Bootstrapping in Business: It's Advantages and Disadvantages for Startups
We have over the years heard business start up stories where the founders claim they built their business from scratch with no outside support or capital. This phenomenon in the business world is known as bootstrapping.
In this feature, we'll be looking into bootstrapping, it's advantages and disadvantages. Is it a smart move for starting up your business?
First of all, what is bootstrapping?
Bootstrapping is the starting of a business using personal funds alone with no support from outside investors.
Bootstrapping as a business term originated from the 1990s phrase "pulling yourself up by your boot straps" which means achieving success or overcoming an obstacle on your own without external support.
Will Kenton of Investopedia defines bootstrapping as the building of a company from the ground up with nothing but personal savings and cash coming from first sales.
Bootstrapping is a very common practice for small business entrepreneurs in Nigeria.
A majority of these businesses were built from the ground up with the Entrepreneur's personal savings, sweat, sheer luck and is kept running for some time by the cash gotten from first sales.
It is a different story for start ups in the tech sector. Most people in tech get ideas but would want to wait till they get investors before starting. The thing is, they might never get an investor and so, their idea might never see the light of day.
Advantages of Bootstrapping
The biggest advantage of bootstrapping your start up is that you own your business 100%. All profits and decisions are controlled by you.
You have full control over the direction you want your business or company to go. You do not require a board's or investor's permission to implement changes. Investors can decide they do not like the direction your company is focusing on and since they have a share of the company, they can make you change this.
3. Saves Time
Starting up your business with your personal savings enables you to focus on the business itself without wasting valuable time hunting for investors before startup. A lot of businesses start with personal savings before including investors.
When you have nothing but your savings to support your business, you'd be forced to be creative; to find new ways to make profits, promote your company, offer better services and products. You would find a way to make things work.
Most often than not, in the first year of bootstrapping your start up, all the money made from sales would be put back into the business. Sometimes, you do not even get a salary throughout that period until it is firmly off the ground. Thus, instilling discipline. You'd not have the liberty to waste money any how you like.
If your business survives bootstrapping and is eventually successful, you'd have a strong business that is fully customer oriented. Owing to the fact that at start up, the profit made from customers, is where part your capital came from.
Disadvantages of Bootstrapping
1. Financial Risk
In Bootstrapping your business start up, you are exposing yourself to huge financial risks. The company would fail if you lose any money since you are the sole owner of the company.
Most investors are already established in their niche and as such connect you also to people you'd otherwise have no access to. Thus, helping in networking for your business. Starting your business with no outside investors removes this benefit. You will have to build your network on your own.
3. Slow Growth
The progress of bootstrapped businesses is usually slow compared to where you gather huge start up capital from investors. You can literally push your business to greater length with more money. You can go all out with marketing, full staffing, rent or build your operational base, open branches, and so on.
These are things businesses started and run with bootstrapping achieve years after establishment.
It's true that 70% of startups fail, but there is the 30% that go on to become very successful.
A good example is SkillPatron, an online market place for outsourcing services in Africa. It was launched in 2016 by Jake Adebayo but remained under the radar till 2018. By 2020, they were featured by Startups Influencers as one of the hottest African Startups to watch out for in 2020 with a market capital of around 197.9 billion Naira.
They were able to achieve this because they did not pursue profit first but focused on building the value of their company and establishing the system and direction to work with.
Now, we all know that business start ups does not always go as planned. There is always a chance if you're bootstrapping that your savings might be exhausted halfway into the business. At this point, do you fold up and abandon your business? No.
What do you do then?
Look for investors. It is totally possible to bootstrap your business start-up to a specific point and seek for external funds to continue, instead of wasting valuable time hunting for investors before launching.
This practice would enable you build value, set the direction of the company and you'd be able to attract better investors.
TeamApt, a Nigerian fintech company launched in 2015, bootrapped their start up and operated for two years before seeking for external funding. The CEO, Tosin Olorundare said that a lot of companies in their bid to please their investors end up being trapped.
He said, "when you start up without external funding, you don't go cool, you go out rugged".
His company presently is pulling off a 7 figure annual revenue in dollars.
Although, experts would advise start ups to go for investors as it reduces financial risks and ensures financial stability and security. Bootstrapping is still a very viable option as it offers you two very important features, total freedom and control over your business.
Yes, there is a chance you'd fail, but failure has never stopped anyone from trying again, no? You can always start again till you get it right.
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