At first glance, getting funding for a startup seems like the obvious choice. Building an asset with someone else’s money is generally perceived as ideal because, ultimately, you receive more money with less risk.
Obtaining funding for your company certainly can help you scale faster, but there’s another side of the equation that is much less known. What if your goals don’t include moving to the valley with a potential IPO? What if your endgame is stability, or to spend time with your family?
In cases such as these, you may find bootstrapping to be the most suitable model for you and your startup.
Bootstrapping is about retaining ownership (control) of your company and generating profits. Bootstrapping your startup means you will grow your business with little or no external investments. It means relying on your own savings and revenue to operate and expand your business.
We chose to bootstrap our startup instead of securing funding from outside investors, and will continue to do so in the future.
There can be pros and cons to bootstrapping your company so, along the way, I’ll also share the good and the bad from our own experience, showcase other bootstrapped companies, and explain how you can get started.
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What is bootstrapping?
In the context of startups bootstrapping refers to the act of starting a business with little or no money. At most, it means starting a business without the financial help of venture capital firms or outside investments.
Much like the old adage of “pulling yourself up by your bootstraps,” to bootstrap your startup business means to succeed without any outside help. Bootstrapping your startup isn’t easy to do, but it sure can be rewarding.
When bootstrapping your business, you will either raise the funds yourself, use some sweat equity or consider crowdfunding.
Examples of successful bootstrapped startups
Startup success is often equated with money and VC investment, but there are other (and sometimes more important) ways to measure it.
The startups that are commonly covered in the news are all raising money, so that may be what the public equates with success. You rarely see coverage of startups founded with little or no money.
However, there are successful startups (many of them remote) that are profitable and retained 100% by the owners. That’s what we’re aiming for. These types of businesses are very common, yet they don’t often make the news.
Jason Fried of Basecamp (previously 37signals) put it best when he said, “Look at what the top stories are, and they’re all about raising money, how many employees they have, and these are metrics that don’t matter. What matters is: Are you profitable? Are you building something great? Are you taking care of your people? Are you treating your customers well?”
At Hubstaff, we’re bootstrapped and we’ve got a great feeling of pride from building something with our own funds and those generated from the sales of our product. And we aren’t the only ones. Other examples of companies that are bootstrapped, profitable, and proud include:
- Huckberry – Members-only, bi-weekly web magazine featuring curated outdoors apparel and gear along with great stories.
- Envato – Series of sites, including marketplace and tutorial sites, that help people learn professional creative skills and earn income.
- GitHub – Web-based platform used for website version control and offering public and private source code hosting.
- Campaign Monitor – Email marketing and automation software for designers and their clients.
- InsuranceAgents.com – Insurance comparison website designed to help people save on insurance costs.
We hope the above examples of successful bootstrapped startups offers you the inspiration and motivation you need to get your own startup business off the ground.
Note: Want to know HOW we managed to stay bootstrapped so long? Read this post on how we pay our contractors.
How to fund a bootstrapped startup
This is one of the most commonly asked questions when people are looking into bootstrapping their startup.
Most founders start looking for funding because they think they need it. But the truth is you don’t. When Jared and I started Hubstaff we each invested $26,000 of our own personal funds into the business. This meant we started with $52,000 to get the initial product built.
Although $26,000 is not a lot of money to put into a startup, I realize that not everyone has that kind of money laying around. So, how can you fund a bootstrapped startup?
Build an income-generating business first
Many bootstrapped startups began outside Silicon Valley and some even as merely side projects.
One of the most widely-discussed secrets to setting up a successful bootstrapped startup is to first build an income generating business, then use those profits to fund your startup’s first two years of business.
By doing this, you don’t have to raise external funding. However, there are other ways to build a bootstrapped startup. So, if building an income generating business first doesn’t work for your type of business, one of the other methods may be better suited to you.
Partner with your opposite skill set
By seeking out the missing skill set your business needs, you and your partner each do what you’re good at, and neither of you gets paid until the business is profitable.
This approach is very common as it allows you to both bring valuable and complementing skills from the offset.
