«Dr. Lynn Neeley, Professor Management Department, Northern Illinois University DeKalb, Illinois Many entrepreneurs have used a variety of bootstrap ...»
ENTREPRENERUS AND BOOTSTRAP FINANCE
Dr. Lynn Neeley, Professor
Management Department, Northern Illinois University
Many entrepreneurs have used a variety of bootstrap financing methods to satisfy
their ventures’ resource needs. These techniques, which may be a combination of social
or economic transactions, have included purchasing used rather than new equipment,
getting the “best” possible terms from suppliers, forgoing salary withdrawals from the business, bartering for goods and services, and sharing equipment with other businesses, to name only a few options. In the last few years, some scholars have begun to explore this important set of activities, bootstrap finance. The purposes of this paper are to examine bootstrap finance in its context, to show some of the techniques for and sources of bootstrapping, and to demonstrate recent use of these techniques in the United States.
Introduction Financial resources have been one of the important aspects of the start-up or continuing operations of most enterprises (Brush, et al., 2001; Carter, Gartner, et al., 1996). Whether funding needs have been small or quite large, entrepreneurs have exploited a variety of financial sources and used many different techniques, including bootstrap financing (Bhide, 1992; Bruno and Tyebjee, 1985; Camp and Sexton, 1992;
Harrison and Mason, 1997; Stevenson, et al., 1985). Bootstrap financing is a variety of alternative routes that owners can take to meet businesses’ financial needs without traditional institutional commitments or market obligations (Bhide, 1992; Freear, et al., 1995; Shulman, 1994; Winborg and Landstrom, 2001). These practices may demonstrate some aspects of social transactions through negotiating, coopting, sharing, or borrowing (Starr and MacMillan, 1990).
Scholars have published definitions of bootstrap finance that have exhibited some of those diverse approaches and have agreed that bootstrapping financiers avoid longterm borrowing and long-term contractual commitments and that they hesitate to issue stock to raise capital—entrepreneurs “buy capital” rather than “sell stock” (Wetzel, 1983). Instead, bootstrap financing is a variety of ingenious methods that find resources, maximize their efficient use, and minimize the explicit costs associated with using these means whether they are found inside the business, obtained from other people, or provided by other companies and organizations (Bhide, 1992; Freear, et al., 1995;
Wetzel, 1983; Winborg and Landstrom, 2001). Bootstrap finance methods encourage businesses owners to exploit personal resources, to utilize personal short-term borrowing, to request funding from relatives, to barter for services, to acquire money through quasiequity arrangements, to cooperate for better customer access, to negotiate for client-based funds, to manage assets effectively, to lease equipment, to outsource production, and to seek subsidies or incentives or grants (Bhide, 1992; Bhide, 2000; McMahon and Holmes, 1991; Stevenson, et al., 1985; Winborg and Landstrom, 2001). Many of the approaches in the preceding list have been and are used by the largest corporations in the world to enhance the productivity of their resources; however, the focus here is on the benefits that bootstrap finance has provided to entrepreneurs who aimed to start, expand, or maintain a fiscally healthy business.
Bootstrap finance techniques have shown some outstanding results among startups that have grown into large and well-known companies. A few spectacular examples of successful bootstrap financing among United States companies launched with modest initial resources are Roadway Express, Clorox, Lillian Vernon, The Limited, Black and Decker, E. & J. Gallo Winery, Gateway 2000, Coca Cola, Dell, Eastman Kodak, UPS, Walgreens, and Hewlett-Packard (Hofman, 1997). Some of these companies’ stories are almost tributes to entrepreneurs who have used bootstrapping effectively. Each of three men put $800 into the launch of Roadway Express, which has grown into a multi-billion dollar business. Lillian Vernon took $2,000 that she and her husband had received as wedding gifts to start her business career; the Lillian Vernon Corporation has become a multi-million dollar company. In 1933, two brothers, who had no commercial or winemaking experience, used $923 from their savings and borrowed $5,000 to open Gallo Wines. The Hewlett-Packard Company began with $523 in 1938 and then won its first customer, Walt Disney, who needed sound equipment (Hofman, 1997). Although the ultimate outcomes of bootstrapped start-ups for these highly visible companies have been exciting, many enterprises have quietly used bootstrap finance sources of funding and techniques to provide the resources that have maintained and expanded their operations.
