What is Bootstrapping Model? Is it Good for Business?

Did you know many companies started their business by bootstrapping? When first time someone listens to the word bootstrapping he or she gets confused. I will tell you about that what is bootstrapping and what are its advantages and disadvantages.

Bootstrapping Means in Terms of Business

Bootstrapping means starting a business without involving external finance or starting the business with your capital, which means a person who starts a business with less capital on a small scale and does not involve any venture capitalist, investors, or taking a loan from any individual or bank and reinvesting the profit from the business into the business to grow it on large scale with his effort is called bootstrapping.

Why Bootstrapping?

Most entrepreneurs adopt bootstrapping model for their business for one to two years to validate their idea, scheme, or product that will be profitable or not in the market and to get an experience of the industry. When they feel that their business idea is going well and business is growing successfully, then they stop bootstrapping and welcome other investors to invest their money into the business or take lone from other financing companies or banks.

If an entrepreneur starts his business involving external finance or invests the money of other investors in the initial stage, he may suffer a loss because he does not have any idea of the product and market trend that is why bootstrapping is important for the business.

GoPro is a company that manufactures waterproof and rugged cameras for vloggers, YouTubers, travelers, or adventurers. This company was founded in the year 2002 by Nick Woodman and he bootstrap his business from 2002 to 2012 which is almost ten years. After ten years of investment and targeting the market of vloggers, YouTubers, travelers, or adventurers, finally accepts the offer from Foxconn to invest 200 million dollars in his business to grow it fastly on large scale.

Like GoPro there are many other firms or companies that we see today that has bootstrapped their business at the beginning. Some of the examples are:

  • Google
  • Facebook
  • Github
  • SAP
  • Oracle
  • Microsoft
  • Dell
  • Apple
  • eBay
  • KFC
  • Coca-cola

Bootstrapping Stages

There are mainly three stages of bootstrapping.

Initial / Beginning Stage

In this stage, a person starts the business with his personal savings, salary,  or borrows some money from friends or family to kick start his business or as a side business.

Reinvestment / Seed Stage

In this stage, the cash earned from the customers is reinvested into the business to keep the business operational and to fulfill the business expenses. Sooner or later there will be more customers and business growth will speed up.

Credit / Creation Stage

In this stage, the owner of a business can finance to improve the product, hire experts, etc. An entrepreneur can also invest money of the investors, take out a loan from the bank or find a venture capitalist.

Pros

  • Business finance and control are in the entrepreneur’s hands in bootstrapping scenario.
  • Bootstrapping is a very effective business model because it boosts flexibility and simplicity in the early stages of business.  
  • A person doesn’t need to share the business profit with investors or to pay interest on the loan. All the profit and equity are enjoyed by the entrepreneur.
  • Business decisions can be taken easily without others’ involvement and no one can influence your decision.
  • A person can wisely use his money and resources by bootstrapping his business.
  • A person gets an idea and experience of the market and validates his idea.
  • If a person suffers a loss in the business he is not answerable to anyone.

Cons

  • A person cannot grow his business in bootstrapping fastly due to limited capital and resources.
  • A person has to reinvest his profit into the business and if he does not get a profit from the business by bootstrapping, his business fails on the initial stage. So there is a risk of failure.
  • If a business bears a loss, an entrepreneur has to answer to the other investors or the shareholders.
  • Investors are always keen on your decisions and business control is distributed among other investors.

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