Essay on Bootstrapping

Bootstrapping refers to a mindset of funding your own business without being too reliant on external debt and equity financing. These include strategies to keep costs low and operations streamlined, and include the use of methodologies to keep the company frugal, agile and low in capital expenditure, hiring strong talent at affordable rates, spending prudently through small up-front capital requirements and stringent accounts receivable and short sales cycle management, short payment terms, sweat equity and small-scale pilots.

In terms of financing sources, bootstrapping would involve usage of the founding team’s personal finances, loans from friends and family. Bootstrapping is advantageous as it would allow the founders to have greater autonomy and control over their business without the pressure from banks, investors and shareholders, and generally limits the scale of the business to ensure that the business does not go into significant debt. Businesses such as Spanx, Tough Mudder and Electronic Data Systems were successfully established in this manner. Furthermore, the use of bootstrapped financing sources such as sweat equity, personal finances and subsidy financing would help to reduce the opportunity cost of debt financing, such as interest rate payments.

However, in evaluating the concepts and risks of the bootstrapping mindset in starting a venture, it is important to realise that while some businesses may be able to scale in the initial phases through agile and lean models with streamlined costs, a lack of equity and debt financing will eventually curtail the long-term growth prospects of the company. For example, the company would not be able to invest in innovative technologies for future expansion, and would face significant limitations when attempting to engage larger clients and sales orders which might require longer payment terms. Furthermore, bootstrapping would involve significant endangerment of the founder’s personal finances should the startup fail, and may involve cash flow and equity issues given the lack of clear equity rights and a large pool of funding to draw from. Finally, a bootstrapped venture may lack the credibility from the support of more credible investors and venture capital firms, who would lend a degree of prestige and reputation to the company through their investment.

Separately, it may be important to consider other alternatives to conventional loans as a source of financing. These include crowdfunding, initial coin offerings, angel investor funding, and governmental enterprise development funding. These alternatives would not come with the conditions tied to traditional debt financing, and would allow the investor a greater freedom of control while still having access to funding. However, an investor should consider the reputational implications of accepting such forms of financing, which include ties to a governmental or angel investor entity, or the public reputational backlash from crowdfunding should the startup fail.

As with any forms of financial management, it is also important to strike a healthy balance between having too much debt relative to equity, as this would restrict loan availability from creditors and may pose an opportunity cost in terms of debt financing. On the other hand, too much equity financing may result in curtailed freedom to act, for fear of a potential shareholder rebellion.

For more in-depth analysis on the bootstrapping mentality, I would encourage you to check out:

Entrepreneur India. (February 1, 2016). Bootstrap Mentality: Key Ingredient for Startup Success. Retrieved from https://www.entrepreneur.com/article/270230#:~:text=In%20the%20startup%20world%2C%20bootstrapping

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being%20frugal%2C%20innovative%20and%20agile.

Kenton, W. (February 18, 2020). Bootstrapping. Retrieved from https://www.investopedia.com/terms/b/bootstrap.asp

Harvey, I. (5 February 2020). Companies That Succeeded With Bootstrapping. Retrieved from https://www.investopedia.com/articles/investing/082814/companies-succeeded-bootstrapping.asp

Wayne, R. (26 July 2019). The Problem with the Bootstrap Mentality. Retrieved from https://medium.com/@rachelwayne/the-problem-with-the-bootstrap-mentality-fa783d7bf710