The Pros and Cons of Bootstrapping an Early Stage Company

Bootstrapping is the traditional way to grow a startup and early stage company. It keeps equity in the founders’ hands and avoids having investors to answer to. But there is another side of the coin: not having enough working capital for marketing and other priorities to grow the company. How do companies that you know deal with the downside of bootstrapping? 

Jeff Cornish

Jeff Cornish has a history of providing strong leadership as a CEO and President of fast growing and successful companies.

His experience spans industries as diverse as transportation, retailing and restaurants. As President and CEO of Performance Transportation Services (PTS), Jeff led a company with the second largest market share among vehicle delivery companies.

"Bootstrapping is often another word for micro managing, or not being able to let go. Good founders will be able to extend themselves through delegating to good people and soliciting good feedback. They use wisely the resources they already have."

Kim Denney

Kim Denney is an experienced Houston area leader with a record of solving top-level problems as an executive with broad responsibilities in the Chemical, Petrochemical, Energy, and Manufacturing industries.

"As with anything in an early stage company, the owner has to prioritize. You will never be able to do everything you want to do. Sometimes marketing is worth every penny you can invest in it, in other situations the company can, for example, get by with a very basic website built by a friend. In all cases, the owner has to focus on cash and make critical decisions based on payback, how much cash is available to invest, and the ability to reduce or eliminate risk.  Emerging growth companies often take on more risk either out of necessity (lack of capital) or lack of awareness.  The key is to know the risks you're taking and be prepared to pivot by keeping some cash available for those situations that warrant rapid change." 

Michael Evans

As a partner with Ernst & Young, Mike developed, led and drove significant growth in a number of practices.

He created, grew and led, as Global Director, the firm’s Real Estate and Construction Industry practice from 1988 to 1998, managing 2,500 professionals and personally serving many of the largest international real estate organizations in the U.S. and around the world.

"There is a significant danger in bootstrapping early stage companies because often the equity contributions are in the form of convertible debt with a finite term. Investors prefer this structure as it gives them first priority over the company if there is a problem and is often more palatable from a risk standpoint. From a founder's perspective, it can limit future equity contributions as it is a first priority and a liability on the balance sheet. If it has a finite term, it can create future cash flow problems as it is an obligation of the company. Use with caution!"

Ferey Faridian

Ferey is a senior strategic investment professional with 25 years of experience spanning management consulting in 12 countries, investment banking and principal investing, as well as serving as CEO/President of high-technology ventures.

"The downside of bootstrapping is slow growth.  If the company has reached a critical mass for the owner to have an acceptable lifestyle business, then growth may be a secondary goal. If the company is in dire straits or in need of cash to realize its mission, then the only way to grow the company is to “give it away” to investors. Even though the owner's percentage ownership is diluted, if the injection of cash increases the value of the company by more than 1-x%, the value of the owner’s stake increases. But in return the owner has less control—a painful tradeoff."

Bill Heermann

Bill has deep expertise in building and running industrial manufacturing and construction companies.Most recently he was President of Precision Industrial Contractors, which serves the industrial construction market.

"The bootstrapping process produces exceptional managers who become considerably adept at evaluating and selecting the best of the "cost vs return" decisions.  They have their skin in the game, which is more valued than the skin of others. Instead of being driven by dramatic growth objectives, these managers will prudently see the need to be profitable along a path of controlled growth."

Tom Henricks

Tom Henricks began his four decades in aerospace as a fighter test pilot in the U.S. Air Force before being selected by NASA to become an astronaut. After leaving NASA, Tom has held a series of senior level positions in the aviation industry.

"One strategy is to sell the family funded startup to raise capital for their next startup. Consider using investors for your next startup to accelerate growth and reduce risk to founder."

Lynn Lednicky

Lynn has had a diverse career as an executive and advisor. As President and Founder of Lednicky Enterprises, he has provided expert advice to the energy, utility, and infrastructure sectors. His engagements have included M&A support, operational and financial restructuring, renewable energy, project development and financing and advising on production and use of natural gas as a domestic transportation fuel.

"The poet Robert Browning said that “a man’s reach should exceed his grasp.” A great philosophy for life, but not so much for running a business.  A better adage for business might be: “prior planning prevents poor performance.”

Access to capital is critical to the growth and survival of any business. Business owners and CEOs face the dual challenge of managing both aspirations and financial liquidity. Successful owners and CEOs manage these two in parallel. It is not necessary for all owners/CEOs to be experts at both aspiration and financial planning, but across their team both skills must have an equal voice at the table.

