Bootstrap – adjective
A situation in which an entrepreneur starts a company with little capital. An individual is said to be boot strapping when he or she attempts to found and build a company from personal finances and/or from the operating revenues of the new company.
Most startups do not have a bunch of cash laying around. So businesses have to make due with what little they have. I often tell my clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed me to consult on how to manage her own marketing campaign; then she could’ve saved a fortune by being her own marketing manager.
The temptation to abandon bootstrapping is strong especially when investors come knocking. One of my clients attracted large investors with a business plan I had prepared for him. Initially, I budgeted a modest salary for him in the financial projection. He saw that there was a good amount of retained earnings (something investors want to see), and had since budgeted a larger salary for himself. I had to tell him to reduce his salary. I am not alone in emphasizing this sentiment:
- A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary. Ultimately, Mark and all the other sharks walk away from the deal.
- Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.
I advised my client to pay himself less and take in dividend income instead because it is taxed at a lower rate. In business, cash is king and the CEO doesn’t want to be the kingdom’s worst drain.