Bootstrapping for startups: A founder’s guide

Bootstrapping: What it is and how it works

Bootstrapping is a strategy used by startups to fund their operations without relying on external investors (e.g., angel investors, VCs, etc.) or traditional financing methods (e.g., bank loans). 

This approach involves using the founder's personal resources, revenue generated from the business, and creative cost-cutting measures to sustain and grow the company.

So, how does bootstrapping work? 

Founders typically use their personal savings, credit cards, or small loans from friends and family to get the business off the ground. 

Bootstrapped startups often rely on cost-cutting measures. For example, they work from home or share office spaces. They use free or low-cost software and tools, and they outsource non-core functions to reduce overhead.

The bottom line is that bootstrapped startups often grow incrementally, reinvesting profits to fund each stage of growth. This measured approach helps maintain financial stability and reduces risk.

Advantages

One huge advantage to bootstrapping is the resource efficiency it creates. Bootstrapped startups focus on lean operations and efficient resource management. This focus on profitability often leads to more sustainable business models.

Another advantage is the independence of startup founders. By avoiding external funding, bootstrapped startups keep greater control over their business decisions and direction because they do not have to please VCs or angel investors.

Another important advantage is that bootstrapped startups keep their equity, which can pay big dividends in the long run. 

Lastly, startups that don’t have to please their investors can fully focus on the business and product, fully focusing on pleasing the customer.

Drawbacks

While bootstrapping can be an effective strategy for many startups, it does come with several drawbacks. 

Bootstrapped startups often experience slower growth compared to their well-funded counterparts. Limited funds can constrain investing in marketing and sales efforts, infrastructure, technology, or equipment, as well as talent. 

With tight budgets, even small fluctuations in revenue or unexpected expenses can create significant cash flow challenges.

Another drawback is that founders’ need to conserve resources can result in financial stress or burnout from working long hours and taking on multiple roles.

The key is to be aware of these challenges and develop strategies to mitigate them while leveraging the advantages that bootstrapping can offer, such as maintaining control and fostering a culture of efficiency and innovation.

Strategies and methods used in bootstrapping

Entrepreneurs often begin by using personal resources, such as savings, assets, and credit cards, to fund their startups. They may also seek small loans from friends and family. 

Bootstrapping prioritizes early profitability over rapid expansion to reinvest earnings back into the business. Successful bootstrapped startups often employ rapid iteration, quickly developing and testing products or services to adapt to market needs and customer feedback.

As far as guidance and mentorship, entrepreneurs leverage their personal and professional connections for support and resources.

The bottom line is that implementing lean and efficient operations is paramount in bootstrapping. Below we’ll go over examples and their method to succeed without outside funding.

Examples of successful bootstrapped startups

BambooHR

BambooHR, an HR software company for small and medium businesses, was founded in Utah in 2008 by Ben Peterson and Ryan Sanders. For the first three years, neither founder took a paycheck, relying on savings and making tough budget-conscious decisions.

BambooHR achieved substantial success and grew to $500 million in annual sales. It was then that it accepted its first external investor in 2012. 

The bootstrapped approach allowed the founders to keep full decision-making authority and stay focused on the business and their customers.

BambooHR – still a privately-held company – is a profitable SaaS company with annual recurring revenue of more than $100 million. It reports having 1,200 employees, 30,000 customers, and 3 million users.

How did BambooHR grow without outside funding?

• Founders did not take a paycheck for three years and once they did raise capital, accepted minimal outside funding
• Remained focused on building and improving HR software, addressing pain points in traditional HR processes, specifically for small and medium-sized businesses
• Fueled its growth with its own revenue
• Expanded its workforce slowly and deliberately
• Aimed to create a product that companies would love and find valuable

Wayfair

Niraj Shah and Steve Conine founded Wayfair, a home goods e-commerce retailer, in 2002. The company didn't accept any venture capital until they reached $500 million in sales, which was more than six years after its founding. 

The company initially sold furniture through various websites, and in 2011, the founders decided to consolidate and rebrand as Wayfair. Following the launch of Wayfair.com, the company took its first institutional financing, raising $165 million from four investment firms. In 2014, Wayfair went public (NYSE: W). In 2019, the company made the Fortune 500 list (#499). Today, the company is valued at $6.72 billion.

How did Wayfair grow without outside funding?

• Operated primarily on a dropshipping model, connecting customers with manufacturers without holding inventory, which reduced capital requirements
• Initially grew by optimizing against Google's algorithm, buying hundreds of SEO-friendly URLs to aggregate traffic
• Targeted categories that larger e-commerce players like Amazon weren't focusing on, such as furniture and home decor
• Invested in building a proprietary technology stack tailored to the home goods and furniture e-commerce market
• Prioritized developing an exceptional product at extremely low prices to drive high-volume sales and global distribution

Weighing the pros and cons of Bootstrapping vs. other funding methods

Wrap up

Having enough capital is essential for a startup’s success. As you grow your business, focus on what matters—your product and customers. Rho's finance platform helps you manage cash and automate finance busywork, so you can focus on growing your business.

With Rho's Corporate Cards, you can make the purchases you need to keep your business operations running smoothly, all while enjoying 1.25% cashback. Combined with our expense management platform, you can make more strategic spending decisions and gain the insights you need to take control of your budget and bootstrap for longer.

Want to learn more? Schedule time with a Rho finance expert.

Schedule a demo today.