The term "bootstrapping" has been around since the 1880s as it referred to the leather strap that hangs from the back of the boot. It helped make it easier to pull up the boots. Since then, the term grew to mean many other things especially in the computing and business world.
In terms of finance, bootstrapping means to operate only on the business' capital without funds coming from the outside. Bootstrapping comes from the idea that bootstraps allow a person to pull himself up by his own bootstraps, so a business manages itself with its own funds. Many startups that do bootstrapping reinvest all of their profits back into the business. This works well for businesses where its expenses are low and profits are high.
Bootstrapping businesses obviously can't start the business this way as there are generally no profits available to reinvest in the business. The initial investment could come from the owner, an angel investor, or venture capital. A successful bootstrapper only needs a small capital rather than a large one.
Also, a sales cycle can affect whether a company can follow the bootstrapping approach. Long sales cycles mean it takes longer to recoup the profit to put back into the business. By the time the profits come in, the business could be out of cash flow.
Bootstrapped businesses also limit the number of staff. After all, payroll is an expense. Many bootstrappers tend to do many of the tasks, at least in the early days of the business. They might begin outsourcing some of the tasks, which can be a cheaper option than having an employee.
To succeed with bootstrapping means watching every dollar that goes out and comes in. Owners look for ways to get things as cheap as possible by comparison shopping, bartering, negotiating deals or some or all of the above.
Guy Kawasaki has an excellent post on The Art of Bootstrapping. His first rule is to "focus on cash flow, not profitability." This confirms that having a small up-front capital, short sales cycles, short payment terms, and recurring revenue works better for companies wishing to go with the bootstrap approach. Few businesses have the luxury of meeting all of these requirements.
It's OK if your business doesn't have the traits for bootstrapping and needs to rely on external resources for working capital. Even in a challenging economy, obtaining capital works well in helping a business stay on top of its cash flow and grow.
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