Why bootstrapping finance

Entrepreneurial Success. How To Succeed in Business. What is Bootstrapping? Bootstrapping is a means of financing a small firm through 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 start-up capital. It is characterized by high reliance on any internally generated retained earnings, credit cards, second mortgages, and customer advances, to name but a few sources.

Why Bootstrapping? Bootstrapping offers many advantages for entrepreneurs and is probably the best method to get an entrepreneurial firm operating and well positioned to seek equity capital from outside investors at a later time. Bootstrapping Options. Bootstrapping options available to entrepreneurs can be divided into four categories:. Product development Business development Minimization of capital needed , and Meeting the need for capital.

References :. Venture Financing: Step-by-step Guide. In this stage, money from customers is used to keep the business operating and, eventually, funds growth. Once operating expenses are met, growth will speed up.

In the credit stage, the entrepreneur must focus on the funding of specific activities, such as improving equipment, hiring staff, etc. At this stage, the company takes out loans or may even find venture capital, for expansion. To run a successful bootstrapped company, an entrepreneur must execute a big idea, focus on profits, develop skills, and become a better business person.

With a big idea , it is best to break it into a series of ideas, and then execute the startup on the best portion. Then you follow up on other sections later. In most instances, a company will be successful in its execution of a business idea, rather than the idea itself. This is what funds the business. A very different mindset must be employed for bootstrapped startups compared to the management mindset in a venture-funded or angel-funded company.

Usually bootstrapped businesses expect to be around for a long time, slowly and quietly growing, developing paying customers to meet the business costs; whereas, companies involved with outside funding will be expected to have high growth so that the investor can have a profitable exit strategy. People starting a business must develop a wide variety of skills, as well as passion, resilience, perseverance, and courage. These are usually required to make a bootstrapped company workable. Improving one's core values matters too, including being resourceful, accountable, and careful, as well as enthusiastic, passionate, and relentless in the advancement of the company.

There are generally two types of companies that can bootstrap:. Bootstrapping is cheap—working with your own money means that super-efficiency is necessary. You are more aware of the costs involved in the day-to-day running of the business and start operating your company on a "lean" business model.

Having to solve problems without external funding means that bootstrappers have to become resourceful and develop a versatile skill set.

The founders are their own bosses and are responsible for all crucial decisions in operating and growing the company. The fact that raising external finance is not an issue, which can be a very stressful and time-consuming task, allows for full concentration on the core aspects of the business such as sales and product development. Additionally, due to the limited cash supply—alternative options, such as factoring , asset re-financing, and trade finance—become part of the norm with bootstrapping.

Building the financial foundations of a business, on your own, is a huge attraction to future investors. Investors, such as banks and venture companies are much more confident funding businesses that are already backed and have shown promise and commitment by their owners.

Business glitches can be rectified with growth, such as product and service—therefore, perfection at the launch of the business is not a necessity. An entrepreneur's lack of experience and know-how—particularly in the fields of business acumen and leads—can cause stagnation and disaster. When there is more than one founder, equity issues can become a problem.

If there is an imbalance between the founders regarding the amount of capital invested, experience, or time, this could cause disharmony as well as adverse tax consequences.

Commingling company funds and personal funds can defeat one of the major reasons to incorporate or set up an LLC. Also, consulting an attorney is beneficial for company startups. Although bootstrapping allows for greater control and the profits are yours, it also involves much more risk where losses and failures may be experienced.

One reason some bootstrapped companies are unsuccessful is due to the lack of revenue: Profit is not sufficient to meet all costs. Starting a business most often requires very long hours of work just to keep your business going, let alone the fact that in many cases, there is no paycheck to go with this effort. All problems are yours, as hiring staff is not usually applicable; therefore solutions are limited to your ability or the abilities of friends and relatives who might be willing to help.

You'll need to become adept at handling stressful situations that might crop up if you finance your company using debt to another person, such as family members and friends.

Understanding what is expected of you and communicating this clearly to others can help you cope with the stress of the situation.

Building a strong business with a sound foundation and value takes time and many bootstrapped companies have achieved this by providing amazing products or services.

