What it is:
Bootstrapping refers to the efforts of an entrepreneur to start a business using his own assets as the source of capital.
Bootstrapping can also refer to a highly-leveraged transaction when an investor acquires a controlling interest in a company, financing the transaction by using the assets of the company as collateral for the loan.
How it works (Example):
Entrepreneurs typically apply for a business loan from a commercial bank or seek funding from independent investors. An entrepreneur who risks their own money as an initial source of venture capital is bootstrapping.
For example, someone who starts a business using $100,000 of their own money is bootstrapping.
In a highly-leveraged transaction, an investor obtains a loan to buy an interest in the company. The investor uses the assets of the company they are about to purchase as collateral for the loan.
Why it Matters:
Bootstrapping frees the entrepreneur from having to pay interest on a loan or from having to share any potential profits with other investors. However, entrepreneurship involves significant risk. When personal funds are used to finance a new business, the person stands to lose not only the time invested but their own money as well.
Bootstrapping in leveraged transactions is extremely risky since the potential investor is using the company’s assets to service their loan.