Successful businesses must imagine their possible future and at the same time know the capital resources necessary for that future.  If the left foot is aspiration and the right foot is planning, it is easy to see that progress is impossible unless both feet are moving forward in a coordinated fashion.  One can’t get ahead of the other without a fall.  

Bootstrapping is what normally happens when the aspiration gets ahead of planning for liquidity.  On the other hand, owners who are constantly frustrated by the inability to find cheap sources of capital without cumbersome restrictions are not so much guilty of dreaming too big, as they are guilty of planning too small.  Planning allows the owner/CEO to understand the business and its risks.  Armed with that understanding it is possible to find the right match with capital resources while minimizing frustration."

Art Medici

Art Medici has a diverse background as an executive leader in e-commerce, high tech, telecom and information companies. His experience spans startups, high growth small/mid cap firms and global leaders like Thomson Reuters.

"Companies that bootstrap must manage expenses to the penny and ensure that the staff understands why.  This can be especially effective if employees own stock or have options.  They are likely to want to avoid dilution as much as the founder. If enough assets exist, SBA loans can be useful for investing in the business"

Billie Otto

Billie was until recently Executive VP and CIO of TrueBlue Inc. (NYSE: TBI) the largest industrial staffing firm in the U.S. The company has nearly $2 billion in revenue, serves approximately 130,000 customers and deploys more than 375,000 temporary associates.

"I think it is key that leaders embrace that they ARE bootstrapping and think about the top 2-3 implications of that stage.  It may mean holding off on going after that big fish client that you know you can serve well.  Or it might mean starving the business development efforts or maintaining below market salaries.  Likely, it will mean all of the above.  Successful companies acknowledge these painful decisions and share them with their core team so they can agree on how long they will endeavor to maintain that pain threshold before trying something new.  Too many founders/CEOs toil with that pain and daily triage alone and, in doing so, risk losing the faith and efforts of key resources."

Ted Parrish

Ted Parrish has a strong background as both an operating executive and an advisor. He brings to Newport extensive background in financial services strategy and operations.

"One significant drawback to bootstrapping is the tendency to lean on trade creditors because you have few, if any, choices. This means you must manage supplier relationships and vendors very carefully."

Doug Payne

Doug Payne is an experienced executive leader and Board member with a successful track record of building growing profitable companies.

"Bootstrapping forces difficult decisions about deployment of capital, which is a good thing. There is higher risk of failure, but it forces management to stay focused on those initiatives that will really drive success. Too much capital can lead to grandiose ambitions, waste and lazy decision making."

Kevin Poole

Kevin Poole is a seasoned leader with diverse experience as both a senior advisor to CXOs of middle-market firms, and as an operating executive at a Fortune 500 company.

"Bootstrapping is certainly a viable path to success provided the founder/owner is very deliberate in planning for growth.  Specifically, the founder must develop a multi-year growth plan that identifies in detail the capital requirements necessary to support planned growth, including some form of financial cushion to cover unplanned events. Also, a smart entrepreneur will fully investigate non-dilutive financing options such as SBA-backed lending and mezzanine financing -- which provide growth capital without having to give-up equity." 

Mark Rosenman 

Mark is a co-founder of Newport Board Group and its Chief Knowledge Officer. Serving as the Chief Knowledge Officer at Tatum, he successfully drove strategies to develop, capture, share and deploy the knowledge and experience of the firm's professionals.

"Any company that bootstraps must be ready to be very clear and consistent about what it means for the company's business model. For example, the company simply won’t be able to afford  nearly as many trade shows or conferences as its marketing and sales folks would like. They therefore must come up with inventive, lower cost ways to meet prospective customers, check out competitors etc."

Mike Sanna

As a senior executive in the technology and semiconductor industries, Mike has significant accomplishments in marketing, engineering, operations and general management. He has a strong track record in such key areas as developing and executing rolling multiyear market and product strategies and leading intercompany development teams to create unique solutions.

"A young company can grow using its own funding only if it has a good plan for what is required to get to breakeven--with milestones and burn rate that can be regularly checked against progress. They need to be flexible to changing the plan to ensure that their available funds survive until they start generating positive cash flow. Documenting the process is key. If they require outside funding, they must be able to show prospective funding sources where they've been, what has gone wrong with the plan, how they've reacted to those issues, and what they've learned that will aid them going forward. "

John Sullivan

John has delivered top- and bottom-line results running a wide range of companies and dealing with challenges like acquisitions, lean manufacturing, supply chain optimization/low cost sourcing, new product development and brand and channel management.

"Many companies that are trying to bootstrap wait until it is too late and then run out of cash; leaving them at a disadvantage in raising new capital. Better to recognize the shortfall earlier and plan the outreach for new funding."