9/30/2016

BootstrappingtheMostCommonSourceofInitialFinanceforEntrepreneurialFirms(byTen3OnlineBusinessCoach)

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BootstrappingtheMostCommonSourceofInitialEquityforEntrepreneurial
Firms
DefinitionBootstrappingOptionsStrategiesforSuccessfulBootstrapping

BootstrappingOptionsforProduct
Development
ImportantBootstrappingTechniquesforProduct
Development:
Prepaidlicenses,royalties,oradvancesfrom
customers
Specialdealsonaccesstoproducthardware
Developmentofproductatnightandonweekends
whileworkingelsewhere
Customerfundedresearchanddevelopment
Freeorsubsidizedaccesstogeneralhardware
Turningaconsultantprojectintoacommercial
product.
Amongtheleastimportantwaysidentifiedtobootstrap
productdevelopmentareattemptingtoobtainresearch
grantsandcommercializinguniversitybasedresearch.
BootstrappingOptionsforBusiness
Development

WhatisBootstrapping?
Bootstrappingisameansoffinancingasmallfirmthrough
highly creative acquisition and use of resources without
raising equity from traditional sources or borrowing money
from a bank. In short, "bootstrapping" means starting a
new business without startup capital. It is characterized
by high reliance on any internally generated retained
earnings, credit cards, second mortgages, and customer
advances,tonamebutafewsources.
Bootstrappingisthemostlikelysourceofinitialequityfor
more than 90% of technology based firms. Venture
capitalists are rarely able to fund small startup firms (in
US,seekingleesthan$5million),regardlessofthequality
of the venture, because of their very specific investment
criteria and high costs of due diligence, negotiating, and
monitoring. Bootstrapping offers many advantages for
entrepreneurs and is probably the best method to get an
entrepreneurial firm operating and well positioned to seek
equitycapitalfromoutsideinvestorsatalatertime.
Bootstrappingoptions
Bootstrappingoptionsavailabletoentrepreneurscanbe
dividedintofourcategories:
1. Productdevelopment

ImportantBootstrappingTechniquesforBusiness
Development:

2. Businessdevelopment

Foregoneordelayedcompensation

3. Minimizationofcapitalneeded,and

Reducedcompensation

4. Meetingtheneedforcapital.

Personalsavings
Workingfromhome
Dealswithprofessionalserviceprovidersatbelow
competitiverates
Spaceatbelowmarketorverylowrent
Personalcreditcardsandhomeequityloans.
Theleastimportantbootstrappingtechniquesusedin
businessdevelopmentincludeSmallBusiness
Administration'sguarantees,theentrepreneur'sseverance
andparachutepayments,barterarrangements,andspecial
termswithcustomers.

StrategiesforSuccessfulBootstrapping
Employing bootstrapping measures to grow a small firm
clearly relies greatly on networks, trust, cooperation, and
wise use of the firm's existing resources, rather than
collecting new financial financial resources from outside.
Strategies for successful bootstrapping are based on the
followingsevenrecommendations:
1.Get operational quickly. Use a copycat idea in a
small target market to get a firm off the ground fast.
New and bigger opportunities are certain to develop
oncethefirmisinbusiness.

BootstrappingOptionstoMinimizetheNeed
forCapital
ImportantBootstrappingTechniquestoMinimizetheNeed
forCapital:
Buyusedequipmentinsteadofnew
Borrowequipmentfromotherbusinessesforshort
termprojects
Useinterestonoverduepaymentsfromcustomers
Hirepersonnelforshorterperiodsinsteadofemploying
permanently
http://it4b.icsti.su/1000ventures_e/venture_financing/bootstrapping_methods_fsw.html

2.Look for quick, breakeven, cashgenerating

products. Firms that are making money build
credibility in the eyes of customers, employees, and
investors. Therefore bootstrapped firms may wish to
take on profit opportunities that large firms regard as
distractions.
3.Offerhighvalueproductsorservicesthat sustain
direct personal selling. Since it is usually difficult
and costly to persuade customers to switch from a
familiarproductorservicetoasubstituteofferedbya
new firm, successful entrepreneurs usually choose
highticket products and services where their
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9/30/2016

BootstrappingtheMostCommonSourceofInitialFinanceforEntrepreneurialFirms(byTen3OnlineBusinessCoach)

individualpassionandsalestacticscansubstitutefor
alargemarketingbudget.

