Bootstrapping in a Startup: Exploring the Pros and Cons

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What is bootstrapping?

Bootstrapping is a term used in the context of startups that fund themselves without the help of an angel investor or venture capital fund. So, in the first instance, I would focus on choosing the right form of running a business. For a startup that finances itself with its own funds, the costs of running the company are important. Therefore, if the startup is made up of just one person then it is worth considering a sole proprietorship. If the team is larger, it is reasonable to choose a simple joint-stock company, which can be set up for the proverbial zloty. When choosing a legal form, it is worth taking into account not only the costs of operations and servicing and the size of the team, but also whether the business model is exposed to a high risk of liability.

What are the pros and cons of bootstrapping?

Does supporting oneself only with equity capital simplify the formalities of running such an entrepreneur’s business, or does it create more complications? When deciding to support an external investor (a business angel or VC fund), it is worth realising that this is de facto the sale of part of the company. A startup entering into a relationship with an investor enters irrevocably into a path, the final stage of which is the sale of 100% of the company to an external entity. In addition, the investor has numerous powers in his portfolio companies, so that basically no important decision in the startup can be taken without his approval and he can control expenses. This can significantly block the growth of a startup.

VC vs Bootstrap

The founder’s vision needs to coincide with the investor’s vision and this can change over time. By bootstrapping, the startup does not have to align with the investor at all costs. It has full decision-making power and control over the company’s direction. In addition, such a founder does not have non-compete bans and operational exclusivity which means that he or she can also get involved in other projects that are interesting to him or her.

Bootstrapping also means that loans are taken out on the individual, not the company. What other legal restrictions should the owner of a self-financed start-up bear in mind?

In most cases, even with bootstrapping, loans are taken out against the company in question. However, very often financial institutions, e.g. banks, require founders’ guarantees as individuals. This gives rise to the founders’ direct liability for the loan commitment. If the company is unable to repay the loan amount, the bank, having a surety, will certainly turn to the founder for repayment. It is therefore worth ensuring that such sureties are not granted or are granted for small amounts. In addition, in the case of a founder who is married, it is worth considering the establishment of property separation to protect family assets in the event of failure of the start-up.

It can be said that a startup that bootstraps itself successfully has fewer legal restrictions than a startup with an investor. Usually, the latter are not profitable for a long time, whereas profitability for a bootstrapping startup is a priority. This is what opens up the scope for working capital or investment loans, which startups with an investor on board can only dream about (especially in the first phase of the company’s development).