What Is A Bootstrapped Business?
“If you don’t have a lot of capital, don’t choose a business that requires it.” - Seth Godin
Not every business needs to be “Venture Backable”.
Instead, the default option for startups should be to create a “Bootstrapped” business.
Bootstrapping refers to a self-sufficient company, one that uses its own money, rather than from a lender or investor.
Crucially, you keep full ownership of the company.
This initial money might come from you the founder, or it can be generated right from the beginning through pre-orders.
Bootstrapping is not a perfect option, but it’s within your control.
Investment is seen as a seductive solution to the most common entrepreneurial problems, allowing a company to grow rapidly and carry a seal of approval from investors.
However, this external money comes with strings, and strings bring complexity:
Huge growth targets
Time pressure
Differing views on strategy
Investor accountability
The ability to be kicked out of your own company
And even if you were ok with these strings, the decision isn’t totally within your control.
You’re waiting for an investor or VC firm to pick you, to declare you worthy, and they generally say “no” to most people who approach them.
The alternative is you pick yourself – using your own vision, setting your own goals, spending your own money.
It is hard to be this self-sufficient, with some people describing it as “pulling yourself up by your bootstraps”, a move that is both evocative and physically impossible.
Bootstrapping Forces Creativity
Because money temporarily solves most startup problems, the decision to bootstrap requires creativity, hunger, ambition, some rat cunning, and customer centricity.
Bill Bernbach said “It may well be that creativity is the last unfair advantage we're legally allowed to take over our competitors.”
It takes creativity to dodge costs and run lean experiments.
It takes hunger to chase early revenue and put in the work without a salary.
It takes ambition to bet on yourself, to see the value in holding on to your equity.
It takes rat cunning negotiate clever deals and make yourself look like a bigger entity than you actually are.
It takes customer centricity to listen to your audience rather than pitching for what you think you’d like to build, nor telling people what they’re supposed to buy.
Bootstrapping forces you to do the hardest parts of the work first - no stalling while you spend money and set up shop.
Your funding comes from customers who are buying solutions, not investors making bets.
That brings forward the “Product-Market Fit” hurdle, but that’s not necessarily bad.
If you have Product-Market Fit, if you have customers saying “shut up and take my money”, everything else gets easier.
If you can’t find or impress customers, finding that out now is the second-best result.
The worst result is if you set up a bigger business that customers ignore.
The earlier and smaller you are when you find out that you need to change, the easier it is to pivot.
Building With The Customer’s Money
An example of doing the hard part first is running a pre-sales campaign.
Pre-sales is the process of seeking commitment and advancement from customers, pitching them a compelling offer and asking for something in return.
We are not looking for compliments and vague promises, we want a downpayment, in part or in full, which can be used to create the products/services in question.
If that sounds unusual to you, think about crowdfunding campaigns and platforms like Kickstarter.
The entrepreneurs upload a project or offer, they film a video explaining the concept, then invite pre-sales in exchange for different levels of “reward”.
Some of these rewards are ego-driven donations, like naming rights or the chance to have lunch with the founding team, but a lot of these rewards are your chance to buy the product/service at a discount.
Once the project hits critical mass, the money goes to the startup and they can get to work.
If it doesn’t reach its target, all funds are returned.
This is a great mechanism because it speeds up the moment of truth – do customers want to buy what you’re offering?
Making a decent video isn’t easy, and running a campaign takes your creative energy and existing network, but it beats investing in inventory or overheads that customers don’t care about.
This doesn’t need to be public either – you might recreate the process approaching ten big customers individually, each time pitching a compelling offer and asking for buy-in.
Their responses when asked for a commitment will show you how they truly feel, and that can be good and bad news, but all of it help you refine your offer.
If you’re thinking “Well our situation is different, we couldn’t possibly sell something without having built it already”, that’s understandable, but history would disagree.
Your peers and competitors have been doing it already – running pre-launch campaigns to validate demand, create excitement and prepare their audience to put down a deposit (partial or full), giving them the resources to create their work without taking on so much risk.
Objections To Bootstrapping
Bootstrapping often involves growing iteratively in waves, rather than building a big, expensive and eventually efficient business.
When founders object to bootstrapping, it usually comes down to the idea of building a company once, at a larger scale, so that it looks more professional and has greater economies of scale.
i.e. each product/service is cheaper to deliver, but the amount required to break even each month goes up.
They don’t want to build a small bakery then a bigger bakery, they want to start with the big one.
So they worry about any methodology that feels like taking the long way around.
What they miss is that going the long way around lets you build momentum and reduces risk.
A small bakery with a queue out the door will have lots of opportunities to grow.
A big empty bakery will have a hard time generating demand and answering investor concerns, and it’s hard to become popular in a hurry.
Of course, some business models need external funding – it would be nearly impossible to bootstrap a biomedical breakthrough, a new smartphone or mining company.
When you need expensive equipment, clinical trials or an enormous licensing fee to begin, outside cash is essential.
That’s fine.
But if you’re not in that position, bootstrapping is on the cards, or might even be the only option available to you.
Profit First
Mike Michalowicz wrote a good book called Profit First, which described a mindset and practice to help bootstrapped business remain financially healthy.
He describes the problems that happen in bootstrapped businesses where there are more uses for money than actual money.
Something is going to miss out.
And in a lot of startups and small businesses, they pay for all of their costs first and profits are “whatever is left”.
Which usually means not a lot, and with no predictability.
Of course, profits can’t be “whatever is left”, they are the fuel and safety net of your company, and yet we treat them like the lowest priority.
It comes down to our natural tendency to not think about money when money is plentiful, then get really creative and frugal when money is scarce.
This tweet from Dan Wilbur sums it up:
Mike Michalowicz’s alternative is to pay yourself your profits first, before your other costs.
Or basically, treating your profit like a cost, like your rent or insurance, which you pay on time, without deviation.
This means that “what’s left” goes to cover your less essential costs, forcing you to be selective about how to allocate the last of your money, knowing that your profits have already been secured.
Running the Profit First system doesn’t require special software, it’s an easy adjustment to how you handle money that comes in to your company, squirreling away your pre-determined profit before it can be eaten up by non-essential costs.
Why Isn’t Bootstrapping More Glamourised?
Bootstrapped stories aren’t told as often, because there’s no deals to announce and fewer people sharing in your success.
There’s a financial incentive for funds and VCs to sell the benefits of taking their money and selling pieces of your company.
You might get to pose for a photo and have articles written about your deal – specifically on how much you raised, not what you gave up in return.
In some ways, the amount of money raised is a vanity metric, and as Eric Ries said: “Vanity metrics are the numbers you want to publish on Techcrunch to make your competitors feel bad”.
What actually matters is the return on that investment – did the company use this money to find Product-Market Fit?
There are very few press releases that say “this company made $300k in profit, find out how they’ll sensibly allocate it” - it’s a non-story but a great reality.
But they’re not lesser stories, if anything they’re more relevant, relatable and achievable.
Bootstrapped companies are hard to build, but you control your own future.
You can’t get fired from your own company, at least not in a single meeting, customers can vote you out by shopping elsewhere.
You retain ownership and control, giving you skin in the game and a reason to pay attention to the financial implications of your choices.
And ironically, investors love to offer money to entrepreneurs who don’t need it, so you won’t need to shut the door on investment anyway.
For more on how to bootstrap, you might enjoy Profit First by Mike Michalowicz or The Customer Funded Business by John Mullins.