An important decision to be made when starting a business is whether to bootstrap or attempt to raise capital investment.
Capital investment grows a startup through funding from external sources. On the other hand, a bootstrapped startup refers to the process of starting a business with only personal funds and assets and no external funding. A bootstrapped business relies solely on the founder’s own injected funds as well as funds generated by customers to operate and grow the business.
Some examples of bootstrapping include:
- Running the business from home instead of leasing an office
- Leasing equipment rather than buying equipment
- Obtaining loans from family and friends instead of borrowing money from a bank
There are both challenges and opportunities involved in a bootstrapped startup. This article will provide an overview of the challenges and opportunities associated with bootstrapped startups.
How Does a Bootstrapped Startup Work?
- Beginner stage: A bootstrapped business may require personal income or savings or borrowing money from friends and family to start.
- Customer funded stage: Involves using the income generated from customers to continue operating the business and fund its growth.
- Credit stage: Involves focusing on funding specific activities such as upgrading equipment and employing staff. At this stage, the business may take out loans or look for venture capital to expand.
Opportunities for Bootstrapped Startups
Without any external investors, the founders of the business have control and are responsible for all decisions involving the operation and growth of the business. Founders do not have to run their ideas by other investors or gain approval for business-related expenses or decisions.
Inexpensive cost of entry
Bootstrapping is an inexpensive and easy way to start a business because personal funds are used and less money is borrowed. This also means the business can be started sooner as there is no need to wait for bank loan approvals and search for and secure investors.
Limited resources forces innovation
Bootstrapped businesses often experience limited resources, though this can assist a founder in developing efficient and practical solutions due to budget constraints. This often inspires creativity as founders do not have the resources that well-funded ventures do.
Challenges for Bootstrapped Startups
As there are less funds available, a tighter budget is required which can be challenging and may mean holding off on any non-essential additional products and services. Founders of a startup business often work outside of typical hours to operate and grow their business and some can not afford to hire employees at the start.
By investing personal funds and assets into the business, the founder takes full financial responsibility. The founder risks losing personal savings or putting an asset at risk if the business fails.
Higher risk of failure
A bootstrapped startup relies on the founder’s own funds as well as funds made from sales. Bootstrapped businesses are often unsuccessful due to a lack of revenue and insufficient profit to meet all costs associated with the business.
A bootstrapped startup is an inexpensive way to begin a business and allows the founders to maintain complete control of the business, though bootstrapping does not always achieve success. There are a range of challenges associated with bootstrapping including limited resources, personal risk and higher risk of failure.
Should you require further legal advice please contact OpenLegal by filling in the form on this page or calling 1300 337 997.