Bootstrapping

The concept of bootstrapping refers to the financing of a business start-up from one's own resources. External financing is deliberately avoided.

Origin of the term

The term bootstrapping is derived from the English word "bootstrap". This means something like bootstrap in German. The connection with the financing of a start-up comes from the Baron Münchhausen legend. In this legend, the baron sinks into a swamp and pulls himself back up by his own bootstraps. Hence the metaphor for founders who, when bootstrapping, raise financing entirely on their own.

Special features of bootstrapping

If you opt for the bootstrapping financing option as a founder, you should be aware of a few special features. Due to the fact that founders do without any external financial resources when bootstrapping, they usually have a very tight budget for their start-up project and a tight schedule to which they must adhere. The aim is always to avoid expenses while maximizing income. Founders should therefore operate economically and effectively from the outset and get into operational business as quickly as possible. They should try to reach the break-even point as soon as possible and make their first profits, as their financial resources are limited.

Where does the capital for bootstrapping come from?

As bootstrapping is a financing method without external funds, any capital raised here comes from your own resources. This can either be equity or money from friends and family. Bank loans, supplier loans, leasing or public subsidies can also be considered for bootstrapping.

The principles of bootstrapping

There are a few things to bear in mind for bootstrapping financing to be successful. Entrepreneurship researcher Bhidé from Tufts University in Massachusetts has drawn up seven principles that should be adhered to when bootstrapping:

1) Start operating as soon as possible.

2) Focus on reaching the break-even point early and generating positive cash flows.

3) Sell higher value products than your competitors.

4) Don't work with high-paying team members who don't understand the start-up culture of your company.

5) Be controlled and efficient with your limited resources.

6) Always focus on having liquidity in the form of cash available.

7) Maintain contact with banks; they may be able to contribute to financing at a later date.

Advantages and disadvantages of bootstrapping

Advantages of bootstrapping:

• Due to the time and money limitations, you learn to operate economically and effectively right from the start.
• Investors are impressed by the fact that you have managed the financing on your own.
• As a founder, you are not dependent on others. Because you finance yourself, there are no outside interests in the company that could influence decisions.

Disadvantages of bootstrapping:

• Very limited financial resources.
• High pressure to perform, as you have to make a profit in a short space of time.
• Limited development opportunities due to lower capital.