Strategic Bootstrapping

Matthew W. Rutherford

• Publisher: Business Expert Press
• Year: 2015
• Print ISBN: 9781606496985
• eBook ISBN: 9781606496992
• Topic: Commerce
• Subtopic: Communication d'entreprise

Strategic Bootstrapping is about helping entrepreneurs sift through the "noise" regarding bootstrapping a start-up. The cold-hard facts on bootstrapping are presented. Practically speaking, most entrepreneurs should avoid bootstrapping, realistically, most entrepreneurs will need to engage in some form of bootstrapping. The argument then shifts to how should one bootstrap? In this era of lean start-ups, effectuation, and bricolage, bootstrapping is oft romanticized but seldom analyzed. This book is different from other bootstrapping books in two key ways. First, it draws on evidence from scienti c study to offer best practices. Second, it utilizes this evidence to help en-trepreneurs thrive—not just survive.

CHAPTER 1

Bootstrapping Described

About This Chapter

New firms are different. Firms that are still in developmental infancy represent a distinct subsection of the universe of all firms. Indeed, experts have noted that new ventures differ fundamentally from more mature firms and these differences mean that new strategies and tactics must be developed, because strategies for survival and growth cannot simply be shipped wholesale from the realm of mature firms (McDougall & Robinson, 1990).

Consider, for example, Under Armour in 1995. Now a household name and wildly successful apparel firm, Kevin Plank started this company from his grandmother’s garage and sold product out of his car. Since it took him over a year to land his first major account—a team sale to Georgia Tech—he had to live very frugally because initially no customers were willing to buy a fledgling product from a novice entrepreneur with a company that had no history or legitimacy. Because of this lack of legitimacy, he built his business on hustle and thrifty living.

New ventures like 1995 Under Armour lack financial, human, and social capital. They have no legitimacy, reputation, or status, and as a result face long odds competing with more established competitors who do not have this set of liabilities. As organizations mature, they gain unique resources and cultures that allow them to differentiate themselves from the competition (Barney, 1991). As a result of these issues, new ventures fail at a much higher rate than more mature ventures. While estimates vary, most would put the chances of surviving 3 years at about 60 percent, and closer to 50 percent at 5 years (Knaup, 2005).

The rate of success is likely lower for those entrepreneurs who decide to launch their firm with no outside financial assistance (Ranger-Moore, 1997). These so called bootstrappers are exacerbating their inherent disadvantages by limiting their access to financial capital. However, most entrepreneurs do bootstrap and some prosper. Kevin Plank founded his company’s launch with credit cards, taking no equity finance or bank debt in the founding years.

Plank’s success aside, after taking all the risk factors into account, it is a wonder that the failure rate for new firms is not much higher. How could any firm be expected to survive in such a harsh environment, with such substantial disadvantages? But many new firms, like Under Armour, do survive and some even grow, create jobs, and generate tremendous wealth for entrepreneurs.

It is the goal of this work to investigate ways that entrepreneurs can increase these survival rates and have a much greater chance to create wealth for themselves and others, even if they decide to eschew external financing. But, it is also the goal here to encourage entrepreneurs to think through the decision to bootstrap very carefully.

There has been an explosion of articles, books, blogs, etc. that all attempt to help entrepreneurs navigate this precarious stage of existence. Much of this writing is based on anecdotal evidence from the entrepreneur/author. This book takes a different approach to assist new venture entrepreneurs—it takes an evidence-based approach. That is, the research on the topic is reviewed and applied to the practice of starting the new venture. In addition to the wealth of knowledge available from practicing entrepreneurs, academics and other experts have collected and analyzed a large amount of data. The results of this analysis can add new and objective information that can assist the practitioner in decision making.

This is certainly not to suggest that the evidence-based approach is better than the anecdotal approach, but it is to suggest that one approach is not complete without the other. This book should be seen as a companion piece to the more anecdotal, personal experience-based books currently on the market (e.g., The Art of the Start by Guy Kawasaki). It is meant to provide objective facts to the entrepreneur, where those facts are available. In this book, we will drill down into the theory and evidence on one specific facet of the start-up—the process and content of bootstrapping.

What Is It?

Briefly, bootstrapping is understood as the condition whereby start-up entrepreneurs operate (often in creative ways) their firms with no outside financial assistance. This is certainly a condition in which many entrepreneurs find themselves, and there is little argument about that (Aldrich & Martinez, 2001; Shepherd & Zacharakis, 2003), but there are differing opinions regarding whether one should choose to bootstrap if given the choice. These opinions are often conflicting and therefore confusing. In carrying out the goals of the book, this advice will be organized and examined.

