Disadvantages of Bootstrapping
In the previous article, we have learned about what self-financing i.e. bootstrapping is. We have also learned about what are the various advantages of using the bootstrapping technique.
However, despite the advantages listed in the previous article, relatively few startup founders actually go the bootstrapping route. This is because of the fact that bootstrapping also has some significant disadvantages.
The disadvantages of bootstrapping have been explained in the article below:
- Lower Survival Rate: Empirical data shows that the chances of survival of companies using the bootstrap method are quite low. This is because the number one reason which causes startup failure is that startup companies run out of funds. They may have a viable product that creates value for the customers as well as other stakeholders. However, if they don’t have enough cash to stay afloat long enough for the product to be successful then the startup is bound to fail.
The problem with bootstrapping startups is that the company completely relies on the founder’s savings and borrowing capacity in order to function. Needless to say that such saving, as well as borrowing capacity, can be finite and quite limited. Hence it puts the company at a severe disadvantage. This is the reason that companies tend to resort to external financing instead of relying on bootstrapping to raise all the funds.
- Resource Shortage: Startups that use the bootstrapping route face a severe resource crunch all the time. These companies are short of funds when it comes to hiring the best people. They are also short of funds when it comes to using the best marketing agencies or financial advisers.
A lot of the time the survival of such companies comes into question because of the perennial resource shortage. Hence, using the bootstrapping route requires the founders to have precise plans in place. They should also be able to secure the services of the best advisors in order to ensure that their startup company has a better shot at survival.
- Limits the Scale of Operations: Bootstrapped startups cannot afford to have big bang launches. Typically, these companies start on a very small scale. This is a problem because when startup companies operate on a larger scale, they are perceived differently by customers and other stakeholders. Customers and other stakeholders are more likely to deal with a startup that is perceived to have a larger scale of operations. This is because many times customers consider the scale of business to be synonymous with the quality of the product.
- Urgency to Generate Revenue: Startup companies that use bootstrapping methods are under a lot of pressure to immediately generate revenue. This is because revenue is the only sustainable source of funding for such businesses. This puts the startup company at a severe disadvantage particularly if its competitors have professional funding. Such competitors can afford to burn cash for a much longer time as compared to the startup firm. As a result, they can cause the startup firm to go bankrupt even if the firm has a better product or service. Companies like Facebook, YouTube, and other tech firms are prime examples of how startup firms can strategically use their capital in order to capture huge market share.
- Slow Growth: Another problem with bootstrapped businesses is that the rate of growth tends to be slower as compared to other companies. Even if the bootstrapped companies are able to create a successful small setup, they are not able to scale at a higher pace. This can be detrimental to their interests. It is possible for other startups to copy their idea, use professional funding and then deploy that idea on a much larger scale. It is important for any company to scale up very fast once their basic idea has been proven. Startup companies lack the ability to do so. Hence, many founders prefer external funding since it allows them to manage competitive forces in a better manner.
- Limited to Certain Business Types: There have been many cases wherein bootstrapped businesses have gone on to become very successful. However, in most of these cases, the underlying asset model is web-based and asset-light. Building a website or a technological model can be quite challenging for a company. However, it can be done on a low budget if the founders and their team have exceptional technical skills. It is very difficult for traditional businesses which rely on brick-and-mortar-based models to become successful if they do not use external funding.
- Less Networking: Last but not the least, it is important to realize that investors not only bring money but they also bring business acumen and a strong network. A strong network can go a long way for a startup business. A lot of the time, founders do not use this strong network because they do not want to give up control of the business. However, in some cases, a business would be better off by giving away the control instead because it would open the gates for newer opportunities.
The bottom line is that bootstrapping does have some significant advantages. However, it is not for everybody. Founders need to make a careful decision after considering all the pros and cons.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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