a lot of successful entrepreneurs how they first got started, and they'll
tell you that they did whatever it took, either to raise the financing
they needed, or in lieu of that financing, to launch their business
and grow it through its early stages on their own. You'll hear scary
stories about second mortgages and max-ing credit cards, as well as
stories about guilt financing from friends and family members.
Bootstrapping can be defined as everything beyond the pursuit of formal
debt and equity financing that an entrepreneur does to both raise and
minimize the resources needed to launch their business and carry it
through its early stages. It involves getting the maximum leverage out
of every resource entrepreneurs can get their hands on. Bootstrapping
can also include the money that entrepreneurs can avoid spending through
such activities as bartering, purchasing used equipment, or launching
their business in their home. Many successful bootstrapping entrepreneurs
did not intend to get started this way, but were forced to develop alternative
financing strategies when the formal capital markets turned them down.
If there is common quality among inventors and technology entrepreneurs
it is a vulnerability to falling in love with their technology. After
months or more typically years of invested energy, resources and dreams
to bring the technology to life, they often have what can be called
a Field of Dreams mind set. One of the most memorable lines from that
popular movie of the late 80s is if you build it, they will come. Technology
entrepreneurs are typically sincerely convinced that if they succeed
in developing their technology, then the markets, customers and the
resources necessary to bring the technology to market will come. Even
though the customers finally came at the end of the movie, it wasn't
before the hero was at imminent risk of literally losing the farm.
Raising formal debt and equity financing is all about perceptions of
risk and opportunity and both entrepreneurs and investors have a common
interest in wanting to reduce risk. However, entrepreneurs often have
great difficulty in perceiving the risks in their venture. They are
convinced that there is minimal risk and that they will be successful.
The truth is that most new and pre-sales companies are just too risky
for formal debt and equity financing and will be unsuccessful in the
formal capital markets, although most of them are surprised when that
happens. They can also waste a lot of good time and effort pursuing
what ultimately becomes an exercise in futility.
Except for the rare company that can attract equity financing out of
the gate, the companies that are most likely to be successful tend to
be those that either begin with a bootstrapping strategy or have one
that they know they can fall back on if they are unsuccessful in raising
the desired venture capital or angel financing. Bootstrapping strategies
out your personal savings or retirement accounts
equity loans and second mortgages
friends and family plan
STTR, ATP and other research and development grants
your product/service for someone else's
from professional services providers free or low cost services,
or deferred payments now in exchange for the promise of future billings
or equity • Obtaining better-than-normal credit terms from
suppliers in exchange for a promise of continued use
payments from customers, sometimes in return for long term discounts
Personal Financial Resources
Be prepared to put your own money in before expecting anyone else to
help. Let's face it, the most powerful thing you can do to express your
confidence in yourself and your business is to put your money where
your vision is. You should expect to put in your own money before anyone
else will lend to you or invest in you. How much of your own money is
enough? The general rule of thumb is enough so it hurts. It will vary
depending on your personal net worth, the amount of money you are looking
to raise, and the investor. Investors want to make certain that it would
hurt you so much financially to leave the business that you will never
wake up tired and bored some morning and decide to quit.
At the same time, however, it is advisable before launching your venture
to set limits on how far you will leverage and risk your personal financial
resources and how much debt you are prepared to take on. This can be
particularly important for married entrepreneurs whose spouse may not
share their tolerance for risk or vision for the business. It is almost
always easier to make these decisions up front before reaching a crisis
point, but it is never easy to live with them once that point is reached.
The use of credit card debt to finance a business is typically viewed
as an act of desperation and one step away from making a deal with the
devil, and it can prove to be both if not done properly. While I used
to strongly caution entrepreneurs against the use of credit cards, my
thinking was changed somewhat by the experience of a former client at
the Rutgers Technology Business Incubator. The two entrepreneurs launched
their business by each taking on $175,000 of personal credit card debt.
Although that sounds pretty scary and is not for everyone, the duo succeeded
in obtaining the equivalent of a $350,000 bank loan at a time in their
development when the banks would have laughed at them. In addition,
by actively managing the debt and transferring it from one introductory
rate to the next, they averaged an interest rate better than the best
that the banks could offer. These two gamblers were smart, very good
planners and a little lucky and succeeded in building a $2,000,000 business.
Credit cards can be a last resort source of financing, if the debt is
It is easier to qualify for credit cards before you quit your day job
to launch your venture. Entrepreneurs who intend to launch a business
without secure financing may want to think about obtaining several credit
cards that they can fall back on if needed. However, as with many bootstrapping
strategies, there is a trade-off in the time required to competently
manage this strategy.
Friends & Family Plan
This can be an entrepreneur's best prospect for initial debt or equity
financing. Approach people who know you well and who believe in you
and hopefully the business you are trying to start. Some will also be
driven to invest by guilt. Friends and family are typically the most
patient and flexible source of capital when the promised return on their
investment inevitably takes longer to be realized than anticipated.
