great effect with a client who produces digital display. He was bootstrapping and we needed to manage his resources as much as possible. So first, we decided he will convert a section of his apartment to a factory to save the cost of renting a space. But producing in the house meant not many people will be able to see his products. So we needed showrooms in busy and commercial areas of the town, but obviously he couldn’t afford such.
Then we became creative about it. We met electronics shops and even boutiques. We discussed with them and their outlets became our showrooms and they get a percentage of the profit from each product sold. The company made massive sales from that and eventually adopted it as part of their model.
DISADVANTAGES OF BOOTSTRAPPING
As fascinating as it sounds to bootstrap a startup it also has some disadvantages. And here are few of them:
1. It will increase your building and breakthrough time
Because you don’t have enough resources to fast-track some tasks it typically takes more time to build when you bootstrap a startup. While this may be acceptable if you have other sources of income but it will be a huge risk if all you have is the business. So if projections don’t go as envisaged there is a huge risk you might be out of business after a while.
2. It might put you into more stress
Entrepreneurship is generally not for the feeble minds. It comes with lots of stress and challenges. But all that might increase if your choose the route to bootstrap as a startup. Truth be told, there are certain mental and physical stress you won’t experience if you know you have enough money in the bank to operate for the next foreseeable future.
3. You may have to work without earning a salary for a while
You are doing your best to plough back the profit into the business. This means you may not earn as much as you deserve as you seek to bootstrap your startup. Sometimes the money coming in is not even enough to run the business let alone for you to earn. This may not be an easy experience for you.
4. You lose the experience and network that venture capitalists bring
One of the benefits of securing funding from venture capitalists or angel investors that many don’t seem to emphasis is the experience and network they bring into the business. The money aside, most of them have extensive experience running businesses. And because they have equity in the business they want it to succeed as much as you the entrepreneur do. But when you choose to bootstrap a startup you lose those priceless benefits.
5. It may not be practical for some businesses that require large investment
I don’t think that in practical sense bootstrapping can apply to all businesses. Imagine you want to go into importation or manufacturing in a large scale. You will definitely need substantial resource outlay from the word ‘go’. Except you are coming from a position where you already worked for years and gather so much money bootstrapping may not be your best option here.
SUCCESSFUL BOOTSTRAPPED COMPANIES
If you are considering the best funding option for your business and bootstrapping is one of the options in your mind I have a good news for you. Or maybe you have been seeking external investment for your business and you have not been able to secure one. And you are on the verge of giving up on that fantastic idea you don’t need to. The good news is that many top brands you know were able to bootstrap their way to the top. Take a look at the following entrepreneurs that were able to bootstrap their startup to success.
Expectedly Mailchimp will be the number one name on any such list. In September 2021 a big news broke out in the tech startup space that Software firm Intuit announced that it was acquiring Mailchimp in a $12 billion deal. The sale represents the largest-ever exit by a bootstrapped business. Which also implies that it is the most successful of any startup that bootstrapped 100%.
How did they start?
MailChimp started as a side project funded by various web-development jobs. Ben Chestnut and Dan Kurzius were running the web design agency Rocket Science Group. And in 2000 Ben and Dan had a design consulting business. The client was asking for e-newsletters. But at the time, creating them was a tedious process. So, they worked to create a better way to design email newsletters, and through that MailChimp was born the next year, 2001.
Mailchimp was a delightful email marketing service for small businesses. It was designed as an alternative to the oversized, expensive email software of the early 2000s. With Mailchimp, they found that working for small businesses gave them the freedom to be more creative and adapt quickly to their needs. So, in 2007, Ben and Dan decided to shut down the web design agency and focus exclusively on Mailchimp.
Strangely the two founders decided they don’t want to accept any outside investment. And they stood by that reaching a revenue of $600 million in 2016, $700 million in 2017 and $800 million in 2018. And by 2021 the company was sold for 12 billion dollars with the two founders each having 50% of the share.
Year Founded: 2001
Founders: Ben Chestnut and Dan Kurzius
Kayako story is one of the most inspiring stories of all the bootstrapped startups I know. It is a help desk and customer service software that helps businesses be more productive and build customer loyalty. Kayako currently serves over 500,000 customers across 100 countries. And according to the CEO their annual revenue is in millions of dollars.
