Bootstrapping for Start-ups
The process of bootstrapping most simply means “pulling one self up by their bootstraps” – an
entrepreneur that funds his/her own business and continues to grow it from the revenue and profits
generated. But what happens when the capital isn’t there to being with? Bootstrapping has also come
to include a variety of strategies to grow the company in those earliest of stages when capital is a
scarce resource. Here, we will review some of these alternatives.
Leverage Equity – in lieu of cash, equity (stock or a membership interest) can be used by founders to
help grow their business. Often when entrepreneurs are first getting started all they have is an idea
and their own investment of time and skill. These resources should not be undervalued. Equity in one’s
venture can be leveraged to 1) entice partners, 2) buy services or employees, or 3) to receive goods
from vendors.
Often entrepreneurs are hesitant to give away an interest in their business, this is understandable.
However, a smaller portion of a successful business is ultimately more valuable than the entire portion of
a business that has no value. Certainly, equity should only be distributed where absolutely necessary
and only to individuals or organizations which the entrepreneur trusts and feels comfortable partnering
with for potentially the life of the business.
Sharing equity in the venture is perhaps the most viable way to provide a new company with services
and/or goods that it might not otherwise be able to afford. The type of equity provided will depend
on the type of business. Lifestyle business will likely have to provide a share of future profits, since the
business is not set up to be sold and the stock may not have any resale value. Venture business, may not
make a profit for some years to come (if ever), and the equity grantee is likely looking to share in the
potential upside of an acquisition or an IPO.
Partner - Single founder businesses can be much more challenging to make succeed. Primarily, because
they’re single founder businesses….one person has to do everything, as well as have enough capital to
get the business off the ground.
In addition to partnering to have more resources to run the business and to incorporate additional skill
sets, additional partners will reduce the amount of financial risk that any one entrepreneur would
normally have to take.
Ask For Deferred Payment – Partners, employees, and vendors may sometimes be willing to provide
services or good for deferred payment. Namely, the entrepreneur can make the payments owed at a
later date. Typically two conditions have to be met.
First, there is usually a risk factor built into the delayed payment. This risk factor adds a premium to the
overall amount of money the party providing the goods/services receives on top of the fair market
value. For example, lets take a web developer that agrees to provide his/her services for deferred
payment with a risk factor of x2. Normally the value of their services would be worth $10,000. But
here, the service provider would typically agree to 1) get paid at a later date to be specified or 2) get
paid when the company has the required funds to do so. At that time, the company would owe the
service provider $20,000 instead of $10,000. The service provider takes a premium on the market
value of their services for the associated risk.
Secondly, the typically must be a relationship of trust. The party providing the good/services typically
either has 1) a prior working relationship with the entrepreneur or 2) some credible means or references
to evaluate their reliability. This is a key factor, as the grantor will want to ensure the value of the time,
services, or resources provided. Depending on the nature of the relationship, and the extent of the trust,
the grantor may ask to secure their deferred payment investment with a personal note.
Find Free Help – often the most coveted resource that entrepreneurs need is human capital. The skill
sets that entrepreneurs need are often found by going no further than their family, friends, educational
and professional contacts. Simply asking for help is often the best way to get valuable services that an
entrepreneur might otherwise not be able to pay for. It’s also often the most neglected aspect of
bootstrapping, perhaps because it’s so obvious.
In addition to the contacts that can be found within the entrepreneur’s network, there are also additional
resources available. Ultimately there has to be an exchange of value, but that exchange does not
always have to be paid for by the business owner in cash. Providing experience to work in an industry
or on a specific task can often be all the value a service provider may require. In these cases,
employing interns can be an important strategy to bootstrapping any business. While some cash
considerations may be required, here the primary value sought is experience. This isn’t always the most
ideal situation, and the entrepreneur can find him/herself spending more time helping the interns than
they help the company. But with the right individuals, this can be an invaluable strategy for any
business owner to employ human capital to growing a business without the cash typically required to do
so.
Pre-Sale – Established businesses purchase their inventory with cash or credit and then resale that
inventory to their customers. The dilemma for new entrepreneurs is that they may not have the cash or
credit to purchase that inventory. In these cases many business owners rely on pre-selling their goods or
services to generate the cash to purchase those goods or provide those services.
Take Shelly for example. Shelly had an idea to make trendy laptop covers that protect computers from
scratches and spills. She had enough money to make a dozen prototypes, but her manufacturer wants
$10,000 do produce a skew of 2000 items. Shelly had planned to sale the covers directly to consumers
over an internet store that she recently had designed. She spent all of her last savings and maxed out
her credit cards to produce the prototypes and get up her website. Here, Shelly could possible take her
designs to an established distributor or to a chain of computer accessory stores and sell a large order.
By requiring payment in advance, she could use the funds to produce the items required for the supplier
and would perhaps have inventory left over to sale to the public.
Access to Credit – Entrepreneurs often have more access to credit than they often realize. At the
simplest level, individual business owners have their own personal credit lines in the form of credit cards.
Entrepreneurs can always take out additional lines of credit and can consolidate multiple lines of credit
into temporary interest free accounts.
In addition small business (SBA) loans are available for new business owners, where entrepreneurs can
often get more access to capital or better terms as a business owner, than they would as an individual.
In addition, larger lines of credit can always be secured against personal or real property. Banks and
other lending institutions will collateralize real estate, stock portfolios, and other liquid assets and lend
capital to entrepreneurs. These loans are often in the form of a line of credit, which is similar to a credit
card, but often with much great access to funds. In lieu of these assets, an entrepreneur can use the
assets of their friends and family to secure the loan, and in some cases can even secure the loan against
their receivables or through letters of intent to purchase their product. In addition, entrepreneurs can
often get equipment leasing for general office necessities or for hard assets required in the product of
their product. In these cases, the supplier may provide credit terms for the lease agreement.
Barter – In the world of start ups, talent is often a more bountiful commodity than cash. Fortunately most
entrepreneurs need cash to buy talent. Where cash is not available, entrepreneurs can always rely on
bartering their skill set to get work done that is needed.
For example lets say Mike and Janet are web developers working on the latest and greatest web 2.0
site. They need to get their corporation set up and require the help of attorney in drafting their bylaws.
Richard is a hard working, and perhaps less creative, attorney who wants to get a new website up to
promote his legal practice defending the rights of K9s. Here, Mike and Janet can offer their web
services to Richard in exchange for his legal services. While this process certainly takes longer than
simply paying cash, it is an extremely important alternative when cash may not be an option.