Bootstrapping

What Is Bootstrapping?

Bootstrapping is the practice of starting and growing a business using the founder's personal savings and the company's own earnings, rather than raising money from venture capital firms, angel investors, or public markets. The name comes from the idiom of pulling oneself up by one's own bootstraps. In bond markets, the term has a separate meaning, described below.

How Business Bootstrapping Works

A bootstrapped company covers its costs from customer payments and personal funds. Founders often keep expenses low, delay hiring, reinvest profits, and avoid selling ownership. Because no outside investor is involved, the founders keep a larger share of the company and do not face the growth targets that investors usually expect. The trade-off is that growth can be slower and the available capital is limited, so the company must manage its cash flow closely to stay operating.

Bootstrapping in Bond Markets

In fixed income, bootstrapping is a technique for estimating spot rates, the interest rates that apply to single payments at specific future dates. Analysts start with the shortest-maturity bond, whose price reveals its spot rate directly. They then use that rate to work out the implied rate for the next maturity, and continue step by step. The result is a set of rates that together form the yield curve. The method is widely taught because it lets analysts price bonds consistently with the market.

Advantages and Drawbacks

• Founders keep control and ownership, avoiding dilution of their stake.
• Discipline around spending can produce a business that depends less on outside funding.
• Growth is often slower, and a shortage of capital can limit opportunities or cause a business to fail during a downturn.