When partnering, it’s important to make sure that you’ve found someone you can work well with.
Research by Gallup and Inc. found that 68% of Inc. 500 founders said their entire founding team is intact. Further, 43% of Inc. 500 co-founders reported starting their company with a close friend.
These figures clearly show the importance of having a strong relationship with your founding business partner.
Dharmesh Shah said it well when he said that the optimal number of co-founders for a startup is 2.09.
Typically you want someone who can cover marketing / operations and another person to cover development. This is the way we work at Hubstaff and this method still works well for us to this day.
By partnering with our opposite skill set, Jared and I were able to ensure our startup succeeded financially. If we hadn’t brought our differences together in a partnership, I don’t think Hubstaff would have grown to the size it is today.
Fund your startup with sweat equity
Sweat equity refers to the non-monetary investment that owners or employees contribute to a business venture.
Sweat equity is especially valuable for bootstrapped startups that may not have the funds to hire employees, consultants, and service providers. Entrepreneurs and startup businesses will sometimes use sweat equity to fund their startup idea by compensating employees with stock, shares, or a discount, instead of providing a paid salary.
In cash-strapped companies, owners and employees will often accept lower-than-average salaries in return for shares in the company.
If you choose to fund your startup using sweat equity, be sure to calculate the value of sweat equity before you get started. You first need to know the overall business value. Then divide the amount of the investor’s investment by the percentage of equity it represents within your business.
Your sweat equity is the difference between your initial investment and this new value.
Use crowdfunding to start your business
Crowdfunding means using a large group of people to raise the funds needed to start your business. It is often used to grow small businesses or cash-strapped startups.
This is a low-risk way of funding your startup. Unlike a business loan you need to pay back or venture capitalists who invest in your business in exchange for a large stake within your company, you don’t have to pay back the money raised through crowdfunding.
Instead, you’ll likely offer crowdfunders a reward or equity as a way of thanking them for investing in your business.
It’s best to think of crowdfunding like networking. It helps spread the word about your business, allows you to connect with more people and helps you finance your idea.
A successful crowdfunding campaign relies on your ability to capture the interest of potential investors. If you already have a large platform or network, this can help boost your campaign as these people will likely already be invested in you and your startup idea.
However, without good marketing and networking, it can be hard to reach your financial goals through crowdfunding.
Use personal savings to fund your startup
One way business owners fund their bootstrapped startup is by using their personal savings. This is the method Jared and I used when starting Hubstaff.
You could use your personal savings, borrow money from your 401(k) — although you should consult your financial advisor before doing this — or keep your existing job and use part of your paycheck to fund your startup until you can afford to take your startup full-time.
With self-funding, you will maintain control over your business. However, you will also take on all the risk yourself.
Be careful if you choose to borrow money from your retirement accounts to fund your startup. You might face expensive fees or penalties, or damage your ability to retire on time. If you fund your business using money from your 401(k), check the terms of your plan’s administrator and a personal financial advisor first.
If you do decide to use your personal savings to fund your bootstrap startup, don’t use it all.
Be sure to always keep some emergency funds left in your personal savings. You never know what could happen. Having emergency funds in your personal savings can be helpful in the event that a client doesn’t pay on time, your work equipment gets damaged and needs replacing, or any other type of emergency that might occur in life.
We understand that not everyone is privileged enough to have their own savings. If you don’t have $26,000 in savings like we did, or don’t want to risk using your savings, then you most likely have the ability to raise it from private investors, family or friends.
The main point is that you don’t need to raise several hundred thousand in a seed round. Raising a large seed round will take a lot of time and attention that could be put towards your product and marketing instead.
Before bootstrapping, determine your mindset and startup goals
As with most things in life, figuring out how to fund your startup isn’t black and white.
There are advantages and disadvantages to taking funding and there is no one right or wrong answer. When making a decision in business, one of the things I’ve learned is to begin with the end in mind and then work backward.
What are your long-term goals?
Before deciding whether to bootstrap your business or seek funding from venture capitalists, take time to understand your long-term goals. What do you want five years from now? What do you want 10 years from now?