Eventually, they reach the point, through solid strategies and sustainable profit, where the company grows to have a powerful position within their industry. Many of the successful companies that we see today had their humble beginnings as a bootstrapped enterprise. Examples of these include:. Obviously, there are entrepreneurs behind the scenes of successfully bootstrapped companies, such as Bill Gates, Steve Jobs, Michael Dell, and Richard Branson. GoPro, Inc.

GPRO , which was formerly Woodman Labs, Inc, is an American corporation that develops, manufactures, and markets high-definition personal cameras. The company manufactures small, body-worn cameras that record the user's experiences.

These cameras became popular among sports enthusiasts because of their ability to record hands-free, high-definition footage. Nick Woodman, an American from California, conceived the idea of a wrist strap that could tether already-existing cameras to surfers. His inspiration came after a Australia surfing trip where he was hoping to capture quality action photos of his surfing. But he found he was unsuccessful as an amateur photographer because he could not obtain quality equipment at accessible prices.

He tested his first makeshift models but came to the realization that these were not good enough, therefore concluding that he would have to manufacture the camera, its housing, and the strap himself.

He moved back in with his parents at age 26 and worked many long hours to develop his product. In , the company sold its first camera system, which was a 35mm analog camera, which eventually evolved to digital. As new adopters discovered the product, the cameras branched out from the surf scene to be used for auto racing, skiing, bicycling, snowboarding, skydiving, base jumping, white-water rafting, and skateboarding.

Although it took 10 years for GoPro to reach its zenith, there had been a great deal of aggressive marketing, social media strategy, as well as constant consumer technology advancements going on throughout this time. And, of course, the company benefitted from being in the right place at the right time by taking advantage of a situation when smartphones were making traditional digital cameras and camcorders obsolete.

However, Woodman was not a success the first time around. Previously, he had built two companies. Both failed. In that same year, , new business incorporations were recorded.

Does this disparity mean that the United States needs more tax breaks, aggressive investors, and financially sophisticated entrepreneurs to channel venture capital to more start-up companies? Not at all. Over the past two years, my associates and I interviewed the founders of companies on the Inc.

The companies—Software , Symplex Communications, Gammalink, and Modular Instruments, to mention just a few—are not household names. But they are the mainstay of the entrepreneurial revolution that politicians want to sustain and that so many people, managers and business students alike, hanker to join. Lessons about entrepreneurship are often drawn from individual case studies, which provide rich but potentially idiosyncratic data, or from survey statistics that reveal little of the hows and whys of success.

In pursuit of both depth and breadth, I recently completed a far-reaching field study of start-ups. With the help of Research Associates Kevin Hinton and Laura Pochop and Professor Howard Stevenson, I interviewed company founders about how they overcame the daunting obstacles that confront start-ups. The companies in the study came from the Inc. I narrowed my list of prospective interviewees to companies founded after , on the grounds that the start-up history of older companies would be more difficult to obtain.

Finding a representative cross section of start-ups was a challenge. Since many incorporations are just attempts at self-employment or poorly conceived ventures that would say little about starting new businesses, I could not simply draw from the hundreds of thousands of new businesses incorporated every year.

At the same time, I also wanted to avoid the few billion-dollar successes like Federal Express or Microsoft, which the typical entrepreneur cannot realistically hope to emulate. My sample provided a happy middle ground. The Inc. Start-ups are characterized by close relationships among financing, marketing strategies, hiring, and control systems that would be hard to capture through a structured survey.

Since executives of successful companies are inundated with mail surveys, response rates are generally low. Although we had some difficulty in contacting entrepreneurs and scheduling appointments, only a few declined to be interviewed. Each interview lasted from one to three hours.

Usually two researchers took handwritten notes, which were then compiled into a single transcript and returned to the interviewees for review. To my knowledge, this is one of the broadest, most in-depth studies of U. Where other field studies have focused on limited geographic regions or industries, we visited over 20 cities and towns in a dozen states to interview entrepreneurs in a wide range of businesses. Researchers who have tackled similarly broad samples have relied on mail surveys.

Reflecting Inc. But the skew actually reinforces my findings about the importance of bootstrapping: start-ups that grow more slowly are even less likely to need or be able to attract outside risk capital. These interviews attest to the value of bootstrapping: launching ventures with modest personal funds. Furthermore, fewer than one-fifth of the bootstrappers had raised equity for follow-on financing in the five or more years that they had been in business. They relied on debt or retained earnings to grow.

