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Bootstrapping Advantages Disadvantages

Bootstrapping Advantages Disadvantages

Bootstrapping Advantages Disadvantages

The popularity of private equity funding in India is at an all time high with equity investors investing record amounts of funds into startups in India. With all the publicity surrounding private equity and angel funding, the concept of bootstrapping has become lost. In this article, we look at the advantages and disadvantages of bootstrapping, so the Entrepreneur has a good understanding of the concept of funding. For more information about Bootstrapping, you can also refer to the article on “Bootstrapping for Entrepreneurs”.

Advantage of bootstrapping

Several entrepreneurs think that they need a lot of funding to start a new business. This is true but only in some cases? Most start-up businesses do not required large funding and can be started by utilizing own resources or funds from dear ones. Bootstrapping by using funds from friends or relatives or simply partnering with them can actually get you started on your business easily. Bootstrapping is hard but it is the most profitable way to run the business. Several successful entrepreneurs agree that bootstrapping the business in the initial stages comes with several advantages such as:

  • You get to be your own boss and do not have to constantly explain or take advices from a banker or venture capitalist.
  • Bootstrapping will help you become super efficient which is very important for a start-up business. When you bootstrap, it gives you better control over the expenses and the cost involved in the day to day operations of the business. Most bootstrapped companies are accountable and careful. Most bootstrapped companies start out with one big product. This helps build customer loyalty, partnerships and a gradual increase in sales.
  • When you bootstrap you tend to learn more since you do not have resources at your disposal. You tend to do things on your own and make mistakes. These mistakes are learning’s and will only help you get better with managing and operating the business.
  • Most entrepreneurs when bootstrapping know how to handle pressure better. They are minimalists in nature and are so, keep costs down and avoid unnecessary spending.
  • Profit and cash flow are different from each other. Therefore, a bootstrapped company not just enjoys the profits but also keeps a keen eye on the cash flow.
  • When resources are little you think out of the box to yield better results. This helps to work with cost-effectiveness and also develop a versatile skillset
  • When you bootstrap with your own investment money then you as a founder of the business hold complete responsibility for the business. This leaves the founder’s equity and control over the company safe and undiluted. This allows you to run the operations as you would want your business to run therefore invariably when the business churns out profit- you get to be the sole owner of it all.
  • Bootstrapping a business for as long as possible leads to higher valuation when private equity investors invest in the company.

Disadvantages of bootstrapping

Bootstrapping Disadvantages
Bootstrapping Disadvantages

Bootstrapping comes with its own set of disadvantages too. You bootstrap by working on funds without borrowing. It’s suitable to work in such a manner during initial stages of a business startup but the possibility of more fund requirement in due course of time to develop and generate more products will hamper the growth and productivity of the business.

  • At some point in the business, you might feel static and redundant with no scope for further development
  • In bootstrapping all the profits are yours but in case the business goes topsy-turvy then the losses are yours too. Also, the profits earned from the most bootstrapping company will mostly not be adequate to meet all the expenses and cost. It might not be adequate for expansion mainly depending on the nature of the business. For example, if you start a home-based lunch delivery service for 10 people and you suddenly receive a bulk order for additional 20 people; you may have profited from the previous billing just enough to cater to the initial ten people but no funding to cater for the new 20 order that you’ve received.
  • Bootstrapped companies run a risk of losing growth opportunities due to lack of funding.
  • Several entrepreneurs who seek funding from venture capitalists or banks have money at their disposal to make payrolls and pay bills even if there is any delay in receiving the payment from customers or other sources. Such delays for a bootstrapped business can become the cause of concern.
  • Sometimes bootstrapped entrepreneurs tend to get sucked into extreme bootstrapping that they tend to lose out on the window of opportunity for growth. As long as the business model is viable seeking funds from external resources should not be a concern even for a business that started off on bootstrapping.
  • Bootstrapping too soon can lead to lower valuation for the company.