Bootstrapping is when entrepreneurs find a way to self-fund businesses instead of accepting investment from outside sources.
“Bootstrapped startups have a long history in the U.S., with many of the biggest companies in the world starting just from one good idea and no initial funding.” (source: USchamber.com)
The history of business is filled with many successful entrepreneurs who bootstrapped their businesses. For example, Steve Jobs and Steve Wozniak built their first computers in Steve Jobs’ parents’ garage. Their first computers, the Apple I, were MVPs (or minimum viable products) through which they could quickly generate the capital they needed to build their business.
Basecamp, formerly known as 37 Signals produces award-winning project management and team communication software that is trusted by millions of customers around the world. Basecamp was bootstrapped by providing web design services to other companies. According to Jason Fried, one of Basecamp’s founders, the company grew from $1 to a $100 billion valuation without any external investment.
MailChimp helps companies send email newsletters and generates about $700 million in annual revenue. They were bootstrapped by co-founders who had been laid off from their web design jobs. They were named Inc’s Company of the Year in 2017 and are still 100% owned by the founders.
Tough Mudder produces extreme races. “Thousands of people will pay good money to run the most grueling obstacle course ever invented, which will include ice baths, extreme hill-climbing, and electrical shocks” (source: USchamber.com). The two founders each invested $10,000 of their own money to start Tough Mudder, and with no venture funding, more than 2 million people have now run Tough Mudder races.
Why Do Businesses Bootstrap?
Why do businesses turn to bootstrapping? Sometimes entrepreneurs don’t have a sufficient track record to secure venture funding.
“Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.”
– Guy Kawasaki
Entrepreneurs who are successful at bootstrapping their ventures can receive many benefits, such as retaining more ownership, decision-making authority, and creative control over the business.
“A slow bootstrap worked really well [for GoPro]… As long as you can bootstrap not at the sacrifice of competitive advantage, bootstrapping is a really powerful thing because it allows you to be totally devoted to your vision.”
– Nick Woodman (GoPro Founder)
4 Bootstrapping Strategies I Have Used to Help Fund My Businesses
I have created and sold three digital ventures that used bootstrapping for all or part of their funding. Here are 4 strategies I have used for bootstrapping my businesses:
We can bootstrap a business through arbitrage. According to Wikipedia, arbitrage is “the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices at which the unit is traded.” In other words, arbitrage is the process of finding something we can purchase at a low price from one source and resell for a higher price to a buyer.
For example, in the early days of my Adoption.com venture, my best way to bootstrap was to sell domain names. Back then, Network Solutions was the only domain name registrar, but people didn’t really trust the internet to buy and sell yet. So, when Network Solutions let people like me register a domain name, they would physically mail me a paper invoice for that domain name. They gave me 90 days to pay for the domain name. If I didn’t pay for a domain name within 90 days, they would take it from me and put it back into the pool of available domain names for someone else to register.
So, I would register large groups of domain names. Then, during the 90 days of free ownership, I would contact potential buyers and try to sell the domain name. If I was able to sell the domain name, I would pay the Network Solutions bill, then transfer the domain to the new owner. If I was unable to sell the domain, I generally let the domain name expire instead of paying for it.
Years later, as I had a little more money, domains had become much more scarce and were increasing rapidly in prices. So, I developed a list of hundreds of short domain names I felt would be very valuable. I then reached out to the owners of all those domain names, and I found the best deals. I purchased those deal domains, held onto them for a little while, and then sold all of them to help fund my business.
Over the years, I sold millions of dollars of domain names, which provided needed capital for my growing businesses. My goal was not to be a domain broker. I always saw this as a short-term arbitrage to help fund my long-term businesses.
This concept of arbitrage can work well in many different niches other than domain names. For example, many people buy products at thrift stores and then resell those items on eBay for a profit. As another example, I know someone who has family connections in the diamond wholesale market. So, she buys diamonds through that wholesale connection and resells them in her small-town college market.
I have helped bootstrap three of my startup ventures over the years by providing professional services to other organizations. I provided digital development, marketing, and monetization services. For example, in the early days of Adoption.com, I helped a lawyer build a website for lawyers. Also, through the years, we have done consulting and web development for adoption agencies and attorneys. The funds from that consulting and web development work were used to bootstrap the core Adoption.com business.
Years later, I started a venture to create and grow niche online communities. To fund that venture, I did extensive consulting work for businesses in Brazil, such as Azul Airlines. I spent about ½ of my time over about 3 years working for other companies in Brazil.
This method of bootstrapping can often be the most lucrative in the short run. For example, when I was doing consulting in Brazil, my business partner and I generated more than $1.5 million in consulting revenue our first year. However, bootstrapping through professional services does have its pitfalls. Because professional services usually trade hours for dollars, this type of bootstrapping can consume a lot of time. As a result, there may not be enough time left to effectively grow the core business. The reason this worked for me is that I had a tremendous business partner named Brad Pace who stayed in the U.S. and ran the business while I was consulting in Brazil.
Also, bootstrapping through professional services is only available when the entrepreneur has developed sufficient skills and experience to sell the professional services for a substantial fee. Young entrepreneurs without a track record may not be able to sell professional services for a large enough fee to make this worth their while.
Business Plan Competitions
Prize money from business plan competition wins can be incredibly valuable for startup ventures because it is an investment that never has to be repaid, or for which we don’t have to give away equity. Further, it builds credibility and gives exposure when a group of expert judges proclaims to the world that we have the best business plan.
In the early days of my first business, Adoption.com, I helped bootstrap the business through business plan competitions. I submitted business plans to two competitions and won both. In addition to the prize money, in both cases, I was offered unsolicited investments shortly after winning the competitions.
