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Given the current global startup environment, I believe a re-definition of the term bootstrapping is in order. I believe bootstrapping is more than just an adverb and should be viewed as a comprehensive strategy for tech startups.
What is bootstrapping?
Historically, bootstrapping has been a term used to describe the efforts made by individuals to overcome a nearly impossible obstacle or to improve oneself through self-sustaining efforts requiring no assistance from others. The saying, “to pull oneself up by one’s bootstraps” has been a common Western expression during the previous two centuries. In modern business language, bootstrapping has primarily meant founding/starting a new business without external funding.
In the glossary of my first book, Start-Up Guide for the Technopreneur, I defined bootstrapping simply as “the practice of sustaining operations and development without raising external capital.” At present, the meaning of the word tends to be limited to financial situations.
I will now argue that bootstrapping is much more as it applies to entrepreneurial ventures. By definition, an entrepreneurial venture is a business undertaken knowingly without initial resources sufficient enough to achieve its objectives. The resources critical to be acquired by any entrepreneurial venture include financial, knowledge-based, and relational resources. Any decision or pursuit through which a startup tries to acquire any one or a combination of such resources at a cost, in both financial and non-financial terms, less than the cost of securing the investment funding or other traditional financing otherwise needed to acquire such resources may be considered a bootstrap.
Three types of resources
The three resources vital for every tech startup are financial, knowledge-based, and relational resources. Financial resources include all monetary and tangible assets of a venture. Knowledge resources include the aggregate skills and experiences of the founders, employees and advisors, intellectual property possessed, the learning achieved and the principles and processes that are followed.
The learning achieved includes institutional knowledge, best practices used and what has been specifically learned on the target customers, marketplace and product. The principles and processes to be adhered to include the values and organizational structure of the startup and the processes followed to reduce waste and improve execution.
The relational resources of a startup include the personal connections of the founders and employees, online presence, the chemistry, incentive and morale of the team. Relational resources also include relations with various stakeholders and other external parties such as media, government regulators and trade associations.
Garnering third-party credibility is often an underestimated relational resource, and branding represents the most potent relational resource. Acquiring relational resources is primarily about acquiring the most valuable asset of any startup venture – trust.
Bootstrapping is very important for the following reasons. First of all, it reduces or avoids the dilution of the Founders’ Equity. Before founders get excited about securing equity funding they should remind themselves that equity funding dilutes their equity interest, likely leads to the forfeiture of a certain amount of decision-making control and creates external obligations that must be honored now and in the future. Founders should ask themselves, “Is the equity round currently being considered necessary, and is it worth it?”
Secondly, necessity breeds innovation. Founders may not like to hear this but the act of bootstrapping creates an environment of palatable risk in which resides the source of the greatest innovation and the likelihood of optimal efficiency.
Finally, it demonstrates “skin-in-the-game.” When it is time to solicit for investment funds prospective equity investors will be heartened by your personal commitment and trust that your managing team will allocate their invested funds wisely. Later we will discuss the condition when a bootstrapping strategy is to be finally abandoned.
Components of a bootstrapping strategy
A variety of bootstrap decisions and opportunities represent the numerous possible components of a bootstrapping strategy and plan. Bootstrapping decisions include any actions, policies, processes, or structuring that are undertaken to reduce an actual financial or opportunity cost, increase efficiencies, and reduce the time necessary to attain objectives or successfully complete development efforts.
Any decision to better position a venture to take advantage of any bootstrapping opportunity – either potential or planned – may be deemed a bootstrap decision as well. Implementing a lean and/or agile process, decision to relocate, and assembling a complete founding team are examples of bootstrapping decisions. Bootstrapping opportunities are any external activities or programs that can be leveraged to effectively acquire resources without the expenditure of equity investment capital.
Bootstrapping opportunities can be considered either “minor” or “major.” Minor bootstraps are minor in that these opportunities primarily or exclusively offer only one of the three resource types to be acquired. Securing related project work, competing for prize money, securing public funding, attending workshops, pitching, and other startup events are all examples of minor bootstraps.
