The Bootstrapping Conundrum

Why being too risk-averse can actively interfere with making good investment decisions

By Andrea Hill

In technical terms, bootstrapping means building a business from scratch using one’s own money and reinvesting organic cash flow to grow instead of seeking outside capital. In practical terms, bootstrapping has come to mean using an incredibly frugal approach to investing in one’s business. Bootstrapping has become a mindset and a buzzword rather than a growth strategy.

In the jewelry industry, most startups need to bootstrap because the differentiating strategies that attract investors can be hard to come by. Developing a business plan that can be built on incremental sales and profits is the only way most companies can get rolling.

The Pros and Cons of Bootstrapping

There can be significant upsides to bootstrapping a business. Bootstrappers retain full ownership because taking on investment dollars dilutes ownership and forfeits some control. The entrepreneur is able to experiment, make mistakes, and even completely change strategies without having to keep an investor happy.

Another benefit is that bootstrapped growth is usually slower, which affords time to build a sound foundation and refine operations. Trial and error is a great teacher, and as long as it doesn’t cost you your early customers, it’s very freeing to be able to experiment without having to negotiate with investors.

Theoretically, bootstrapped companies have less debt, which is also a benefit. In reality, many bootstrappers rack up high credit card bills with burdensome interest rates. But as long as a company avoids that pitfall, growth without debt means that if things don’t work out as planned, there’s no ongoing financial burden if you decide to close your doors.

Bootstrapping comes with two significant disadvantages. The first is financial risk. Most people don’t think of this as a bootstrapping problem, because they haven’t taken out loans or made commitments to investors. But bootstrappers can be faced with sudden and significant expenses that force them to put their own money into the company to avoid defaulting on customer commitments. Self-funded businesses also risk stagnant cash flow and simply running out of money.

But the biggest risk is when that bootstrapping mindset becomes entrenched. Company owners find themselves unable to invest in their own companies either because bootstrapping has become a mindset rather than just a practice or because they have become too risk-averse to make good investment decisions. And this is when bootstrapping starts actively interfering with business potential.

Let’s look at a few examples of how this can play out.

A jewelry production company with 60 employees has managed to grow slowly and steadily over the past 17 years. For the first seven years, the owner spent 25 percent of her time traveling, visiting clients, and selling, and also employed four outside sales reps. The company’s primary marketing and selling expenses were trade shows, trade magazine ads, and producing sample lines.

In the past 10 years as trade show expenses skyrocketed, trade show performance waned, and the seasoned reps retired one by one, the company added digital marketing, but that method has not been able to replace the customer growth that trade shows and reps once provided. They have experimented with lower-priced lines, more frequent collections, and setting up an off-brand online direct sales channel, but that has merely resulted in reducing margins and increasing operations and logistics expenses.

There is a significant opportunity they haven’t tried yet. They could sell to major online marketplaces and perform as a sub-manufacturer for a very large international brand. But the company’s computer systems are antiquated and won’t support the processing that would be required to go after those opportunities. The business owner has learned it will cost $130,000 to upgrade, and she can’t see making that commitment.

Here’s another example. A designer brand has managed to amass a distribution network of 95 independent jewelry specialty retail stores but cannot figure out how to get to the next goal of 200 stores. Its collections are well-regarded and quality is high, but it struggles with customer service and timely deliveries, and it is getting a bit of a reputation for service problems. An expert has advised the brand that it can solve both its sales pipeline problems and its service problems by learning how to do a more strategic form of selling and implementing system controls to help manage and improve service operations. The cost of this solution is $35,000 to improve internal operations and for training, and $1,925 per month for a CRM system.

In both those examples, the ROI for the software and upskilling is dramatic and easy to prove, but an entrenched bootstrapping mindset is keeping them from achieving their goals. What else can it be? They have proven that they are willing to do hard work, can recruit and retain a productive workforce, create sustainable business cultures, and are capable of growth. But they are stymied at the point where making a meaningful investment is necessary to get to the next step.

Whether you are a very small business contemplating the purchase of a laser welder or a large business considering implementing manufacturing automation, it’s important to remember that no business grows without investment. Frugality is certainly a virtue, but not when it comes at the expense of achieving your business goals.