I have two little boys who are 3 and 5 years old. I want to coach t-ball games, spend time with them playing Legos, and truly get to know them. I don’t want to spend my time commuting to an office and working until 11 p.m. each night. It’s not worth it to me.
When we started Hubstaff, our goal was to have a business that did a few million dollars in revenue annually. We wanted to create freedom in our own lives through the software product that we would build, and the sales that software would produce.
We thought there may be some spin-offs of Hubstaff that we would create together, which could also produce a few million annually, but we never had the intention of creating a massive VC-backed company that was going to be the next Uber. (By the way, kudos to all that Uber has accomplished. We just didn’t choose to go that way.)
By understanding your business goals and the motivators driving your startup, you can better understand which route is best for your business.
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Benefits of bootstrapping your startup
Many entrepreneurs are set on the idea of forgoing venture capitalists in favor of bootstrapping their startup.
Knowing so many successful companies started out as bootstrapped startups, more people are recognizing that it could also be possible for them to build a startup that reaches heights of success. So, what are the benefits of bootstrapping your startup?
Ownership over your own business
Bootstrapping means you can retain full ownership over your business. As a solo entrepreneur, you will own 100% of your business by bootstrapping. Even if you choose to set up your business with a partner or two, your business share will still be significantly larger than if you go through multiple venture capitalists or investors and continuously dilute your ownership.
Bootstrapping your business will often mean it’s smaller and slower-growing than if you were to accept VC investment. However, your share may be worth more than if you worked with investors to raise the money to achieve a billion-dollar valuation. This shows that having full ownership over your business can be far more valuable in the long-run.
Control over the business direction
When you accept investment from external sources, you also take on the external pressure and responsibility to make sure your business satisfies the interests and needs of those people.
Maintaining control over our business is one of the main reasons why we chose to bootstrap Hubstaff. We get to control how we run the company and the direction we want to take it without the input of others who may or may not have the same vision and goals.
When raising capital through business investors, there are solutions like super-voting shares that can give you, the business owner, the majority of control over your business. But if, like us, you want to maintain control over your business direction, bootstrapping is the way to go.
Keeping your business for as long as you wish
If you want to start a business that you can run for a lifetime, then bootstrapping might be the route for you. Similarly, if you aren’t sure of whether you want to keep your business for a long time or not, you may not want to rush into agreements with outside investors yet.
Many external investors will rely on a successful business exit in order to see a good return on their investment. Therefore, when entering agreements with investors, they will often request you have a business exit strategy and timeline in place.
If you are starting a business with the intention of selling it five or 10 years later, raising investments from angel investors or VCs could work for you. Alternatively, if you plan to keep your business indefinitely, or wish to turn it into a multigenerational business, you may be better off bootstrapping your business.
Cons of bootstrapping your startup
Bootstrapping a startup is often a romanticized idea. Starting a successful business on next-to-no money sounds like a dream, right? If you’re passionate and willing to put in the hard work, it can be incredibly rewarding. With that said, it can also be highly challenging.
If you are looking to bootstrap your startup, you need to be aware of the potential challenges and downsides. By understanding the trade-offs involved in bootstrapping, you can fully understand which route is best for your startup.
Minimized chance of survival
One of the main reasons new businesses fail is due to money issues. A study found that 82% of businesses fail due to cash flow mismanagement. When starting a business, it is crucial to carefully budget every aspect of your business along with the overall potential value of your business venture.
As a new business starting out with little or no investment, your chance of survival could be lower than a business who has received investment from outside sources. Bootstrapping a business isn’t easy. But, if you have done your research, understand your cash flow and have a business strategy in place, you should be able to mitigate this risk.
Another reason why people may choose venture capital investments to fund their business is to quickly scale their business. Outside capital can be a quick way to take your startup business to the next level.
When bootstrapping your startup, your business growth is organic so the rate of growth will be far slower than if you accepted outside investment.
Without outside capital you’ll be limited on what you can do and how fast you can do things within your business. Some growth milestones may take longer to reach and you will have to retain revenue to re-invest into your business for key components such as new product development, hiring, or marketing.
