Bootstrap funding: a guide to self-funding your business

You might have heard the phrase “pull yourself up by the bootstraps”. In modern English, it means to do something without help from anyone else. This is where the terms ‘bootstrapping’ and ‘bootstrap funding’ come from in the startup scene.

In this article, we’ll explain what bootstrapping is, break down the pros and cons and offer some useful tips to help you self-fund.

• What is bootstrapping?
• Advantages and disadvantages of bootstrapping
• How to bootstrap your startup
• Examples of startups that bootstrapped successfully

What is bootstrapping?

In startup funding, bootstrapping means funding your business with your own money, income from your company’s sales and, occasionally, money from friends and family. You can also think of it as funding your startup without taking venture capital investment.

Some startups take investments from angel investors during a bootstrap round, but it’s usually a small amount (under £50,000) and the deal terms (i.e. the details of the investment) are straightforward in comparison to those of a venture capital deal.

Bootstrap funding vs. venture capital

The table above lists the key differences between bootstrap funding and venture capital. Bootstrapping is a less formal way to raise capital and one that keeps the founder in control because you don’t have to give away a lot of equity (ownership) in exchange for investment. VC funding gives you access to a large amount of capital, but it also means you’ve got to give away ownership to get the money. This comes with disadvantages like having less control in your company and pressure from VCs to grow fast.

When you raise startup money from friends and family, you still need basic deal terms that cover the essentials like how much equity the investor gets or the terms of paying them back if it’s a loan. These deal terms act as something formal to show a transaction’s been made. Venture capital deals, on the other hand, need to cover a lot of additional terms because the investment is much larger and venture capitalists have to protect the interests of their company.

The deal terms that you agree to with friends, family or angel investors when you’re raising bootstrap funding cover all the basics and act as something formal to show a transaction has been made. Venture capital deals, on the other hand, need to cover a lot of additional terms.

Advantages and disadvantages of bootstrapping

Should you bootstrap your startup? It depends on what’s important to you as a founder. Do you crave the glitz and glam of landing a massive VC investment? Or do you prefer the challenge and reward of self-funding? Let’s take a look at the pros and cons and bootstrapping your startup.

Advantages

• Retain ownership and control in your company and make decisions without pressure from investors.
• Save time and energy by not doing a formal funding round.
• Grow at a sustainable rate rather than being under pressure from VCs to grow rapidly.
• Get motivated to turn a profit soon so you can fund your costs.
• Sustain your startup during an economic downturn. In our current economic landscape, founders find that bootstrapping and agile funding solutions like SeedFAST/NOTE and Instant Investment work better.

Disadvantages

• Keep spending to a minimum.
• Grow more slowly.
• Risk more financial pressure (you may be at risk of debt and extra stress if things go wrong).
• Restrict your network opportunities (compared to when you have access to your VC’s network).
• Face limitations in expertise available to your company (compared to when you have access to your VC’s expertise).

How to bootstrap your startup

It’s not just about being frugal. In fact, frugality can stunt the growth of your company. It’s rather about being strategic and playing into your strengths. If you’re thinking about self-funding your startup, these are our top tips for how to do so. Read them, research them further and decide if they’re a fit for you and your team.

1. Test the market

Before you spend money on creating your offering, gather as much information as you can to understand what’s going to be worth spending money on and what people will pay for.

• Create a minimum viable product that offers the most basic features and see how your customers respond.
• Create a small pay-per-click (PPC) campaign to understand what people really want by seeing how they respond to the adverts.
• Run a rewards-based/pre-sales crowdfunding campaign to test the marketability of your offering and to fund production costs upfront. If you’re a bootstrapped business-to-consumer (B2C) company, crowdfunding is an excellent way to build up your audience and market yourself. You can read more about this in our essential guide to crowdfunding.

2. Keep things lean

The key to bootstrapping is to keep costs low. Consider all the ways you can keep things lean:

• Keep your website costs low and focus on essential functionality instead of spending a lot on a fancy website agency.
• Build a lean dream team – you only need to hire a few people who can tackle a variety of tasks to get the essentials done while you grow.
• Prioritise – be very clear on where your money and time are most effectively spent.

3. Do a bootstrap round on SeedLegals

You can cut legal costs and keep things organised when you raise bootstrap funding on SeedLegals. Our bootstrap funding service helps you easily take investments from friends and family and we guide you through each step:

• Automatically generate customised legal documents (all the docs you need from Investment Proposal to SH01)
• Save time with a step-by-step wizard that guides you through the process
• Get unlimited support from a team of funding experts
• Share and sign everything securely on SeedLegals
  Save money on legal fees by using our customised templates

Examples of startups that bootstrapped successfully

Need a bit of inspiration before you pull yourself up by the bootstraps? Here are some success stories about well-known companies that bootstrapped their way to success.

Mailchimp

This popular email marketing company was sold for £10 billion. Before selling, they acquired 13 million users worldwide and generated £675 million in revenue annually without the help of venture capital. Mailchimp started off small. Founders Ben Chestnut and Dan Kurzius ran a web design agency together and noticed that their clients (small business owners) all needed a simple, automated email tool. So they created one on the side as an experiment. That humble side hustle is what we now know as Mailchimp.

Spanx

Founder Sara Blakely is an inspiring figure for many entrepreneurs and aspiring entrepreneurs. She started the global brand Spanx with just £4,000 of her personal savings and never took any investment. The company was funded entirely on product sales and hit £3.5 million in revenue in its first year. Sara Blakely kept 100% ownership of the company.

Minecraft

The well-known computer game was sold to Microsoft in 2014 for £2 billion after starting as a side hustle just five years before. Creator Markus Persson funded the company on sales alone and generated £1 billion in profit before selling to Microsoft.

Talk to a funding expert

We have a dedicated team of experts who can help you raise a bootstrap round and answer any of your startup funding questions. Book a call below, we’ll be happy to help.