The practice of bootstrapping captures at least the following activities that arise from the entrepreneur’s unwillingness or inability to attract external financing:

• Keeping one’s day job to invest salary

• Utilizing home-equity

• Using credit cards

• Operating from home

• Sweat equity—working long hours

• Loans from family and friends

Avoiding outside investment makes it a virtual necessity that an entrepreneur will have to rely on these activities to stay afloat.

As noted there has been copious writing in the popular press on the topic of bootstrapping, but there has been a bit less in the realm of academia. Infamously deliberate with regard to publishing results, academics who research entrepreneurship are just now reaching a critical mass of research and writing on the topic.

Historically, the academic research on financing focused on the larger, older firm. Yet, as noted, new ventures have a significantly different set of opportunities and constraints than established businesses. For this reason, traditional theories and models of the firm sometimes have had difficulty translating to the new venture. Entrepreneurs are finding this research and teaching from business schools difficult to implement in their situations. Moreover, much of the academic writing on bootstrapping specifically has focused on small—not new—firms. As will be asserted throughout this book, the new firm is a different beast, not only different from large firms, but different from smaller, older firms as well.

Consider the apparel company, Gerbing’s, when compared to a start-up like Under Armour. Headquartered in Stoneville, NC, Gerbing’s manufactures heated clothing for hunters and other outdoor enthusiasts. The firm is almost 40 years old with 50 employees and $15 million in revenue—certainly small, but not new (Privco, n.d.). Practical advice given to a firm such as this would likely not have been overly helpful to Kevin Plank in his bootstrapped start-up—and vice versa. Frankly, the fundamentals of Gerbing’s are far closer to a Fortune 500 firm than a start-up. For example, the managers of Gerbing’s likely spend far more time making decisions about managing resources—that is, which employees to hire, which financing to accept, or which new plant to open—than about attracting initial customers and financing. These two types of firms are so different that they hardly resemble one another. As renowned economist, Edith Penrose states, “The differences in the administrative structure of the . . . [two] are so great that in many ways it is hard to see that the two species are of the same genus” (Penrose, 1959).

Building on this relatively new and growing base of research on the topic, this chapter introduces the notion and nuances of bootstrapping. It also introduces key concepts and relationships that will be referred to throughout this book.

The Cowboy Way—Brief History of Bootstrapping

To this writer’s knowledge, the term bootstrapping originated in the cowboy lexicon as way of describing how cowboys would arise from a seated position to standing. They would reach down, grab the straps of their boots and rock to an upright position. In this way, the self-sufficient cowboy or cowgirl accomplished goals using only what was immediately available on their person—receiving no assistance from the outside. This metaphor has great appeal to the entrepreneurial community, as many entrepreneurs view themselves as renegades, mavericks, and/or lone-wolves, and so it persists.

Bootstrapping is often discussed, but rarely defined. Noted to be an, “essential entrepreneurial phenomenon” (Grichnik & Singh, 2010), bootstrapping is a term that has been discussed in the academic literature for at least 20 years, but has only recently received rigorous examination by scholars.

A review of the academic and popular press reveals multiple definitions of bootstrapping. Most incorporate the idea that bootstrapping is a process whereby entrepreneurs assemble resources and at least persevere—if not grow—without utilizing debt or equity financing from outside banks and/or investors. This process is generally termed financial bootstrapping (Freear, Sohl, & Wetzel, 1995). But, in actuality bootstrapping comprises two related, but distinct activities. To be complete, a definition should also address the fact that entrepreneurs must be imaginative to discover ways to compete and survive without access to this financing. As such bootstrapping is not only the absence of outside debt or equity, it is also the ongoing process of acquiring other resources (e.g., supplies, employees, equipment) at minimal cost (Freear, Wetzel, & Sohl, 1990).

Bootstrapping also presupposes that the entrepreneur brings a relatively limited amount of resources to the table. Present day Warren Buffet, for example, would likely do very well as the entrepreneur of a bootstrapped firm because, for all intents, his venture would not be bootstrapped. Mr. Buffet could bring his enormous personal wealth to internally finance his business. He, personally, has more wealth than most venture capital (VC) firms. Therefore, there would be little need for him to engage in creative tactics to operate in a frugal manner, even if he chooses to avoid external finance.

Bootstrapping is often discussed as inevitability in start-ups, as the refrain goes: “there is simply no money for aspiring entrepreneurs.” And, on average, it is true that new businesses do not receive external funding and that new ventures have fewer financing options than more mature ventures. However, it is also the case that, as we stand in the afterglow of the Jumpstart Our Start-Ups (JOBS) Act, that there has never been a time when there were more options for external financing.