How did they start?
It all started when a 17 year old Indian boy by name Varun Shoor told his father he wanted to start a digital business instead of proceeding to college. His request was granted and he dropped out of school and started building Kayako having been coding since age 13. He started the business in Jalandhar, India but later relocated its office to London, England.
Quite unlike many Software as a Service(SaaS) startup Varun Shoor choosed to bootstrap his startup all the way. And he has maintained that and has not collected investment from any external source in its 21 years of existence. The core strategy of a bootstrapped company deployed by Varun Shoor is that he learnt the core skill – coding needed for the business and did the job himself.
Year Founded: 2001
Founders: Varun Shoor
Zoho is a multi-billion dollar b2b software company.
How did they start?
The company started in 1996 as AdventNet before been renamed Zoho Corporation in 2009. It was founded by Kumar Vembu and Shekhar Vembu, two brothers from Chennai, India. But it was their third brother Sridhar Vembu who became CEO in 2000 that played a pivotal role for the startup to bootstrap successfully to a hugely profitable company today. The company reached 50 million customers in January 2020 and made a revenue of $690 million in 2021. Just like any other startup that wants to bootstrap the company didn’t seek external investment of any sort.
Two key strategies of bootstrapping a startup that Zoho founders employed to great effect are:
1. They refused to collect salary from the business until after 1998 when sales crossed $1 million.
2. They succeeded in 1997 in convincing Sridhar Vembu with a vast experince in sales to join the team rather than outsource that.
Year Founded: 1996
Founders: Kumar Vembu, Shekhar Vembu and Sridhar Vembu
Headquarter: Chennai, India.
Shutterstock is an American provider of stock photography, stock footage, stock music, and editing tools. It is one of the earliest stock image sites and maintains a library of around 200 million royalty-free stock photos, vector graphics, and illustrations. And also has around 10 million video clips and music tracks available for licensing.
How did they start?
Founder Jon Oringer got his start as a professional software developer, but he was also an amateur photographer on the side. Although he was particularly passionate about coding yet of more interest than coding to him was making money. Oringer was always creating new applications and marketing to his own email list a variety of products to buy. He did this while working on his master’s degree. But soon he realized that products sold better if you attached photos with them.
However, photos were super expensive to use, so he decided to take his own photos with a Canon he bought. Remember he is a professional photographer. This soon prompted him to realize that other entrepreneurs on the web might want stock photos as he did. With this, he put together the odd 30, 000 photos he already took and paywalled them behind a website with a $49 monthly subscription for unlimited use.
This soon blew up, and Oringer expanded his services by adding on contributors beyond himself. He bootstrapped with his startup for 9 years.
It was after 9 years of operations when Shutterstock hit 18 million royalty stock pictures that Oringer decided to float an IPO raising a small round only once (mainly to help scale his management team). Yet, he still maintains a close to 50% ownership of the company by himself.
Today Shuttlestock is worth over 2.5 billion dollars. I consider that very impressive considering that he started the business alone and all with his personal funds.
One of the main reasons he never had to raise money in his first years of operations was that he achieved product-market fit relatively early on, where demand exceeded his own photo supply.
Year Founded: 2003
Founders: Jon Oringer
Headquarter: New York
Mojang is an independent video game developer based in Stockholm. The company is a household name among gaming fans today. The company also known as Minecraft became highly successful and eventually became a best-selling game of all time.
How did they start?
Creator Markus Persson had a background in gaming, but he saw room for improvement. His passion for creativity made him work on his idea for Minecraft on the side of his regular job. He eventually saw enough potential to launch Mojang officially in May 2009. Markus managed to run the company for the next 5 years with his personal fund. He made a profit of over $1 billion dollars. And eventually sold to Microsoft for $2.5 billion dollar in 2014.
Year Founded: May 2009
Founders: Markus Persson
Headquarter: Stockholm, Sweden
MyClean is an established home & office cleaning services company based in New York City, with offices in Chicago and DC.
How did they start?
Michael Scharf, left his comfortable, investment banking career to co-found a premier cleaning tech startup called MyClean. He quickly immersed himself in the world of dirty, NYC apartments, toilet bowls and dust bunnies. He cofounded MyClean with Mike Russell.