Bootstrapping your business will impact your visibility, the marketing you can do, and what you can do to serve your customers. You will have to be innovative if you want to achieve a fast growth rate. Ultimately, if you are bootstrapping your startup, we advise planning for a slower growth rate.
Networking and business support
Sometimes in business, it’s not what you know but who you know. Connecting with venture capitalists and angel investors can offer you the opportunity to develop relationships with key experts and mentors. Your investors may be able to provide you with valuable business advice or put you in touch with people who can help you achieve the next step within your business plan.
Enrolling others with a vested interest in your business can provide you with invaluable advice and support. Accepting external investment puts you in touch with stakeholders and decision-makers with keys to sizable sales channels.
However, when you choose to bootstrap your business, you’ve got to rely on yourself and your own network. Therefore, you’ll have to put in a lot more time and effort to network with others and gain the business support you need to grow your business.
Lack of credibility
As the new kid on the block, it can sometimes be hard to cut through the competition and prove your credibility. Having outside investors can help boost your credibility, especially if they have a proven history of investing in credible, respectable businesses. Investors often give customers the confidence to buy into new businesses.
If you are self-funding your business and don’t have a previous track record successfully managing businesses, it can be harder to prove your credibility. You will have to work a lot harder to make sure you stand out from the rest of the market. Doing so will show your audience that you’ve done your research and that you are committed to ensuring your business succeeds. If you’re someone who is filled with determination and enjoys a challenge, then bootstrapping your startup may be the challenge you welcome with open arms.
How we bootstrapped Hubstaff
When we first built Hubstaff, we did so by bootstrapping. Now, 8 years later, we have chosen to remain a bootstrapped company.
I’ll be honest with you — bootstrapping your startup is scary. But it can be done. That’s why I wanted to share with you our personal story behind bootstrapping Hubstaff. If you’re thinking of bootstrapping your startup, I really hope our story will inspire you on your own startup journey.
Handling investor interest in Hubstaff
After building Hubstaff for approximately three years, we had received more than two dozen messages related to funding.
Obviously, when we first started getting messages about funding we were excited and would respond immediately. We took it as a sign we were on to something useful that others would want to take part in. We were making less than $15K in monthly recurring revenue (MRR) when we first began receiving these calls (this was before we went revenue transparent).
Some of these calls were really insightful as they provided us with the opportunity to talk with senior-level executives who offered us valuable advice.
We spoke about the tools other companies were using, reducing churn, and the industry overall.
However, most of the time the person we got on the other end of the phone was a junior associate trying to reach out to a lot of different companies that may be a good fit. As a result, most of them asked us to get back in touch once we hit $100K in MRR.
This led to internal discussions between my co-founder, Jared, and I. As we approached the benchmark mentioned above, we started to wonder why we would need more investments at that point.
All of these calls taught us some important things about funding. These investment firms are looking for proven businesses and operators with limited risk. We get that. But, at the time we were curious about what the benefits of getting added funding would actually be once we had reached $100K in MRR? The majority of the risk would be gone by then. On the flip side, we would have to give less equity to get the cash. But, ultimately, would it be worth it?
Using our own savings to start Hubstaff
As mentioned earlier, when we started Hubstaff, Jared and I each invested $26,000 into the business. We chose to invest our time and attention into the business instead of looking to get funding.
Most of the capital that we used to start Hubstaff was to build the initial desktop apps because neither of us had expertise in that area.
I was running the marketing and operations of the company while Jared was building the server-side code (Ruby on Rails). We also had two developers on board who were building the desktop applications for Windows, Mac, and Linux.
Why we haven’t pursued funding
There are several reasons why we have decided not to pursue funding for Hubstaff including:
1. We don’t need the money
We funded this business with money made from past business successes and current consulting income. We’re bootstrapped and, therefore, only spend what the business has made in profits since the initial investment.
2. We feel that investing personal funds would have a high ROI on those funds
If we did need the money, we both believe that putting personal money into the business would be one of the best investments we could make (better than stock market, real estate, etc.).
