The Pros And Cons Of Bootstrapping Startup by Alejandro Cremades

TL;DR - Advantages and disadvantages of bootstrapping a startup (no outside investment)

Helpfulness - 5

Tags - bootstrapping, self financing, pros and cons of bootstrapping, entrepreneurship, initial capital, growth of startups

Questions answered:

  • What is bootstrapping?
  • What are the pros and cons of bootstrapping a startup?
  • What do entrepreneurs need to do if they are going to bootstrap their startups?

Summary:

  • Bootstrapping a startup, if successful, may bring founders even more rewards.
  • However, it also has downsides, so it is important for founders to know the trade-offs.
  • Bootstrapping a startup means starting lean without outside capital and fueling growth internally from cash flows produced by the business.
  • Pros:
  • Ownership:
    • Bootstrapping a startup means the founder can continue to own 100% of the businesses - even with a much smaller business and revenues, the founder’s share may be worth more than if he/she raised outside capital to achieve a billion dollar valuation
  • Control over direction
    • Bootstrapping means no exterior pressure and responsibility to satisfy other parties’ interests that may be different from the founder’s vision and values.
    • Although solutions like super-voting rights can give the founder more control when raising outside capital, bootstrapping gives the most control over decisions.
  • Keeping a lifetime/multigenerational business
    • Outside investors normally put founders on a clock for achieving a sizable exit within about 10 years.
  • Sense of accomplishment
    • For many entrepreneurs, building a successful venture independently gives a greater sense of accomplishment than using the help of outside capital.
  • Building a business model that really works
    • Founders bootstrapping their startups are forced to quickly build business models that work and can produce positive cash flows and profits right away.
  • Cons:
  • Lower chance of survival
    • One of the most common reasons for startup failure is cash flow shortages.
    • Some founders never get to realise the potential of their startups because they do not have enough budget for their startups to stay afloat due to limited financial resources.
  • Growth
    • Outside capital allows founders to scale big and fast.
    • Without outside capital, founders have limited options in terms of marketing, customer services, product development, etc, which can stunt growth potential.
  • Top level help
    • Raising outside capital can bring not only cash but also top level support/guidance for startups.
  • Hard work
    • Founders bootstrapping their startups need to work more hours and manage more roles.
  • Staying organised
    • Founders bootstrapping their startups should also make sure basics such as bookkeeping, taxes, and systemizing processes are covered
    • They can make a big difference when it comes to filing with the IRS, trying to scale, or raising outside capital later.

Follow up links:

Interviews with successful founders who bootstrap their businesses,