What Is Bootstrapping? What It Means and How It’s Used in Investing
What Is Bootstrapping?
Bootstrapping describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. An individual is said to be bootstrapping when they attempt to found and build a company from personal finances or the operating revenues of the new company. Bootstrapping also describes a procedure used to calculate the zero-coupon yield curve from market figures.
Key Takeaways
- Bootstrapping is founding and running a company using only personal finances or operating revenue.
- This form of financing allows the entrepreneur to maintain more control, but it also can increase financial strain.
- The term also refers to a method of building the yield curve for certain bonds.
- GoPro was a bootstrapped company that eventually went public with a $3 billion valuation.
Understanding Bootstrapping
Bootstrapping a company occurs when a business owner starts a company with little to no assets. This is in contrast to starting a company by first raising capital through angel investors or venture capital firms. Instead, bootstrapped founders rely on personal savings, sweat equitylean operations, quick inventory turnover, and a cash runway to become successful. For example, a bootstrapped company may take preorders for its product, thereby using the funds generated from the orders actually to build and deliver the product itself.
Compared to using venture capitalbootstrapping can be beneficial because the entrepreneur is able to maintain control over all decisions. On the downsidethis form of financing may place unnecessary financial risk on the entrepreneur. Furthermore, bootstrapping may not provide enough investment for the company to become successful at a reasonable rate.
In investment finance, bootstrapping is a method that builds a spot rate curve for a zero-coupon bond. This methodology is essentially used to fill in the gaps between yields for Treasury securities or Treasury coupon strips. For example, since the T-bills offered by the government are not available for every time period, the bootstrapping method is used to fill in the missing figures to derive the yield curve. The bootstrap method uses interpolation to determine the yields for Treasury zero-coupon securities with various maturities.
Bootstrapping Example
There are a number of successful companies that started as a bootstrapped operation. For example, the home search platform Estately was bootstrapped by its two founders, Galen Ward, and Douglas Cole. Ward quit his job in 2007 to start the company and convinced his partner to drop out of graduate school to join him.
With enough personal finances to live on for a year, the two co-founders invested $4,000 total in purchasing a cheap server, paying for incorporation fees, and maintaining a runway that could cover miscellaneous expenses. The company grew from the $4,000 personal investment to a reported $1 million in revenue in 2014. It was also reported to have 17 employees.
Additionally, bootstrapped companies, even if they become successful, can still decide to take on future investments. In fact, this is often the case when a successful company hits a growth plateau and uses outside investments to accelerate its business. This was the case for GoPro, which was initially bootstrapped by Nick Woodman, who used his personal savings and a $35,000 loan from his mom. Woodman took a $200 million investment from Foxconn 10 years after starting the company. GoPro completed its initial public offering (IPO) with a near $3 billion valuation.