The purposes of this paper are to examine the concept of and context for bootstrapping and to look at bootstrap finance in practice. The first section examines several different definitions of bootstrap financing as it has been presented in scholarly research. The second section places bootstrap finance in context by showing the development of some of the issues involved, by discussing a few of the ways in which entrepreneurs’ preferences have influenced those techniques, and by describing some of the additional complexity found in new and growing enterprises’ resource decisions in comparison with large firms’ decisions. An overview of bootstrap finance techniques and sources is provided in the third section. The fourth section shows the results of a recent poll of United States entrepreneurs in regard to their use of bootstrap finance.
The Bootstrap Financing Concept
Although the word “bootstrap” was not used in their writing, the idea of acquiring or exploiting resources through social transactions rather than economic transactions and the concept of getting needed resources at lower costs with social transactions was put forward by Starr and MacMillan (1990). These authors looked at social contracts made in order to possess or borrow or co-opt tangible and intangible assets as a strategy that has been quite well suited for entrepreneurs to employ in resource-constrained start-up organizations. The business owner’s needed support was secured by social assets, which included obligation, trust, gratitude, liking, and friendship, rather than monetary payments.
In the early 1990s, scholars began to name bootstrap finance explicitly and to recognize this combination of resource acquisition methods as a distinct realm for their attention and inquiry. Over the last few years several definitions have been published, but the first pointed reference appeared in the Harvard Business Review. In his article that christened the field for scholars, Bhide (1992) focused on bootstrapping in the earlier stages and defined it as “launching ventures with modest personal funds.” On the basis of extensive interviews with a large number of accomplished entrepreneurs, he reported valuable descriptive data supporting the widespread practice of bootstrap finance. He asserted that in situations involving entrepreneurs and venture capitalists it was possible or even probable that there were: (a) a poor fit of objectives, (b) hidden costs of venture capitalists’ money, (c) strategy conflicts, and (d) reduced flexibility. Given these situations, bootstrap finance methods could have been quite attractive to entrepreneurs.
Freear, Sohl, and Wetzel (1995) expanded the idea of bootstrap financing to use in firms’ rapid growth stages, rather than exclusively in the earliest stages of an enterprise’s life, and broadened the types of resources that might be exploited to include other options. Their concept of bootstrapping was, “highly creative ways of acquiring the use of resources without borrowing money or raising equity financing from traditional sources,” such as business alliances. These authors reported the importance of bootstrapping and forming alliances as strategies to gaining resources necessary for the survival of the newer ventures studied. Van Auken and Neeley (1996) interpreted nontraditional sources as those that would not have appeared within the institutional financial markets, and they explicitly added the sale of the entrepreneurs’ personal properties, and personal indebtedness to the mix of bootstrap methods employed by business owners. In 1997, Harrison and Mason replicated the Freear, et al. research and found that 95% of the firms they studied had used bootstrap financial methods to varying degrees, and they contrasted the use of bootstrap techniques and business alliances between two groups of entrepreneurs in the same industry but geographically distant from each other. Although some differences in the frequency of use were shown, the bootstrap methods and entrepreneurs’ preference were similar for the two groups, one in Ireland and the other in the United States. The importance of businesses’ owners having exploited the value of their personal residence, put forward by Dennis (1998), augmented the possibilities for bootstrap finance techniques.