So, importantly, the primary cause of lack of external financing is not the so called “funding gap”—the reluctance on the part of financiers to lend to new ventures—it is because entrepreneurs do not ask for external funding (Shane, 2008). To be clear, even if they asked, many new venture entrepreneurs would likely still not receive financing, but far more would. This fact is the key and will be referred to throughout.

Because many entrepreneurs identify with the “cowboy way,” there is a tendency, particularly in the popular press to glorify the bootstrapped entrepreneur, and with good reason. Any individual or team that can survive—or grow—without external money should be celebrated. Firms like Ben and Jerry’s, Google, and Pandora were all bootstrapped and are very much celebrated.

But readers should understand that it is extremely difficult to simply survive without external funding and nearly impossible to grow. The role of the popular press is to celebrate the outliers—not to accurately describe the average, or most likely condition. Virtually all of the advice provided by expert entrepreneurs is correct, in that it reflects what worked for them in their specific context or contexts—war stories, if you will. The problem, though, is that one expert’s advice often conflicts with another’s and novice entrepreneurs get buried under an avalanche of conflicting advice. Throughout this book, I will attempt to provide clarity to this advice.

The reality is that bootstrapped entrepreneurs are likely to struggle to overcome the inherent burdens associated with being new (Neeley & Van Auken, 2010), and as a result, will fail. The only way to overcome these burdens is to be “old”, or at least appear that way, and this usually requires resources.

Bootstrapping is an ironic concept. In one way, bootstrapping can be a very freeing experience. Free from external financiers, cowboy entrepreneurs are able to operate their businesses in the way that they choose—they have the much sought after autonomy. In another way, though, bootstrapping represents, by definition, constraint. Entrepreneurs are free to act however they wish within some fairly tight resource boundaries.

Therefore, this book encourages the entrepreneur to think through carefully what starting as a bootstrapper means. Specifically, the entrepreneur should think through ways that a start-up might achieve a large degree of autonomy, while simultaneously shedding some of the debilitating capital constraints. There are more ways to do this than one might think.

Bootstrapping Involves Making Choices about Initial Financing

So, entrepreneurs bootstrap for one, or both, of the following reasons: (1) the decision is made to eschew external financing, or (2) external financiers deny to provide such funding. The majority of entrepreneurs bootstrap (Kim et al., 2006), but their motivation for bootstrapping matters immensely. The end result is largely the same (i.e., financial constraint), but the process is important because some processes are much more likely to end in failure than others. If entrepreneurs are bootstrapping simply because they are driven by a desire for autonomy, control, or risk aversion; the prognosis is likely a bit better than if the entrepreneur is bootstrapping because he or she must. When an entrepreneur is denied funding by debt providers or financiers, this is a clear market signal that the firm is primed for failure (Carpentier & Suret, 2006). This is an important point: being denied financing is a feedback windfall for the entrepreneur. Stated differently, the decisions that financiers make about the viability of a new venture should be taken very seriously by entrepreneurs.

The popular press is full of examples of entrepreneurs who persisted through rejection after rejection from money handlers to eventually succeed, ostensibly because the financiers were dim. To be clear, this happens and financiers miss opportunities often. Moreover, many new ventures are simply not appropriate for funding. However, if funding is denied, it is also likely that the entrepreneur has either misidentified the opportunity or done a poor job of communicating its viability. Entrepreneurs must be very careful and honest with themselves if they decide to launch after being denied funding. The confidence (or overconfidence) that many entrepreneurs possess is likely critical for success, but this bias comes with a number of negatives that must be addressed (Cooper, 1988).

In general, firms with more resources on average increase their chances of survival and growth (Singh, Ang, & Leong, 2003). Acquiring resources is, virtually by definition, a method of shedding newness burdens. Building on this, simply by going through the process of requesting external funds, the entrepreneur builds social and human capital by receiving valuable information from knowledgeable stakeholders. There is value being added to the firm and the entrepreneur during the capital raising process, and it is far better to request funding early than to wait until a time when the e...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Contents
• Chapter 1 Bootstrapping Described
• Chapter 2 Bootstrapping and the Problem of Being New
• Chapter 3 New Venture Finance Considerations for the Bootstrapper
• Chapter 4 Financial Bootstrapping
• Chapter 5 Bootstrap Strategically
• Chapter 6 Typologies for Strategic Bootstrapping Success
• References
• Index