What is 'Bootstrapping'

Bootstrapping describes a situation in which an entrepreneur starts a company with little

capital,
relying on money other than outside investments. An individual is said to be bootstrapping
when he
attempts to found and build a company from personal finances or from the operating
revenues of
the new company. Bootstrapping also describes a procedure used to calculate the zerocoupon yield
curve from market figures.

Bootstrap as a metaphor, meaning to better oneself

by one's own unaided efforts, was in use in 1922.
This metaphor spawned additional metaphors for a
series of selfsustaining
processes that proceed
without external help.
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. In short, "bootstrapping" means starting a
new business without startup
capital. 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.

The aim is to maintain a strict discipline on cash flow by managing

costs very closely and trying to get the company up and running as cheaply as possible. By
ensuring as low a cash burn rate (rate at which a company uses up cash) as is feasible, you
increase the chances of your business succeeding. Similarly, without any debt repayments or
obligations to shareholders you can afford to be more flexible with your idea.
bootstrapping is a method for constructing a (zero-coupon) fixed-income
yield curve from the prices of a set of coupon-bearing products, e.g. bonds and swaps
BREAKING DOWN 'Bootstrapping'
Bootstrapping a company occurs when a business owner starts a company with little to no
assets.
This is in contrast to starting a company by first raising capital through angel investors or
venture
capital firms. Instead, bootstrapped founders rely on personal savings, sweat equity, lean
operations, quick inventory turnover and a cash runway to become successful. For example,
a
bootstrapped company may take preorders for its product, thereby using the funds
generated from
the orders to actually build and deliver the product itself. In investment finance,
bootstrapping is a

method that builds a spot rate curve for a zero-coupon bond.

Sources of boot strapping

Trade Credit
The first source of business money we'll discuss is trade credit. Normally, a
supplier will extend you credit after you're a regular customer for 30, 60 or 90
days, without charging interest. For example, suppose that a supplier ships
something to you, and that bill is due in 30 days but you have trade credit or
terms. Your terms might be net 60 days from the receipt of goods, in which case
you would have 30 extra days to pay for the items.
However, when you're first starting your business, suppliers aren't going to give
you trade credit. They're going to want to make every order c.o.d (cash or check
on delivery) or paid by credit card in advance until you've established that you
can pay your bills on time. While this is a fairly normal practice, to raise money
during the startup period you're going to have to try and negotiate trade credit
with suppliers. One of the things that will help you in these negotiations is a
properly prepared financial plan.

Factoring
This is a financing method where you actually sell your accounts receivable to a
buyer such as a commercial finance company to raise capital. A "factor" buys
accounts receivable, usually at a discount rate that ranges between one and 15
percent. The factor then becomes the creditor and assumes the task of collecting
the receivables as well as doing what would've been your paperwork chores.
Factoring can be performed on a non-notification basis. That means your
customers aren't aware that their accounts have been sold.
There are pros and cons to factoring. Many financial experts believe you
shouldn't attempt factoring unless you can't acquire the necessary capital from
other sources. Our opinion is that factoring can be a very good financial tool to
utilize. If you take into account the costs associated with maintaining accounts
receivable such as bookkeeping, collections and credit verifications, and
compare those expenses against the discount rate you'll be selling them for,
sometimes it even pays to utilize this financing method. After all, even if the factor
only takes on part of the paperwork chores involved in maintaining accounts
receivable, your costs will shrink significantly. Most of the time, the factor will
assume full responsibility for the paperwork.

Customers
Customers are another source of bootstrap financing, and there are several

different ways to take advantage of these valuable assets. One way to use your
customers to obtain financing is by having them write you a letter of credit. For
example, suppose you're starting a business manufacturing industrial bags. A
large corporation has placed an order with your firm for a steady flow of cloth
bags. The major supplier from which you will obtain the material the bags is
located in India. In this scenario, you obtain a letter of credit from your customer
when the order is placed, and the material for the bags is purchased using the
letter of credit as security. You don't have to put up a penny to buy the material.
In your personal financial dealings, you may have had a builder, or someone else
working for you, ask for money up-front in order to buy the materials for your job.
That contractor used your money to get started on the job. You were actually
helping to finance that business. This is how customers can act as a form of
financing.