More recently, Winborg and Lanstrom (2001) refined the language of bootstrapping and further explored the lengths to which entrepreneurs had gone to obtain the wherewithal to operate businesses. Their premise was that bootstrapping fulfilled the “need for resources without... a financial transaction.” Winborg and Lanstrom added forgone salary or salaries from other employment, jointly controlled assets, several forms of cash or asset management, and governmental subsidies to their analysis. They used a comprehensive list of bootstrapping techniques as the basis for identifying six different groups of bootstrappers, who were distinguished by their orientation toward methods of resource acquisition. Those methods were characterized as an internal mode, a social mode, and a quasi-market mode; preferences for these methods were found among the bootstrap entrepreneurs. The findings were that (a) delaying bootstappers, private ownerfinanced bootstrappers, and minimizing bootstrappers relied upon the internal method of resource acquisition; (b) relationship-oriented bootstrappers preferred to use a socially oriented method of resource acquisition; and (c) subsidy-oriented bootstrappers applied quasi-market oriented methods. A sixth group of entrepreneurs had not used any bootstrapping techniques to meet the needs of their businesses. Winborg and Landstrom suggested that financial bootstrapping was probably a widely occurring, contextually based phenomenon and merited more study. They went on to observe that a focus on institutional or external market finance as a solution for smaller or newer businesses could be misplaced. They contended that resources gained through bootstrap finance methods could meet such businesses’ needs more appropriately in many situations.
Clearly, scholars have shown that bootstrap financing has encompassed a variety of resourceful methods to find monies or other resources, to maximize those assets’ value, and to minimize the explicit costs associated with using monies or other capital “found” inside the business, obtained from other people, or provided by other companies (Bhide, 1992; Freear, et al., 1995; Harrison and Mason, 1997; Stevenson, et al., 1985;
Winborg and Landstrom, 2001). These authors have brought a great number of techniques to the discussion of bootstrap finance, and some additional routes for the entrepreneur to acquire resources for a business could be considered. Quasi-equity, outsourcing, and foundation grants could be added to the blend of bootstrap financing methods that are reflective of practice and consistent with ownership preservation and avoidance of long-term debt obligations. Even though some ownership interest may have changed hands, the quasi-equity was not actively traded, was held by one or a few individuals other than the entrepreneur, and was not sold with an initial public offering as an ultimate objective (Ang, 1992; Wetzel, 1983). Quasi-equity includes limited partnerships, individual or group angels, adventure capitalists, and equity interests traded to incubators and credit enhancements within this paper’s boundaries (Ang, 1992;
Arkebauer, 1993; Blechman and Levinson, 1991; Freear and Wetzel, 1990; Schell, 1996;
“Start-up Nation 21,” 2001; Wetzel, 1983). A discussion of quasi-equity, outsourcing, and foundation grants appears in a later section.
It may be constructive to consider bootstrap financing’s scholarly context before examining several of the options that entrepreneurs have had at their disposal. Bootstrap finance emerged from traditional corporate finance activities and literature through scholars’ works contrasting what they had found as common practices in larger versus small businesses. Not surprisingly, the language used and the financial practices at issue among the earlier studies had an institutional finance orientation. Distinct differences between the two size-defined groups of businesses were clear, and schlars sought to explain them. Finance with an entrepreneurial bent, and bootstrap financing especially, developed partially as a result of those explanations. Some of the elements of bootstrap financing, modified from the traditional large corporate or organized markets perspective to fit a more characteristic entrepreneurial setting, follow.
Entrepreneurial finance began to appear in the scholarly literature as if it were occurring in the same context as corporate, or institutionally oriented, finance. Much of the language or terminology and many of the fundamental financial issues initially studied were identical to those that had been found in research based on the Fortune 500 (Grablowsky, 1978; Walker and Petty, 1978). Some of these issues or common practices were working capital management, capital budgeting, financial leverage, dividend policy, and capital structure. But the framework within which these financial issues have existed for entrepreneurs has been a richer and more complex model because of the entrepreneur’s personal preferences and constraints, which can modify their financial decision-making (Ang, 1992; Busenitz and Barney, 1997; Cooper, et al., 1989;
Landstrom and Winborg, 1995). An overview of the conventional terminology, financial issues, and the greater complexity inherent in an entrepreneurial setting for financerelated decisions follows.
Similar Language and Financial Management Issues