I remember one night a business plan competition application was due. The plan had to be postmarked that day. I had gone home to get some dinner, and after dinner, I was going to finish up the application and take it to the post office. As I was on my way back to the office, I was rear-ended. It took forever for the police to arrive and take care of the situation.
When I was able to leave, I raced to the office and printed the application. Then, I headed to a post office in Phoenix that gave postmarks and was open until midnight. By the time I arrived at the post office, it was after 12:20 am. Remember, the business plan competition application had to be postmarked the previous day.
As I walked up to the post office, I found it was dark and locked up. However, I saw an employee leaving an employee entrance. I walked over and handed the postal worker the application, and I said “This has to be postmarked yesterday. It’s to help children find loving families through adoption.” The postal worker looked at me, then took the package, and went back inside. Not long after, the postal worker came back out the employee entrance and said “You are in luck. The person in charge of turning over the date stamp was at a baby shower in the post office and hadn’t done it yet. So, I was able to postmark it yesterday.”
There are ethical issues related to that postmark date and the fairness to other applicants I did not consider at that time. I should have been more prepared, and I should not have arrived at the post office so close to the deadline. However, the bottom line is the money, exposure, and credibility from winning that business plan competition was ridiculously valuable for our company, and played a huge role in helping us bootstrap, survive, and grow.
After I had been running Adoption.com for a few years, we had a very kind but pesky competitor running a site called Adopting.org. That competitor was undercutting us on price and making our monetization more difficult. I really wanted to buy this competitor, but I didn’t have the cash to do so.
However, because I was running a business in the same niche, and already had all the technology and relationships to monetize the site, I knew how much money I could generate per thousand page views. In the negotiation process, my competitor shared with me her site’s page views and her revenue, so I was able to calculate her revenue per thousand page views to use as a comparison. I believed I would be able to implement our revenue streams onto her site after the purchase and make more money from her site than she was making.
To test this theory, we went to our advertisers and pre-sold essentially all of the advertising on our competitor’s site before we even completed the purchase. Preselling helped remove the risk of this transaction and allowed me to bootstrap the purchase of our leading competitor.
Many businesses today have seen a lot of success bootstrapping their ventures by preselling through crowdfunding platforms such as IndieGoGo and Kickstarter. One of my past consulting clients named Inergy Solar wanted to make industry-leading, light-weight portable solar generators. They had designed the product but needed the capital. So, they created a great video, put it on IndieGoGo, pre-sold a huge amount of generators, and started production. They secured the capital they needed without having to take out a loan or give away any equity.
I recently interviewed Eric Farr for the Monetization Nation show. Eric is the Owner and Executive Officer of Brainstorm. Eric told the story of how they found a client who wanted a specific software solution. That client agreed to pay enough money that Eric and his company could build the software. The client retained the right to use the software for their business, and because they funded the software development, they had a lot of say in the features and roadmap for the software. It was a win-win because the client received exactly the software product they wanted for a fair price. However, Eric retained the right to license the software for other businesses and started his software company. This type of preselling is a common way that software companies bootstrap themselves.
In addition to generating capital through bootstrapping, another essential element of bootstrapping is cost containment. Because bootstrappers don’t have all the financial resources of venture-funded companies we have to be more frugal and find less expensive ways to do things.
When we bootstrap, we will often have to forgo the perfect team with seasoned track records. Instead, we will need to find “young and hungry” members of our team from college campuses or overseas who are able to work for a price we can afford at the beginning, with the hope that they can grow their compensation as the profits of the organization grow.
Getting to Profitability as Fast as Humanly Possible
If we choose to bootstrap, we must get to profitability as fast as humanly possible. In this situation, we must remember that cash flows don’t start until we start shipping. So, bootstrappers don’t have the luxury of being perfectionists. Bootstrappers usually have to be willing to sell and ship products that are “good enough” and not wait until a product is “perfect”. Bootstrappers have to remember that good enough is good enough, and that perfect is the enemy of cash flow.
Bootstrapping a business is probably going to take more time and than taking an investment. But in the end, we may have a lot more control over our businesses. We will probably be retaining the ability to run the business the way we want to run it. We probably won’t have investors pressuring us to make short-sighted decisions to make quick profits. We will instead have the freedom to focus on the long game if we want to.
“When someone says ‘Think of all the things you could do if you raised a ton of money,’ I instead think of all the things I couldn’t do. I value independence more than any check anyone could ever write me.” (Jason Fried)
1. Many of the world’s most successful companies have used bootstrapping.
2. Successful bootstrapping can have great upsides, such as retaining more ownership, decision-making authority, and creative control over the business.
3. Bootstrapping can also have downsides, such as slower growth, more personal risk, and distraction from our core focus.
4. Bootstrapping through arbitrage is when we buy something inexpensively from one source and sell it to a different buyer for a higher amount.
5. Bootstrapping by providing can often be the most lucrative in the short run, but young entrepreneurs without a strong track record may not be able to earn enough money from this to be worth their while. Also, this may distract the entrepreneur from their core business.
6. Bootstrapping through winning business plan competitions can be a great strategy because we never have to give away equity or repay this investment. Plus, the credibility from winning the competition can give us strong credibility.
7. Bootstrapping through pre-selling products and services can also give us the capital we need without having to give away any equity or taking out a loan. Crowdfunding platforms can be a great way to do this.
8. In addition to generating additional capital through bootstrapping, cost containment is also an essential element of bootstrapping. Because bootstrappers don’t have all the financial resources of venture-funded companies we have to be more frugal and find less expensive ways to do things.
9. If we are going to pursue bootstrapping we have to be laser-focused on getting to profitability as quickly as possible. Bootstrappers have to remember that good enough is good enough, and that perfect is the enemy of cash flow.
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