Bootstrapping in Funding Acquisition

It is widely accepted that one of the greatest challenges in starting a new business is the acquisition of funding. While there are numerous funding strategies to consider, many businesses turn to conventional methods to finance their operations, such soliciting investment dollars from venture capitalists. Others secure traditional new business loans to obtain money. Some entrepreneurs use credit cards to make business-ends meet. However, regardless of how the company ultimately acquires its capital, it is important for new businesses to preserve it. For this reason, many new business owners engage in a practice commonly referred to as “bootstrapping” to make their money go further and last longer.

Bootstrapping is a common practice in many start-up companies. In fact, it is estimated that up to 85% of new companies utilize some form of this technique (Lahm & Little, 2005, p. 64). By definition, bootstrapping is the exercise of obtaining resources, and then effectively utilizing those resources in business (Lahm & Little, 2005, p. 65). In practice, bootstrapping involves great deal of ingenuity (and even sometimes personal sacrifice) on the part of the business owner. Examples of this ingenuity can be found in the various bootstrapping activities employed by entrepreneurs in everyday business.

As previously touched upon, bootstrapping is a two-step process, with the first part of equation being the ability to obtain (or gain control of) company resources. The ways that business owners successful manage to do this are as varied as the nature of the businesses themselves. In their article, Lahm & Little (2005) review one chocolatier’s solution – she pre-sold “a promise of performance” (that is, she sold gift certificates to customers before having the requisite inventory on hand) (p. 66). In order to fund a necessary capital investment in the start-up of her chocolate company, the owner offered customers an incentive of $25 in free chocolate for every $100 in gift certificates purchased by them (Lahm & Little, 2005, p. 66-67). According to the text, the revenue realized from these sales helped the chocolatier fund her purchase and her company ultimately acquired the necessary equipment (Lahm & Little, 2006, p. 67). However, her solution was only the first of many business owners’ creative plans.

Many start-up firms barter their way into accessing resources. The chocolatier happily and resourcefully exchanged her chocolate for accounting and professional web design services (Lahm & Little, 2005, p. 67). Another business owner (a public relations manager) used the promise of business referrals to persuade a long-time friend (an advertising executive) to let him co-occupy office space for free (Lahm & Little, 2005, p. 67). As part of the exchange, the start-up company gained access to “fancy offices, fancy letterhead, fancy everything” that would have been otherwise been cost-prohibitive for his new company (Lahm & Little, 2005, p. 67). Both of these business professionals exemplify the bootstrapping spirit that helps many new businesses not only get by, but thrive.

The second component of bootstrapping is making efforts to preserve capital. Here, business owners employ frugal spending practices to maximize their budgeting allocations and make their limited financial resources go even further. In order to do so, many companies focus on reducing the actual cost to operate the business (Yilmazer & Schrank, 2010, p. 400; Ebben, 2009, p. 347). According to Yilmazer & Schrank (2010), up to 77% of entrepreneurs work without drawing a personal salary in order to funnel those dollars back into business operations (p. 401). Other companies operate out of a home office in order to save money otherwise spent on a real property lease (Ebben, 2009, p. 353). However, leasing is actual the preferred method for these same business owners, as they often chose to lease office equipment instead of buying it (Ebben, 2009, p. 353). With a bit of creativity and penny-pinching, bootstrapping may allow a company to go further, with less.

Other efforts to preserve capital involve a business-owner’s ability to manage the company’s monthly cash flow. Many business owners need to be particularly concerned with revenue and expenses, insuring that there are sufficient funds to cover the minimum expenses (Ebben, 2009, p. 353). Creative alternatives employed by these owners often include the negotiation of payments to vendors, including delaying these same payments whenever possible (Ebben, 2009, p. 353). Conversely, these same entrepreneurs charge customers interest on late payments, and use that money to cover their own monthly operational costs (Ebben, 2009, p. 353). At the same time, other business owners offer customers discounts for upfront payments, and work to secure advance payments from customers whenever possible (Ebben, 2009, p. 353). Creativity again proves to be a useful asset for many entrepreneurs.

The practice of bootstrapping moves from theory to a real-life example in one new business venture out of Northern Michigan. Tony Plemmons, a master’s student at Northern Michigan University, founded a company called The Protein Place (“Past Competition”, 2013, n.p.). Plemmons’ concept was to deliver healthy, low-cost meals to the public, with gyms and other exercise facility patrons as his target audience (“Past Competition”, 2013, n.p.). With $4,000 of start-up capital, it is imperative that Plemmons now engage in bootstrapping activity.

First, Plemmons may find creative locations to operate his business, saving thousands of dollars each month in rent. Like many other small-business owners, Plemmons could initially operate the start-up out of his home, using his personal kitchen as operation central (Ebben, 2009, p. 353). The Protein Palace could later partner with a gym or cross fit venue, and barter with the gym owner for kiosk space in exchange for reduced-price meals for gym employees. Much like the chocolatier, Plemmons could similarly barter with other professionals to design a website for the company, realizing several thousand dollars in savings overall. Lastly, as the greatest spending for the new company would be dedicated to ingredients and packaging. Plemmons should plan on comparison shopping for the highest quality ingredients, which could be purchased by the company at the lowest prices. The practice of cost comparison significantly reduces operational costs for many businesses (Yilmazer & Schrank, 2010, p. 403). Each of these activities combined should allow The Protein Palace to operate for a longer period of time, requiring less resources.

Given the challenges of financing business operations, resourceful entrepreneurs employ a myriad of bootstrapping techniques. They initially gain control of their company’s resources, and then work to preserve the company’s capital. The ability to effectively do this is an invaluable tool for any start-up business enterprise.

References

Ebben, J. J. (2009). Bootstrapping and the financial condition of small firms. International Journal of Entrepreneurial Behaviour & Research, 15(4), 346-363.

Lahm, R., & Little, H. T. (2005). Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching practices versus current business practices. Journal of Entrepreneurship Education, 8, 61-73.

Past Competition Winners. (2013). 2012-13 New Business Venture Competition Results. Retrieved from http://www.nmu.edu/business/node/71

Yilmazer, T., & Schrank, H. (2010). The use of owner resources in small and family owned businesses: Literature review and future research directions. Journal of Family and Economic Issues, 31(4), 399-413.