Real Estate
Another bootstrap financing source is real estate. There are several ways to take
advantage of this source. The first is simply to lease your facility. This reduces
startup costs because it costs less to lease a facility than it does to buy one. Also,
when negotiating a lease, you may be able to arrange payments that correspond
to seasonal peaks or growth patterns.
Equipment Suppliers
If you spend a lot of money on equipment, you may find yourself without enough
working capital to keep your business going in its first months. Instead of paying
out cash for your equipment, you can purchase it with a loan from manufacturers;
that is, you pay for the equipment over a period of time. In this way, equipment
suppliers are a source of bootstrap financing.
Two types of credit contracts are commonly used to finance equipment
purchases:
1. The conditional sales contract, in which the purchaser does not receive title to
the equipment until it is fully paid for.
2. The chattel-mortgage contract, in which the equipment becomes the property
of the purchaser on delivery, but the seller holds a mortgage claim against it until
the amount specified in the contract is paid.

By using your equipment suppliers to finance the purchase of equipment you

need, you reduce the sum of money that you need upfront. There are also
lenders who finance 60 to 80 percent of the equipment value. And then, of
course, the balance represents the borrower's down payment on a new
purchase. The loan is repaid in monthly installments, usually over one to five
years, or the usable life of that piece of equipment.

Leasing
Another thing for you to consider is to lease instead of purchasing. Generally, if
you are able to shop around and get the best kind of leasing arrangement when
you're starting up a new business, it's much better to lease. It's better, for
example, to lease a photocopier, rather than pay $3,000 for it; or lease your
automobile or van to avoid paying out $8,000 or more.
Leasing has been around for a long time. It's common for businesses to lease
real property for retail facility, office space, production plant, farmland, etc. There
are advantages for both the small-business owner using the property or
equipment (the lessee) and the owner of that property or equipment (the lessor.)
The lessor enjoys tax benefits and may gain from capital appreciation on the
property, as well as making a profit from the lease. The lessee benefits by
making smaller payments, retains the ability to walk away from the equipment at
the end of the lease term, and may be able to negotiate build-in maintenance
provided by the lessor.

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, breakeven,
cashgenerating
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 highvalue
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
highticket
4. Forget about the crack team. Small bootstrapped
firms do not have the financial means to afford and
recruit a wellbalanced
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 startups
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
lossmaking
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 startup
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.

A bootstrapped company usually grows through various stages:

1. Beginning Stage: Normally starts with some personal savings, or borrowed or
investment money from friends and family, or as a side business the founder continues
to work a day job as well as start the business on the side.
2. Customer-funded Stage: Where money from customers is used to keep the business
operating and, eventually, funds growth. Once operating expenses are met, growth will
speed up.
3. Credit Stage: Wherein the entrepreneur must focus on the funding of specific activities,
such as improving equipment, hiring staff, etc. At this stage, the company takes out loans

or may be even find venture capital, for expansion.

To be a successful bootstrapped company, the following is necessary:

Lowering Expectations With a big idea, it is best to break it into a series of ideas, and then
execute the startup on the best portion. Then you follow up on other sections later. In most
instances, a company can be determined successful on its execution of a business idea,
rather
than the idea itself.
Focus on Profits This is what funds the business. A very different mindset must be
employed
for bootstrapped startups compared to the management mindset in a venture-funded or
angel-funded company. Usually bootstrapped businesses expect to be around for a long
time,
slowly and quietly growing, developing paying customers to meet the business costs;
whereas,
companies involved with outside funding will be expected to have high growth so that the
investor can have a profitable exit strategy.
Development of Skills People starting a business must develop a wide variety of skills, as
well
as passion, resilience, perseverance and courage, are usually required to make a
bootstrapped
company workable.
Becoming a Better Business Person Improving one's core values matters too, including
being
resourceful, accountable and careful, as well as enthusiastic, passionate and relentless in
the
advancement of the company.
Companies Suitable for Bootstrapping
There are generally two types of companies that can bootstrap:
1. Early stage companies, which do not require large influxes of capital, particularly from
outside
sources, which therefore allows for flexibility and time to grow.
2. Serial entrepreneur companies, where the founder has money from the sale of a previous
company to invest.
Many of the successful companies that we see today
Dell Computers, FaceBook Inc. (FB), Apple Inc. (AAPL),
Clorox Co. (CLX), Coca Cola Co. (KO), Hewlett-Packard
(HPQ), Microsoft Corp. (MSFT), Oracle Corp. ( ORCL),
eBay Inc. (EBAY), Cisco Systems Inc. (CSCO), SAP
(SAP) and Business Objects, to name a few, had their
humble beginnings as a bootstrapped enterprise.
Obviously there are entrepreneurs behind the scenes,
such as Bill Gates, Steve Jobs, Michael Dell and
Richard Branson.

Benefits

There are a number of benefits with bootstrapping, in that it forces

the business management to focus on the product and customers
while giving founders full control of the business.

Total control
A bootstrapping business has total control over its destiny the
business owners answer to no VC, bank or outside imposed board
of directors.
Those outside investors may also have different business
objectives to the founders. Often a venture capital or private equity
investor has a three to five year time frame while a founder may be
looking further.
Also a mismatch
between the founders and investors exit
strategies will almost certainly be a problem should the opportunity
to sell the business arise.
One of the biggest risks for a smaller business is banks can call in
loans or ask for additional security something that crippled many
smaller businesses during 2009.
For those whove raised equity funding, founders can find their
shareholdings diluted or even be fired from the business they
created.

Customer focus
The business that is focused on funding itself pays close attention
to the needs of its customers. The distraction of raising, and then
managing, investors or lenders can distract from building the
business.

Validating the business model

A successful business that has grown through funding itself is has,
by definition, a valid and profitable business model. This is not
necessarily true of VC or debt funded enterprises.

Overcapitalisition
In his Tech Crunch article, Ashkan quotes Marc Andreessen and
Jason Calacanis as saying raise as much money as you can.
This may well be conventional wisdom in Silicon Valley though the
reality is a business can have too much money, as we saw in the
original dot com boom with businesses such as Boo.com lavishing
money on founders and expensive frills.
A business can be crippled by having too much investment money
that distorts the founders objectives and allows the company to
lose focus on helping customers and getting the product right.
Generally with bootstrapping this isnt a problem unless the
founders have an insanely profitable business, which renders the
need for outside investors largely irrelevant.

Disadvantages
For all of bootstrappings advantages there are real downsides as
well including the risk of being undercapitalised and the difficulty in
attracting diverse management.

Undercapitalisation
One of the main reasons for business failures is under
capitalisation; simply not enough money to grow the enterprise or
to put it on a sustainable footing. This is a constant risk for
bootstrapped businesses.

Inability to focus
Many owners or managers of bootstrapped businessese focused
on making sales so they can pay the rent and make payroll; this
distracts management from executing the longer term aims of the
business.

Expertise
In taking an equity partner either in private equity, venture capital
or angel investor the founders get the benefit of the investors
expertise.
A good investor who has similar objectives to the founders can add
real value and complement the original teams strengths and
weaknesses.

No one size fits all businesses

Overall theres no black and white to bootstrapping versus
borrowing money or finding an equity partner; all of them have their

risks and benefits.

As entrepreneur Steve Blank points out, there are six types of
startup and only two of them; the scalable and buyable (born to
flip) are suited to the Silicon Valley venture capital model.

types of bootstrapping:
Owner financing
Sweat equity an interest in a property earned by a tenant in return for labour towards
upkeep or restoration
Sweat equity is used to describe the non-financial investment that people contribute to the
development of a project such as a start-up business

Minimization of the
accounts receivable
Joint utilization
Delaying payment
Minimizing inventory
Subsidy finance
Personal Debt