Should you bootstrap to retain 100% control over your start-up?

In 2015, Habib Ullah Bahar, a graduate of BUET, founded a start-up called Field Buzz with his co-founder Alexis Rawlinson. They started with the little savings they had from their previous venture and did not take any salary for the first 2.5 years.

Field Buzz provides a complete solution for field operations by managing last-mile distribution, tracking interactions between suppliers and buyers, digitalising credit procedures, and facilitating the scaling up of companies. In its 6 years of operations, it has worked with some of the largest agricultural companies producing coffee, cocoa, vanilla, tea, etc. in Asia and Africa. It has completed nearly 7 million transactions and served about 170,000 retailers. However, they have not taken any outside funding till now.

This concept of not taking any outside funds is called bootstrapping.

What is bootstrapping

Bootstrapping is a simple self-sustaining process that is fuelled by personal investments by the founders or cash flow generated from sales. By bootstrapping, the founders retain 100% control over the business and do not raise funds through equity financing.

The concept of bootstrapping is not something new. People have been bootstrapping their businesses for hundreds of years. However, there are debates about the origin of the term. It either originated from the saying "Pull yourself over a fence by one's bootstraps" or "Pulling oneself up by one's bootstraps". Generally, the term was used to describe something very tough to do by oneself.

Pros & cons of bootstrapping

As the founders do not resort to equity financing, they control 100% of the start-up. This means they have complete freedom over all decisions and can always stay true to their vision. They don't have to worry about repayments or exits for the investors. As resources are limited, they are bound to adopt lean operations, find creative solutions, and ensure the highest efficiency within the organisation. This creates an authentic organisational culture.

On the other hand, bootstrapping limits the growth of a start-up. Scaling up becomes extremely hard and competitors may take the market the start-up is catering to. There is a high probability of cash flow shortages, which slim down the chances of survival. As founders do not have additional funding, they have to play multiple roles at the same time, maintain a small team and limit their spending on marketing and R&D.

Stages of bootstrapping

The stages of bootstrapping can be divided into 3 parts: the beginning stage, the customer-funded stage, and the credit stage. At the first stage, founders use their savings or cash from a different job to fund the development and deployment of the product or service. The second stage starts when the revenue generated from the business drives the start-up. Costs need to be kept low at this stage. Finally, the credit stage is when a start-up uses debt to finance its scaling up or expansion project.

How do the founders fund the start-up?

Usually, all start-ups are initially founded by the founder's savings or some other activity. GoPro's founder, Nick Woodman, started by selling Balinese bread and shell belts from his camper van and took a loan from his father. The founders of Airbnb raised $30,000 by selling cereal boxes before starting Airbnb. However, both of these companies eventually went on to raise funding from outside.

Sweat equity is another important source of financing. Sweat equity is the equity of a company being given out as a return for labour and time. Other instruments like factoring, asset refinancing, and trade finance are also used at later stages of a start-up.

Should you bootstrap?

"I think every start-up should bootstrap up to some degree. This will test the dedication of the founders and validate the product/service as you are bound to generate revenues. Our lack of resources made us extremely creative to win customers initially. However, if you have plans to scale you should not wait too long and get VC funding. We are planning on doing so as well," says Habib Ullah Bahar, co-founder of Field Buzz.

The concept of retaining 100% control over your start-up seems intriguing. But in reality, there are very few examples of successful bootstrapped start-ups globally. At some point in the entrepreneurial journey, most founders resort to raising funds through equity funding. The reason behind it is simple – scaling up. Bootstrapping limits the scope of scaling the business. Then again, all businesses have to bootstrap to some point.

According to Rahat Ahmed, CEO of Anchorless Bangladesh, "A start-up can and should bootstrap at the beginning to build out an MVP (minimum viable product). This shows that the founding team is capable of building the product. But ultimately what matters is understanding when to raise capital, from whom and for what purpose. It's critical for a start-up to have necessary funding especially with product-market fit to scale so competitors don't take the market you're going after."

For how long should you bootstrap?

At the end of the day, the main question is not whether you should bootstrap because every start-up has to for a certain period. It is for how long you should bootstrap. This answer depends on multiple factors like what your objectives are, what market you are operating in, what category your product belongs to, how competitive the market is, etc. It eventually all comes down to timing as Rahat Ahmed says, "Bootstrapping is a function of time: You want to do what is preferable to create the most value.  If one focuses too much on bootstrapping, it may take longer to achieve the same thing, which opens up competition and the opportunity may be lost.  If one raises too aggressively and doesn't have a product, it'll be very hard to satisfy investors and may limit the company."