We recognize that accepting investments from outside sources will dilute our own equity share of our business, which in turn, would dilute our ROI. By bootstrapping Hubstaff and only investing our personal funds, we can maintain a high ROI on those funds.
3. We didn’t have an exact plan for the money
This is a big one. The main reason we chose not to pursue funding was because we did not have a sales channel to allow us to invest X for a positive Y return. Without having that model in place, we couldn’t comfortably run the numbers to see if it would make sense to accept the funding.
4. We would be looking for a partner, not just silent money
If we were to take an investor, we’d be looking for someone that can truly help us grow by leveraging experience or relationships. We wouldn’t just want an injection of cash into our business. Examples of this type of funding can be seen here:
- Why we decided to take an investment (even though we didn’t need the cash)
- Strip fund invests $500,000 in Baremetrics
We like that we get to control how we run our company. Bootstrapping Hubstaff also means we can control the direction we want to take the business without the input of others who may or may not have the same vision or business goals as we do.
6. Equity protection
By self-funding our business we are able to protect our future ROI.
7. Time and focus
Looking for investment takes a lot of time and focus away from growing the business. We would rather spend that time and focus on growing Hubstaff rather than looking for investors.
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What would Hubstaff be today if we had taken investments?
We’re proud to have bootstrapped our business. Yet, I can’t help but be curious of how things would be if we had taken on investment when we were at $20K MRR. So, let’s take a look at it…
The way the terms work is that there is a pre-money valuation and a post-money valuation.
Pre-money is what the company is worth before any third-party dollars go into the company. Post-money is what the company is worth after the third party money goes into it.
If you and the investor agree that the business is worth $1M (here’s a great article on how investors will attach a value to your business), and the investor puts $1M into the company, then the post-money valuation is $2M and that results in a 50 / 50 partnership between the two parties.
So much of this decision does come down to the pre-money valuation. For example, Uber’s first pre-money valuation was $4M and they were seeking $1M in seed capital.
Let’s take a minute to examine what it would look like if we were to have raised the same $1M at the same pre-money valuation of $4M.
Here’s a good article on valuation explanations and formulas.
Hubstaff would have had $1M in cash to operate with and would have given up 20% of the company to make that happen.
Here are some of the feelings and thoughts I would have at this point:
- There’s a pressure to get this investor their money back
- We’re tied to them, for better or for worse
- How can they help us grow, let’s figure that out and take advantage of it ASAP if there’s any potential
- How can we spend this money to get the investor a return
The immediate thought in our case is to invest in the product, which Jared and I have discussed before so it wouldn’t be completely new. We would have most likely hired more developers earlier to beef up the product and design. We would have had an iOS app earlier, potentially an invoicing system, shift enforcement, more integrations, and a better product overall.
We also would have taken probably 10% of the money and invested in various forms of advertising and sponsorships (making sure to track the conversions and profitability, of course).
All said and done, we would have probably spent about 10% on advertising to try to find a profitable channel so we could scale up growth.
Overall, we are confident that we made the right decision by bootstrapping Hubstaff. Had we chosen to work with investors, we calculated that our equity share and potential earnings would be less than they currently are.
For our business style and the direction we plan to take Hubstaff in, we believe bootstrapping was the right route to take.
Next steps for bootstrapping your startup
Now, it’s your turn. What are your thoughts on running a bootstrapped company versus accepting venture capital? We understand that bootstrapping isn’t for everyone, just like getting investments wasn’t for us.
If you are interested in bootstrapping your startup, it’s time to take the first step. Here’s how you can help get your bootstrapped startup off the ground:
- Weigh up the pros and cons of bootstrapping vs. accepting investment
- Plan your business strategy and mindset: Where do you see you and your business in 10 years’ time?
- Calculate the costs needed to get your business started
- Decide how to fund your bootstrapped startup: For example, will you be self-funding, crowdfunding, or using sweat equity?
- If you’re looking for a partner, choose someone you know you can work with but who has different skills to you
- Keep on top of your cash flow and stay organized
- Work hard and network with others
- Remember you can accept investments further down the line if you decide you want to
Have you bootstrapped your business? If so, we would love to hear your stories and advice!