BOOTSTRAPPING BUSINESS START-UPS : A REVIEW OF CURRENT BUSINESS PRACTICES

Existing scholarly research on bootstrapping is limited, despite the widespread use of bootstrapping strategies in actual practice among start-up entrepreneurs. This paper discusses bootstrapping as a creative financing strategy. Bootstrapping has been advocated in, and documented by, the popular business press. Two methods that broadly address bootstrapping are identified and discussed. These two methods include the acquisition and control of resources (both tangible and intangible), and the efficient uses of those resources to finance the enterprise for growth. Examples of bootstrapping activities are presented to illustrate each method. The paper also provides a short-list of practical suggestions for bootstrapping start-up businesses. Introduction Bootstrapping is entrepreneurship in its purest form. It is the transformation of human capital into financial capital. The overwhelming majority of entrepreneurial companies are financed through this “highly creative” process, which involves the use personal savings, credit-card debt, loans from friends and family, and formal sources of private equity (Freear, Sohl, and Wetzel, 1995). The entrepreneurship academic community has not fully recognized the effect of bootstrapping on entrepreneurial behavior and organizational success through formal research. Bhide (1992) suggested that the success of an enterprise hinges on the ability of its owner(s) to create and leverage financial resources. There appears to be a dearth of studies in the entrepreneurship literature that focus on the use of resources that characterize the bootstrapping process, such as obtaining start-up working capital from personal credit cards or home mortgaging (Cole, Lahm, Little, & Seipel 2005). This paper discusses two methods which broadly address the four types of bootstrapping options (i.e., bootstrapping product development, bootstrapping business development, bootstrapping to minimize the need for (outside) capital financing, and bootstrapping to minimize the need for capital) identified by Freear, Sohl, and Wetzel (1995) and Winborg and Landstrom (1997). The first method involves the acquisition and control of resources (both tangible and intangible). The second method involves the efficient uses of those resources to finance the enterprise for growth. Examples of bootstrapping activities are presented to illustrate each method. Bootstrapping in textbooks and on the Internet Academic textbooks used primarily in college and university entrepreneurship courses seldom provide indepth coverage of bootstrapping. Bootstrapping is often characterized as a means to an end when other choices (i.e., formal venture capitalists, banks, and angel investors) do not exist. While bootstrapping techniques are widely used by entrepreneurs of all types, little more then a passing mention is made in many of today’s textbooks. Many devote just a few paragraphs or pages to the subject. A series of Internet searches of the academic literature revealed that rigorous study of bootstrapping, as a serious variable in entrepreneurial success has been minimal. The searches conducted on databases used by Proquest revealed the scarcity of scholarly research on bootstrapping. While parameters for the searches were set to select only scholarly journal articles with full-text availability, the low number of articles selected from Proquest databases suggests an opportunity for future studies of bootstrapping as an antecedent to entrepreneurial success. The results of a broader Internet search encompassing the business press, practitioner journals, and magazines revealed the term, bootstrapping, has different meanings to different contexts. A Google search on the term “bootstrapping” returned 650,000 hits. A brief review of the 650,000 hits showed that an indeterminably large number of these hits pertained to homonymic variations, which apply to computing, statistical method, and meanings other than that which pertains to business start-ups. An advanced search algorithm using the words “bootstrapping” and “business” together produced 129,000 hits. Bootstrapping as a Start-Up Financing Strategy While numerous articles appearing in periodicals such as Entrepreneur and Inc. tend to suggest bootstrapping can be risky, they nevertheless also emphasize that the vast number of start-up businesses utilize bootstrapping techniques. Interestingly, academic research has suggested that bootstrapping techniques can minimize risk because of the absences of outside venture capital investors (Carter, et. al., 2002). Although the percentage of start-ups that actually use bootstrapping quoted by Worrell (2002) in Entrepreneur magazine might be disputed as a figure of speech, he wrote: Despite the dream of some entrepreneurs to meet a VC with deep pockets, the fact is that 99.9 percent of business owners will struggle alone, pulling themselves up by their bootstraps. That is not necessarily a bad