What, then, is the problem? Entrepreneurs are wasting lots of brainpower scheming to raise money. Professionals with MBAs and corporate experience are attempting to strike out on their own as never before: Michael Lutz, for example, is a physicist and Stanford MBA who worked at Hughes Aircraft and Raychem for 15 years before he joined up with a Silicon Valley guru to launch a new venture.

Unlike the scrappy dropouts and malcontents of yore, however, these new entrepreneurs are unwilling to pursue business opportunities without raising big money first. Following textbook formulas for snaring investors, they attempt to recruit experienced teams.

They write business plans with crisp executive summaries describing their proprietary edge. If venture capitalists are unresponsive, they network with venture angels. Even today, they have heard there is more money than good ideas. Despite a well-written business plan and excellent contacts, Lutz and his partner failed to attract venture capital in a year of trying.

For the great majority of would-be founders, the biggest challenge is not raising money but having the wits and hustle to do without it. To that end, it helps to understand what it takes to start a business—and why that is likely to conflict with what venture capitalists require. But would-be founders should not interpret lack of interest from the investor community as a pronouncement that the business is doomed.

Often entrepreneurs fail to qualify for venture capital not because their proposals are poor but because they do not meet the exacting criteria that venture capitalists must use. Venture capitalists and other investors in startups are neither greedy nor shortsighted, as some disappointed entrepreneurs believe; they are simply inappropriate for most start-ups. Their criteria are understandably exacting: venture capitalists incur significant costs in investigating, negotiating, and monitoring investments.

They can back only a few of the many entrepreneurs who seek funding, and they must anticipate that several investments will yield disappointing returns. One study of venture capital portfolios by Venture Economics, Inc. Each project must therefore represent a potential home run. Start-ups, however, typically lack all or most of the criteria investors use to identify big winners: scale, proprietary advantages, well-defined plans, and well-regarded founders.

Most start-ups begin by pursuing niche markets that are too small to interest large competitors—or venture capitalists. Venture capitalists are hesitant to pursue small opportunities where even high-percentage returns will not cover their investment overhead.

They favor products or services that address hundred-million-dollar markets. Few entrepreneurs start with a truly original concept or a plan to achieve a sustainable competitive advantage through a proprietary technology or brand name.

Many entrepreneurs thrive in rapidly changing industries and niches where established companies are deterred by uncertain prospects. Their ability to roll with the punches is far more important than planning and foresight. Investors, on the other hand, prefer ventures with plausible, carefully thought-out plans to address well-defined markets.

A solid plan reassures them about the competence of the entrepreneur and provides an objective yardstick for measuring progress and testing initial assumptions.

Finally, many entrepreneurs are long on energy and enthusiasm but short on credentials. Michael Dell was a freshman at the University of Texas when he started selling computer parts by mail order. Others are refugees from declining or oligopolistic industries, seeking new fields that offer more opportunity but where they lack personal experience.

Investors who see hundreds of business plans and entrepreneurs, however, cannot gauge or rely on the intangibles of personality. Thus Mitch Kapor was a good bet for investors because he already had a successful software product, Visiplot, under his belt before he launched Lotus.

Bill Gates, on the other hand, a teenage college dropout when he launched Microsoft with his high school friend, Paul Allen, probably was not. Entrepreneurs who try to get investors to bend their criteria or create the perception that they meet those criteria do so at their peril. Several entrepreneurs pointed to the pitfalls of rushing to raise external financing.

Winning over investors too early, they said, can compromise your discipline and flexibility. Bootstrapping in a start-up is like zero inventory in a just-in-time system: it reveals hidden problems and forces the company to solve them. This way, I wrote all the checks.

I knew where the money was going. There can also be problems with raising too much money. George Brostoff, cofounder of Symplex Communications, which manufactures data communications equipment, agreed. Diminished flexibility is often another consequence of premature funding. Start-ups entering new industries seldom get it right the first time. Success, especially in new and growing industries, follows many detours and unanticipated setbacks; strategies may have to be altered radically as events unfold.