Financial bootstrapping is a term used to cover different methods for avoiding using the financial resources of external investors. Bootstrapping can be defined as ?a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors? (Ebben and Johnsen, 2006:853). The use of private credit cards is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers were founded this way.

Types of bootstrapping

There are many different types of bootstrapping methods. Winborg and Landström (2001) categorized six types of bootstrapping methods when they surveyed the use of bootstrapping in 262 Swedish small businesses.

Owner financing

• Credit cards
• Second mortgages
• Personal savings
• "Friends, fools and family"

Minimization of accounts receivable

• Factoring
• Reward fast payment
• Terminate relationship with slow paying customers

Joint utilization

• Share office, supplies, equipment
• Share employees
• R Y L

Delaying payment

• Negotiate terms
• Lease equipment
• Selling by commission instead of wages

Minimizing inventory

• Using formal routines to minimize inventory needed
• Seeking best possible terms from suppliers

Subsidy finance

• Governmental grants
• Research grants

Bootstrapping as a strategic tool

Bootstrapping has been used as an explanation for how companies get resources when they can not get external investors or debt finance. Ebben and Johnson (2006) want to expand the explanation of bootstrapping to being a strategic tool for getting resources and they show that bootstrapping fits with organizational theory. In the case studies of Wennberg and Berglund (2006) firms continued to use bootstrapping even after they could get both debt and equity investments.

In large corporate environments, bootstrapping is often termed bootlegging.

The use of bootstrapping

Some of the studies on bootstrapping have looked into how technology firms and fast growing firms use bootstrapping. In the study by Winborg and Landström (2001) they found that young fast growing companies used owner financing as the main method of financing and that they used very little subsidy finance and joint utilization. Van Auken (2005b) found that technology based firms in general value methods that increase cash inflow higher than other methods, but he also found that they have an overall low estimation of the effects of bootstrapping. Ebben and Johnson (2006) argue that methods that involve customers or suppliers are hard to utilize for young companies because they have not had time to build a relationship with these entities.

Financial bootstrapping in academic literature

Lahm and Little (2005) compared how business practice and education in entrepreneurship differ in their article: ???Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching versus current business practices???? Their conclusion is that bootstrapping receives little attention in entrepreneurship education and textbooks.

See also

• Bootstrap Network
• Private equity
• Venture Capital
• Search Fund
• List of venture capital firms
• List of finance topics
• Angel investor
• Supply management

External links

• Bootstrappers Bible
• Inc.com articles on bootstrapping
• The bootstrap network
• Bootstrap Bootcamp
• Razor Suleman, CEO of I Love Rewards, on Bootstrapping
• 10 min documentary interviewing entrepreneurs about bootstrapping & funding their startups

References

• Ebben, J., & Johnson, A., (2006). Bootstrapping in small firms: An empirical analysis of change over time. Journal of Business Venturing, Vol. 21, issue 6: 851-865
• Lahm, R.J., Little, H.T, (2000). Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching versus current business practices? Proceedings of the Academy of Entrepreneurship, Volume 11, Number 2
• Winborg, J., & Landstrom, H., (2001). Financial bootstrapping in small businesses: examining small business managers? resource acquisition behaviors. Journal of Business Venturing Vol.16: 235? 254.
• Wennberg, K., & Berglund, H., (2006). Social networking and the development of new ventures, Advances in Interdisciplinary Studies of Work Teams, Vol. 12: 203?225
• Van Auken, H., (2005). A Model of Small Firm Capital Acquisition Decisions, International Entrepreneurship and Management Journal, Vol.1: 335?352
• Van Auken, H., (2005b). Differences in the Usage of Bootstrap Financing among Technology-Based versus Nontechnology-Based Firms. Journal of Small Business Management, Vol.43: 93?103