Major bootstraps simultaneously offer all three resources: financial, knowledge, and relational. The five “majors” include co-working spaces, incubators, accelerators, crowdsourcing/funding, and strategic partnerships.
Identifying, selecting and optimally timing the most appropriate bootstrapping decisions and opportunities requires strategic thinking, a holistic perspective, and an opportunistic vigilance as each startup is unique and the needs of each startup are in constant flux as it rapidly progresses through different development stages.
In today’s startup world there are four prevailing conditions or imperatives that make a bootstrapping strategy both more possible and more pertinent. The first prevailing condition is shorter life cycles for startups. The time to commercially launch and exit has greatly shortened in the last decade. This can be attributed to several factors including the widespread use of open source tools, the availability of numerous global platforms allowing startups to reach ever larger audiences, the cost-reducing use of cloud computing, and the dramatic decrease in bandwidth costs.
Shorter life cycles have created a greater need for efficiency and reduce the aggregate amount of investment required thereby making it more important to identify and secure more timely sources of financing as an alternative to more traditional venture capital entities and direct acquisition of non-financial resources.
The lean movement currently sweeping across the globe is a second prevailing condition that is totally consistent with – indeed an integral part of – any effective bootstrapping strategy. In the Lean Era, failing and learning fast is the path to greater efficiency, cost-cutting and speed to market. A “good money-bad money” determination has become increasingly important and relevant in determining whether a bootstrapping opportunity is worthy.
As I defined in my first book, good money is received from a funding source that is a willing source of intimate knowledge of your technologies, business, and market (i.e. “Know your space”), possess the same objectives as the founders, leave sufficient incentive for management to achieve such mutual objectives, and does not impede future fundraising efforts or decision-making abilities.
However, in relation to bootstrapping, the definition of “money” needs to expand to include knowledge-based and relational resources as well. Being able to secure non-financial resources without expending equity investment capital is an example of “good money” and often represents a bootstrap.
A fourth prevailing condition associated with bootstrapping is the wealth versus control dilemma very well articulated by Noah Wasserman in his excellent book, Founders’ Dilemma. Based on his findings he convincingly demonstrates that those wealth-seeking founders who are willing to accept a “smaller piece of a larger pie” usually are rewarded with greater financial returns than a control-preserving founder whom typically attains a “larger piece of a smaller pie.”
However, bootstrapping may allow founders to “bake their cake and eat it too” by offering an opportunity to enlarge the pie (acquiring vital resources and time to build traction) while being able to carve out a larger piece of the pie (preserve equity interest and decision-making control). Indeed it may be accurate to say that a bootstrapping strategy that lessens the amount of investment capital required is actually reducing the baking time and hastening when the pie can be eaten as well.
Formulating a plan
Given the three critical resources required of startup ventures, the various ways to bootstrap, and the current prevailing conditions prevailing in the startup world, it is recommended that startups conceive a bootstrapping strategy and formulate a bootstrapping plan to enjoy all the benefits to be derived.
A properly constructed bootstrapping plan will illustrate the most optimal bootstrapping path that will track as far into a venture’s life cycle before the necessity to secure equity funding occurs. However, it remains highly unlikely that a tech startup will be able to successfully exit before being compelled to raise equity funding.
So when is it time to discontinue a bootstrapping strategy?
The decision to discontinue bootstrapping is one of the most important decisions founders of tech startups will have to face. A bootstrapping strategy should only be abandoned when the opportunity cost of not securing equity investment funds in sufficient amounts and/or in a timely manner proves to be too great.
This often occurs due to a crisis situation, when a short window of opportunity presents itself, or when execution of a vital undertaking requires funding greater than what is currently available through bootstrapping.
Having a clear, well-thought out bootstrapping plan will improve the probability of success for any tech startup. I am not so impressed when a founder excitedly reports to me that they have secured equity funding. What is much more impressive to me is when a founder presents a lengthy list of all the traction garnered thus far by their venture without the need to acquire and expend investment funds
This article by David Shelters originally appeared on Tech in Asia, a Burn Media publishing partner.