Entering ‘20 Kathy Kuo was planning on raising money for the first time for her business Kathy Kuo Home, an online full-service design boutique offering a carefully curated selection of luxury furniture and home decor. Since founding the firm in ‘12, she had grown the firm to $13M in annual revenue in ‘19 and wanted to raise additional capital to grow her team and invest in new technology to scale.
Then Covid hit, and bootstrapping became the best option.
“Since we weren’t confident in outside funding, I evaluated our internal operations, starting with every conversion point and the operational structure. Separately, we quickly aligned our business around the new customer mindset that came with Covid. During the pandemic, we became even more high touch and prioritized the customer experience and relationship building. This has in turn led us to roughly 300% growth YoY since March and an increased market share, beating our competitor growth by roughly 20%.”
The term bootstrapping has its origin in the early 19th century with the expression “pulling up by one’s own bootstraps.” Later, it became a metaphor for achieving success with little or no outside investment.
Bootstrapped businesses are generally funded by personal savings, but revenues must kick in quickly to self-finance a business. Runway can also be extended by obtaining debt financing (sometimes a personal/corporate credit card), extending payables, shortening receivables, factoring receivables, obtaining long-term financing on long-term assets such as real estate, and leasing equipment (opposed to buying it outright).
In any case, bootstrapped businesses need to focus intensely on current and projected cash flow, often operating on a tightrope to sustainability. Every dollar of revenue collection and expense outlay needs to be tightly managed. Future investments are paid for by retained earnings (deferred gratification for entrepreneurs) or other runway extenders mentioned above.
While many firms have been able to access to venture funding since Covid hit, many others have decided that it makes more sense to bootstrap because they couldn’t access capital or found terms to be unattractive given the uncertainty of the current environment. Others have bootstrapped because they’ve been able to adapt their business model quickly to self-fund growth.
Entering ‘20 Deeannah Seymour was also planning on raising money for the first time for her business ph-D Feminine Health to help fund operations and marketing efforts to grow from 5,000 stores to over 25,000. However, to avoid diluting her equity, she decided to expand her banking relationship and honed her budget for maximum efficiency.
“We culled through every line item of our P&L to ensure we were responsibly leveraging every possible dollar. This has made us lean and much more profitable as a result.” She expects to grow her revenue by >200% in ‘20.
Bootstrapping can allow founders to retain control of their business and avoid diluting their equity while focusing all energy on building a product/service that will quickly and profitability meet the needs of their customers. It provides the ability to rapidly experiment with the business model without seeking the approval of any outside investors.
Leaner startups have finite resources which forces higher conviction decisions on where to invest to create value that customers will pay for. The most clever entrepreneurs build business models that turn customers into a source of growth capital by collecting payment before they deliver their product/service. The required creativity to make the business financially viable can make it stronger long-term. In this Covid period, creativity often includes adapting the sales process to build trust with prospective customers remotely.
As Kuo explains: “By continuing to be bootstrapped, we’ve been able to operate independently, efficiently, and be more agile, which has been a game changer for our business during these unprecedented times. We’ve also been able to focus on what’s best for the brand and customer relationship, not being driven by obligations to hit a specific growth trajectory. As a solo founder who grew a business on being lean, scrappy and capital efficient from the beginning, bootstrapping is part of our operating principles and core to who we are and has continued to serve us well as we recruit new team members.”
Bootstrapping puts all the financial pressure on the entrepreneur, often causing them to live below their means for an extended period of time while absorbing significant stress. It’s a lot less glamorous than being featured in a headline article about raising the most recent significant round.
Some companies naturally require more resources to achieve scale such as those with large fixed costs. However, today many industries have been transformed where you can “rent” resources opposed to buying them outright.
Bootstrapping isn’t necessarily right or wrong. Advocates of bootstrapping such as Basecamp’s Jason Fried and advocates of rapidly scaling through venture capital such as Greylock’s Reid Hoffman take very different views towards raising capital while both achieving tremendous success.
Bootstrapping doesn’t need to be a permanent choice. It can be leveraged as a bridge for entrepreneurs to ultimately raise money with better terms in a position of greater strength.
After all, raising capital can allow entrepreneurs to scale faster and take advantage of opportunities before competitors. Investors can also add significant value through their experience and relationships.
Rachel Huntington entered Covid with only 5% of her party business Bonjour Fete online. While she planned to raise capital in ‘20, she paused when Covid hit, slimmed down her team and then pivoted the business to concentrate on letting existing customers see products online so they could utilize curbside pickup.
“Every dollar out was examined with a fine tooth comb. We wanted to emphasize making money and not spending it and we recognized that our strengths are discipline and stamina. You have a different mindset when every dollar is your own. And during a pandemic cash savings are even more crucial. We needed runway for sick leave if needed by our employees too. Every decision has been our own initiative.”
She had revenues of approximately $1.75M in ‘19 and projects $2M of revenues in ‘20 despite the challenges.
When asked if she plans to raise in the next 18 months? “Yes! Covid has shown us that celebrating life achievements is more important than ever. Our clients are looking for ways to create magic during this time at home. We provide the ability to have everything they need to celebrate. Raising capital will allow us to invest in technology to improve our business and capture the market opportunity we see.”
As a CEO who has bootstrapped Stonehaven for over 19 years, I have profound respect for others on the journey. It’s a badge of honor earned through gritty determination.
I encourage all the founders who have pivoted to bootstrapping in ‘20 to embrace the sharpened focus on maximizing finite resources while enjoying the freedom to control their own destiny. After all, the entrepreneurs who can prove that they survived this stress test will have plenty of capital raising options in the future.
Special thanks to HeyMama for helping source the bootstrapping CEOs featured in this article.
Basecamp: Bootstrapped, Profitable, & Proud
Ycombinator Hacker News: Startups that have bootstrapped their way to profitability
Investopedia: Companies That Succeeded With Bootstrapping