thing. With a little luck and a lot of pluck, bootstrapping a business can be both financially and emotionally rewarding. (p. 1) McCune (1999) quoted Tom S. Gail’s, executive professor at the University of Houston’s Center for Entrepreneurship and Innovation, who estimated that “between 75 percent and 85 percent of startups use some form of bootstrapping to help finance themselves” (p. 1). Although the number of start-up businesses that rely on bootstrapping may be difficult to determine exactly (and may fluctuate based on economic conditions and other factors), it is evident that a substantial number, constituting a majority, engage in the practice. Previous scholars have studied the use of bootstrapping (Van Auken, 2004), as well as differences among firms and consequences of various start-up financing strategies (Van Auken & Neely, 1996). Van Auken observed a “serious gap in the literature” (in apparent concurrence with the authors of this paper) and stated that “research on the use of bootstrap financing is limited” (Van Auken, 2005, p.95), even though “bootstrap financing is a common source of financing” (p. 146). Hamilton (2001) has written about the culture of self-funded e-commerce firms. He identified self-funded entrepreneurs as “classic ‘bootstrapping’ types, often using credit cards, second mortgages, or retirement funds to bring a dream alive” (p.279). In the months prior to 911, the handwriting was on the wall and what had been popularly known as the “dot-com frenzy,” was coming, or did come, to an end. In a July 21, 2001 article published in the Fedgazette (a publication of the Federal Reserve Bank of Minneapolis), Wirtz reported “nervousness” (p. 1) about the new economy and observed efforts to expand the availability of venture capital. The exact moment in time when the socalled “bubble” burst may be the subject of some debate among economists. However, what has transpired post911, is a radical tightening of venture capital availability, and hence, even more bootstrapping efforts on the part of entrepreneurs. Roberts (2003), in an article titled “Bootstrapping is back: Entrepreneurs dig deep and make personal sacrifices for their businesses,” observed: “Entrepreneurs were spoiled during the dot-com era, often receiving funding before they had a business model or a customer, in the past two years, however, venture backers have become much stingier, especially with seed money” (p. 44). Whatever the state of the economy is, has been, or will become, the use of bootstrapping among nascent entrepreneurs can be logically predicted, or observed through formal study. In other words, when there are no other sources of capital to be found, bootstrapping becomes the method of choice (Freear, Sohl, and Wetzel, 1995). Cole, Lahm, Little, & Seipel (2005) observed the scarcity of academic research on the use of credit cards by entrepreneurs and small business owners, despite the widespread use of credit card financing in actual practice. The Federal Reserve Board has estimated that 46% of small businesses include credit cards as a source of start-up capital and provider of cash for ongoing operations (Report to the Congress, 2002). Some entrepreneurs parlay multiple cards to amass significant funds, such as a Los Angeles entrepreneur and his partner, who used 10 Visa and MasterCard accounts and accumulated $40,000 in debt (Deceglie, 1998). The entrepreneurs subsequently reported having a thriving business (that was also paying high interest credit card debt). An online article from morebusiness.com (Charge wisely, 2004) admonished that reliance on credit cards could be “dangerous,” but then offered “nine rules” for using credit cards to finance a start-up business (p. 1). Besides leveraging credit cards, selffunded entrepreneurs tend to utilize personal resources (Longnecker, Moore, and Petty, 2002) and whatever additional creative strategies may be at their disposal. Bootstrapping Methods However one might approach a discussion of bootstrapping, simply put, there are only two basic methods employed by nascent entrepreneurs: 1) gaining control of resources, and 2) efficiently utilizing resources (e.g., minimizing expenses). Taken together, these two methods form the basis for an overall strategy. A bootstrapping entrepreneur’s very survival may well depend on his or her ability to be highly adaptable and operate on a shoestring budget (Goodman, 1996; Pliagas, 2005; Willcocks, 2002). Bootstrapping Risks and Advantages “When everybody says ‘no’--from the banker to the private investor--the tough small business owners turn to themselves.they raise money from within by bootstrapping” (McCune, 1999, p.1). Because bootstrappers have no choice except to be resourceful, they may have an ironic advantage over other individuals who hail from more resource-rich environments in terms of developing their managerial and entrepreneurial skill-sets. To a certain extent, being deprived of resources forces (Bhide, 1992) the entrepreneur to find other inventi