Founding a startup can be a world-changing endeavor. From amazing personal experiences to life-altering wealth, creating a business is filled with wonderful (and scary) moments. But to start a business, you need funding. And finding funding isn’t always easy. Some lucky startups find quick seed money from angels. However, the majority of startups either can’t find seed funding or their founders don’t want to give away equity. As the adage goes, many founders “pull themselves up by their bootstraps.” Here’s your guide to self-funding (or “bootstrapping”) your startup.
Bootstrapping (or self-funding) involves using personal wealth to grow your company. Instead of outside money like angels, venture capital, or friends and family, bootstrapped businesses rely solely on the founders’ savings or the initial income of the business itself. Generally, bootstrapped businesses focus on generating early revenue, and most bootstrapped companies are thrifty, money-savvy, and incredibly careful about every investment.
So, how do you know if bootstrapping is for you? Here’s a quick list of pros and cons.
Both bootstrapping and seed funding can create successful startups. In fact, neither funding method is outright superior. Some of the largest companies in the world were initially bootstrapped. And some of the fastest-growing unicorns used significant amounts of seed funding. However, bootstrapping does have some unique benefits. These include:
- You retain full ownership of your business. Seed funding requires you to give away equity during the initial seed and each subsequent round. Bootstrapping gives you full control of your equity.
- You’re more pressured to create a sustainable business model. Bootstrapped businesses are pressured to create sustainable, profitable business models upfront. Seeded startups often hyperfocus on generating gross revenue, even if each customer comes at a loss. In the long term, many of these seeded startups fail due to an inability to shift to a net-positive operating model. Bootstrapped startups are typically profitable faster, though it may come at the cost of slowed overall growth.
- You have less outside interference. Some founders prefer to work alone. Bootstrapping prevents you from having to answer to any outside forces or deal with any external influence.
- You’ll learn important lessons. Growing a business with your own capital teaches you some important lessons about money management and leadership.
Of course, bootstrapping also has some cons. These include:
- You probably have less capital to work with. Chances are, your savings isn’t on-par with seed money. You’ll probably have less working capital.
- It’s risky. If your startup fails, it comes out of your pocket. This makes bootstrapping risky and rewarding.
- You don’t get mentorship. Seeding comes with its own benefits. Incubators, angels, and accelerators all offer mentorship and resources.
- You limit your networking and connections. When you bootstrap, you don’t get to forge the same connections as you would through seeding. You’re mostly facing the world alone.
Most startups are bootstrapped. Over 70 percent of all startups rely on founder capital for their initial growth. It can be challenging to identify bootstrapped startups. The gas station down the street, your local mom-and-pop retailer, and your favorite restaurant were all probably bootstrapped. But let’s take a look at some unicorns that were entirely bootstrapped at the start.
- GoPro: Nick Woodman saw an opportunity to create a unique type of camera for sports enthusiasts. He used his personal savings and a small loan from his mother to bootstrap GoPro for nearly a decade. Today, GoPro is a multi-billion dollar business, and the initial IPO was nearly $2 billion.
- Shopify: This bootstrapped tech company borrowed less than $1 million during its first decade of operations. From the start, Shopify focused on slow growth and quick profits. Believe it or not, Shopify is nearly two decades old. It didn’t rocket to stardom. Instead, its founders focused on finding a profitable market niche and organic growth.
- Wayfair: For nearly nine years, Wayfair bootstrapped on its founder’s savings. According to founder Niraj Shah, having the right people and plenty of backup plans for growth helped Wayfair position itself as a market leader without requiring significant seeding.
- GitHub: Founder Tom Preston-Werner only spent a few thousand dollars bootstrapping GitHub. He focused on immediate profitability to sustain business operations. According to Tom, GitHub started charging for subscriptions “the day we opened.” Tom knew he couldn’t afford to bootstrap GitHub for decades, so he positioned his business around immediate profitability.
Each of these companies operates in a unique space. But all of them share a few common threads. Here’s how you can bootstrap your startup on pennies and dreams.
Bootstrapping your startup requires you to either use your personal savings, use loans, or create a profitable business quickly. However, you do not need to threaten your livelihood to create a successful startup. Consider you and your family’s future. Not all startups are successful. Focus on immediate profitability, slow growth, and smart business decisions. Here are a few tips that may help:
- Use loans wisely. SBA loans and micro-loans are a great way to raise quick capital without taking out a second mortgage. Do not leverage your entire livelihood against your startup. Be cautious. Choose loans that are repayable without putting your family or self at significant risk.
- Choose the right team. Bootstrapped businesses should focus on hiring scrappy, growth-ready team members. Choose people that are evangelists for your brand. You want dedicated, focused, and ambitious talent surrounding you.
- Focus on profitability over quick growth. Chances are, you need to make money quickly. You should tackle easy-to-acquire markets before you jump head-first into challenging markets with high growth potential. Generate revenue fast and focus on mid-horizon goals after you have a few profitable pillars.
- Lessen outsourcing. While outsourcing is smart later on, you should lessen your immediate spending at the start. Try to learn as many skills as possible. Most bootstrapped founders are marketers, salespeople, and leaders at the same time.
- Be frugal. Choose second-hand equipment. Find cheap office real estate. And always focus on saving money when chasing new goals or acquiring business solutions.
Bootstrapping isn’t easy. But we can help. DigitalOcean provides founders with a variety of cost-effective resources through Hatch — our global startup program. Sign up today to learn how we can help you grow your startup on a shoestring budget.