Amazingly when they proved their idea. Rather than seek venture capitals they opted to raise a loan from family and friends. And they got a total of $267,000 to start the business. It was that meagre amount that they managed as they bootstrapped to success. As at 2020 they were posting $9 million in revenue.
Year Founded: 2009
Founders: Mike Russell and Mike Scharf
Headquarter: New York
GitHub is a web-based hosting service for version control using git. It is mostly used for computer code. The idea behind GitHub is very simple: enables developers to share source code with everyone and make it public without having to pay anything. However, GitHub charges you if you need to hide your source code because it’s private and runs your business. As at November 2021 it is the largest source code host with over 73 million developers.
How did they start?
GitHub started as a weekend project when Tom Preston-Werner, Chris Wanstrath, P.J. Hyett and Scot Chacon discussed their idea for a git hosting site after a local programming meetup. The ideas was to create a platform to easily share code and learn about git, a git hub. For 4 years the founders provided the revenue needed to run the business on their own as they bootstrapped their startup successfully.
They eventually raised $100 million in series A investment in 2012. And by 2018 just 10 years after it was founded they were posting a revenue of $200 – $300 million before it was then sold to Microsoft for $7.5 billion
Year Founded: 2008
Founders: Tom Preston-Werner, Chris Wanstrath, P.J. Hyett and Scot Chacon
Headquarter: San Francisco, California, U.S.
8. Sparkfun Electronics
How did they start?
Nathan Seidle was selling his own DIY electronics kits out of a dorm room in college. He saw something that piqued his interest and the interest of his peers – and he took off. It was a simple idea where Nathan decided to resell hard-to-find circuit boards and gadgets to geeks like him who enjoyed building electronics.
Nathan said the biggest lesson of his startup success is that you don’t need venture capitals to build. This implies that to bootstrap is a viable alternative for any startup. In fact he credits his success for not rushing to Silicon Valley to compete with other big tech companies there. Instead, he stayed true to his roots and scaled his business at a comfortable pace. Furthermore, he stated that venture capitals could have taken him off the track.
Today SparkFun makes annual revenue in excess of $67 million.
Year Founded: 2003
Founders: Nathan Seidle
9. Tough Mudder
Tough Mudder is an endurance event series in which participants attempt 10-to-12-mile-long obstacle courses. It was co-founded by Will Dean and Guy Livingstone.
How did they start?
The idea of Tough Mudder as a business and as an adventure came while Will Dean was in Harvard Business School for his MBA. This was after spending several years as an anti-terrorism officer as well as a second secretary at the high commission in New Delhi. He got the idea of the company while he was studying and participating in different sports competitions which he found too individualistic.
The concept established by Dean was part of the school’s annual competition and made it to the semi-finals. He sent an email to his friend Livingstone whom their friendship had started at age 13 as boarders in England. Livingstone who was a bored corporate lawyer did not even waste a second in accepting to join his friend.
They started by spending $300 on a website and about $8,000 on Facebook Ads to promote the first event they organised. According to Dean, that money was all he had in his account. And it could have been disastrous if it didn’t work. Fortunately it worked.
The strategy paid off: More than 5,000 people ran the first Tough Mudder. And more than 2 million people have run the company’s races in 10 countries since. The Brooklyn, New York-based company generates more than $100 million annual revenue through registration fees and sponsorship deals. And guess what? They are yet to receive any outside investment. This is another story of how to bootstrap a startup100%.
Founders: Will Dean and Guy Livingstone
Year Founded: 2010
One major challenge internet users have to battle with since inception is fraudsters. These are people always exploring channels to scam people or steal their money online.
Braintree is a solution to this problem. It was created by Bryan Johnson where each party pays a small fee for the peace of mind that the transaction isn’t fraudulent.
How did they start?
The company started in 2007 and the growth was so phenomenon that it managed to survive on its own earnings from transactions for four years without any venture capital or crowdfunding.
Year Founded: 2007
Founders: Bryan Johnson
There are a thousand and one startup out there that bootstrapped and still excelled. I will find time to do a comprehensive post dedicated to these types of startups that for whatever reason choosed to bootstrap.
But for now just know that the following also bootstrapped.