Coordinatepurchaseswithotherbusinesses(mutual
purchasingofgoods)
Leaseequipmentinsteadofbuying

4.Forget about the crack team. Small bootstrapped

firms do not have the financial means to afford and
recruit a wellbalanced management team of
seasoned veterans. Reliance on inexperienced
personnel is common and not always a
disadvantage.

Useroutinestospeedupinvoicing
Ceasebusinessrelationswithcustomerswho
frequentlypaylate
Offersameconditionstoallcustomers(thatis,no
expenseonpreferentialtreatmenttosome)

5.Keepgrowthincheck.Sincebootstrapping supplies
only limited financial means for growth, bootstrapped
firms should take care to expand at a rate they can
control. Too many startups fail because they grow
beyondtheirfinancialmeans.

Buyonconsignmentfromsuppliers
Obtaintradecreditfromsuppliers
Deliberatelychoosecustomerswhopayquickly
Sharebusinesspremiseswithothers

6.Focus on cash (not on profits, market share, or

anything else). Because of their financial means,
bootstrapped firms cannot afford to pursue a number
of strategic goals. Bootstrapped firms cannot pursue
lossmaking strategies to build a market share or a
customerbase.Havingahealthycashflowiscritical
to survival, so their sales strategies must ensure
healthyreturnsfromtheoutset.

Employrelativesorfriendsatnonmarketsalaries
Runthebusinesscompletelyfromyourhome.
Oneoftheleastusedmethodstominimizetheneedfor
capitalisconstantsharingofequipmentandemployees
withotherlocalbusinessestoreducefixedcommitments.
BootstrappingOptionstoMeettheNeedfor
Capital

7.Cultivate banks before the business becomes

creditworthy. Bank financing is usually unavailable
to startup firms, especially if little or no collateral is
offered. However, bank financing is quite important
for all small firms once they are established and
making some profit. Keeping good books,
immaculate records, and sound balance sheets from
day one allows you to approach your banker with
confidence once the firm has been in operation for a
fewyearsandiscreditworthy.

ImportantBootstrappingTechniquestoMeettheNeedfor
Capital:
Withholdentrepreneur'ssalarypaymentforshortor
longperiodoftime
Payemployeeswithcompanystock(thatis,saveon
cashexpendituresandgivetheemployeessome
ownershipandadditionalmotivationtoworkhard)
Seekoutbestpurchasingconditionswithsuppliers

Seealso:

Deliberatelydelaypaymenttosuppliers

AlternativeFinancing:VCIsNotTheOnlyWay

Usetheentrepreneur'sprivatecreditcardforbusiness
expenses

Obtaincapitalviatheentrepreneur'sassignmentsin
otherbusinesses
Obtainloansfromrelativesandfriends
Barterunderusedproductsorserviceswithotherfirms
Franchiseorlicensetheproductorbusinessideato
othersforaroyaltyfee.
Theleastemployedbootstrappingmethodsusedtomeet
theneedforcapitalincluderaisingcapitalfromafactoring
company(throughsellingthefirm'saccountsreceivableto
thelender)andobtainingcentralorstatesubsidies.
Bibliography:
1."BootstrapFinance:TheArtofStartups"byBhide,A.,1992
2."WhoBankrollsSoftwareEntrepreneurs"byFreear,J.,Sohl.J.E.,andWetzel,W.E.,1995
3."FinancialBootstrappinginSmallBusinesses:AResourceBasedViewonSmallBusinessFinance",Winborg,J.,andLandstrom.H.,1997
4."AngelInvesting",Osnabrugge,M.V.,andRobinson,R.J.,2000

http://it4b.icsti.su/1000ventures_e/venture_financing/bootstrapping_methods_fsw.html

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