When you need more time, or even more money, you're likely to get it,
at least initially.
The typical overly optimistic entrepreneur must realize that they risk
jeopardizing these important personal relationships if the venture fails
to live up to their promises or the investor's expectations. Entrepreneurs
should not let friends and family invest beyond what they know the investor
can afford to lose.
Keep careful track of how much you and others invest in the business.
Regardless of how close the investor is to you, make sure you have clear
written terms and conditions about interest rates, equity stakes, repayment
schedules, and the like. In the case of equity stakes, make sure the
investor(s) understands that their percentage of ownership will be diluted
when you add additional investors. Seek professional guidance in valuing
your company, because mistakes made in valuation at an early stage can
preclude later investments by institutional investors. In addition,
be sure to consult your legal advisor.
In lieu of formal debt and equity financing, entrepreneurs can sometimes
commercialize their technology by entering into a strategic alliance
with a corporate partner. Entrepreneurs should look for partners who
have capabilities and/or resources that they lack and which are necessary
to get their technology to market. The best prospective partners can
be those companies that are producing similar but non-competing products,
utilizing similar manufacturing technology, and selling those products
to the same customers that you have targeted.
The most common form of a strategic alliance is licensing, through which
an entrepreneur gives the partner the rights to manufacture and market
their technology in return for royalty payments. Licensing can minimize
an entrepreneur's up front costs and financial risks and most quickly
generate a cash flow.
Entrepreneurs frequently have multiple technologies, or a platform technology
with multiple applications, that they wish to commercialize. In such
cases, the entrepreneur can often identify one that is near ready to
market and has significant market potential, but to which they are personally
less tied than others. That technology or application can be licensed
out to begin generating revenue. The resulting cash flow can then be
invested to commercialize some of the other technologies or applications
and/or to attract investors.
It is generally ill advised for entrepreneurs to negotiate their own
licensing agreements. There are many details and intricacies that must
be addressed to ensure a good agreement and ultimate success, which
may not be fully understood by an inexperienced negotiator.
A second example of a strategic alliance is a marketing alliance. You
may be able to partner with a company with an established sales force
that is selling similar, but non-competing, products to your prospective
customers. This can save you the startup expense and time of recruiting
and training a sales force and allow you to enter the market more quickly.
involves contracting with a company to perform a function or provide
a service that is typically or often performed in-house. A good example
is manufacturing. Manufacturing has historically been viewed as a core
function of businesses. However, many new companies are able to identify
established regional manufacturers that have the ability to produce
their product at a reasonable price. This can save a startup company
significant equipment, hiring, and training expenses and can accelerate
their entry into the market , as well as their rate of growth. It can
also greatly reduce the level of risk perceived by prospective investors.
Location, Location, Location
It is generally held that the three most important considerations in
launching a retail business are location, location, location. Location
is also important for young technology companies. However, it is important
because it is an added expense which they should generally seek to minimize,
as opposed to being an asset.
Successful entrepreneurs often try to reduce their early stage operating
costs by launching their business in their home. In addition, business
incubators can help entrepreneurs minimize their office and administrative
support costs and maximize their chances for success. Besides frequently
leasing office and lab space at below market rates, incubators typically
offer shared office support services and free on-site technology commercialization
and business development assistance.
As entrepreneurs prepare their business plans, they should consider
several alternative commercialization and market entry scenarios. In
addition to their most desirable strategy or strategies, they should
develop alternate strategies which reduce and minimize the up front
financing required and identify viable alternative ways of raising that
financing. If entrepreneurs have a viable worst case scenario commercialization
strategy they reduce their risk of failure and maximize their prospects
Bootstrapping can be an effective launch strategy. Indeed it is often
an entrepreneur's only viable strategy and many successful entrepreneurs
both launch and continue to build their business this way. However,
bootstrapping also has some real limitations.
Some businesses simply cannot be effectively bootstrapped, as there
are no viable alternatives to the large sums of money needed to bring
their technology to market. In addition, there are often tradeoffs between
time and money. By limiting the amount of money with which you launch
your venture, you can significantly increase the time that it takes
you to get to market, restrict your growth rate and quite possibly miss
your window of opportunity. Even thriving bootstrapped companies may
find it desirable to raise debt or equity financing once they are generating
sales, in order to take full advantage of their market opportunities
and grow their company to the next level.
Randy Harmon is the Director of Technology Commercialization for the
New Jersey Small Business Development Centers (NJSBDC) of Rutgers Business
School . He works with science, technology, and Internet entrepreneurs
assisting them in commercializing their new technologies, and in financing
and building their technology-based businesses. As part of his responsibilities,
he managed the Rutgers Technology Business Incubator from 1995 until
Randy holds a BS degree from Cornell University and a MBA degree from
Rutgers with concentrations in the management of technology-based businesses
and marketing. He is active within New Jersey's entrepreneur community
and sits on the board of the New Jersey Entrepreneurial Network. Randy
makes frequent presentations on launching, financing and growing science
and technology-based businesses, and business incubation.