Based on "Bootstrap Finance: The Art of Start-ups" by Bhide, A., 1992; "Who Bankrolls Software Entrepreneurs" by Freear, J., Sohl.J.E., and Wetzel, W.E., 1995; "Financial Bootstrapping in Small Businesses: A Resource-Based View on Small Business Finance", Winborg,J., and Landstrom.H., 1997; and "Angel Investing", Osnabrugge,M.V., and Robinson, R.J., 2000

Definition    Bootstrapping Options    Strategies for Successful 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. 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.

Bootstrapping is the most likely source of initial equity for more than 90% of technology based firms. Venture capitalists are rarely able to fund small start-up firms (in US, seeking lees than $5 million), regardless of the quality 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 equity capital from outside investors at a later time.

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.

Bootstrapping Options for Product Development

Important Bootstrapping Techniques for Product Development:

• Prepaid licenses, royalties, or advances from customers
• Special deals on access to product hardware
• Development of product at night and on weekends while working elsewhere
• Customer-funded research and development
• Free or subsidized access to general hardware
• Turning a consultant project into a commercial product.

Among the least important ways identified to bootstrap product development are attempting to obtain research grants and commercializing university-based research.

Bootstrapping Options for Business Development

Important Bootstrapping Techniques for Business Development:

• Foregone or delayed compensation
• Reduced compensation
• Personal savings
• Working from home
• Deals with professional service providers at below-competitive rates
• Space at below-market or very low rent
• Personal credit cards and home equity loans.

The least important bootstrapping techniques used in business development include Small Business Administration's guarantees, the entrepreneur's severance and parachute payments, barter arrangements, and special terms with customers.

Bootstrapping Options to Minimize the Need for Capital

Important Bootstrapping Techniques to Minimize the Need for Capital:

• Buy used equipment instead of new
• Borrow equipment from other businesses for short-term projects
• Use interest on overdue payments from customers
• Hire personnel for shorter periods instead of employing permanently
• Coordinate purchases with other businesses (mutual purchasing of goods)
• Lease equipment instead of buying
• Use routines to speed up invoicing
• Cease business relations with customers who frequently pay late
• Offer same conditions to all customers (that is, no expense on preferential treatment to some)
• Buy on consignment from suppliers
• Obtain trade credit from suppliers
• Deliberately choose customers who pay quickly
• Share business premises with others
• Employ relatives or friends at non-market salaries
• Run the business completely from your home.

One of the least used methods to minimize the need for capital is constant sharing of equipment and employees with other local businesses to reduce fixed commitments.

Bootstrapping Options to Meet the Need for Capital

Important Bootstrapping Techniques to Meet the Need for Capital:

• Withhold entrepreneur's salary payment for short or long period of time
• Pay employees with company stock (that is, save on cash expenditures and give the employees some ownership and additional motivation to work hard)
• Seek out best purchasing conditions with suppliers
• Deliberately delay payment to suppliers
• Use the entrepreneur's private credit card for business expenses
• Obtain capital via the entrepreneur's assignments in other businesses
• Obtain loans from relatives and friends
• Barter underused products or services with other firms
• Franchise or license the product or business idea to others for a royalty fee.

The least employed bootstrapping methods used to meet the need for capital include raising capital from a factoring company (through selling the firm's accounts receivable to the lender) and obtaining central or state subsidies.

Strategies for Successful Bootstrapping

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 following seven recommendations:

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 once the firm is in business.
2. Look for quick, break-even, cash-generating 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. Offer high-value products or services that sustain direct personal selling. Since it is usually difficult and costly to persuade customers to switch from a familiar product or service to a substitute offered by a new firm, successful entrepreneurs usually choose high-ticket products and services where their individual passion and sales tactics can substitute for a large marketing budget.
4. Forget about the crack team. Small bootstrapped firms do not have the financial means to afford and recruit a well-balanced management team of seasoned veterans. Reliance on inexperienced personnel is common - and not always a disadvantage.
5. Keep growth in check. Since bootstrapping supplies only limited financial means for growth, bootstrapped firms should take care to expand at a rate they can control. Too many start-ups fail because they grow beyond their financial means.
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 loss-making strategies to build a market share or a customer base. Having a healthy cash flow is critical to survival, so their sales strategies must ensure healthy returns from the outset.
7. Cultivate banks before the business becomes creditworthy. Bank financing is usually unavailable to start-up 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 few years and is creditworthy.