Bootstrapping

Startups are not a small version of a large company. A startup is a temporary organizationdesigned to search for a repeatable and scalable business model ...that someday aspires to growup to become a real company! A startup is an organization dedicated to innovation under conditions of extreme financial constraints. Large companies have the luxury of allocating budgets to new products and can weather market uncertainties.

So where do startups get their initial financial resources? The answer is: many startups arefinanced on a “shoestring” or “bootstrapping” basis. Shoestringing or bootstrapping is theinternal generation of initial financing, using primarily your own personal resources, and sometimes complemented by various forms of equity investments or loans from family, friends,and relatives (the 3F’s).

Bootstrapping is entrepreneurship in its purest form. It is the transformation of inventive value into financial capital. The overwhelming majority of entrepreneurial companies are financedthrough this “highly creative” process, as well as formal sources of private equity. i Interestingly, academic research has suggested that bootstrapping techniques can minimize risk because of the absences of outside venture capital investors. ii When everybody says ‘no’--from the banker to the private investor--the tough small business owners turn to themselves....they raise moneyfrom within by bootstrapping. iii

Because bootstrappers have no choice except to be resourceful, they may have an ironic advantage over other individuals who hail from more resource-rich environments in terms of developing their managerial and entrepreneurial skill sets. To a certain extent, being deprived of resources forces the entrepreneur to find other inventive ways to make-do (or make do without).iv

Entrepreneurial bootstrapping is more celebrated, studied, and desirable than ever before. Business school students flock to courses on entrepreneurship. Managers, fearful of losing their perch on the corporate ladder, yearn to step off on their own. Policymakers pin their hopes for job creation and economic growth on startups rather than on the once-preeminent corporate giants.

Stages of bootstrapping financing

First stage

Personal resources Sweat equity Garage prototyping

Second stage

Seed capital Friends and family Angels

Business Plan

Time (arbitrary units)

Of course, not every entrepreneur bootstraps. The legendary Mitch Kapor raised nearly $5 million of venture capital in 1982, (a small fortune in those days) enabling Lotus to launch the 1-2-3 spreadsheet. Lotus 1-2-3 was the software industry’s most successful advertisingcampaign. Significant initial capital is indeed a must in industries such as biotechnology or supercomputers where tens of millions of dollars have to be spent on R&D before any revenue is realized.

Capital requirements 

But many startups must rely on bootstrapping, which is easier said than done. History shows that successful bootstrappers follow these principles:

• ? Place great emphasis on critical pre-launch preparations. Conduct enormous amounts of research: library research, bookstore research, Internet research, and especially field research (the non-scholarly translation of field research: network, network, network, with prospective suppliers, customers, advisory board members, and other potential friends of the business).
• ? Crawl before you walk.
• ? Forget appearances. A Taj Majal-style headquarters will only serve you after you are successful, not before. Start your business out of your home. (?).
• ? Negotiate terms carefully. Negotiate terms for purchases from vendors and sales to customers. When possible, arrange the purchase-sales sequence in a way, that customers finance the purchase of inventory through prepayment terms.
• ? Advertise a product that could be produced, if response to the ad justifies its production.
• ? Develop business communications and media skills. Be worthy of media attention (i.e.,
• be newsworthy) due to a unique product, company history, team, or even aspiration
• ? Be extra careful of your overhead expenses,