It isn’t surprising that most startups and small businesses are bootstrapped. After all, while there’s around 28 million small businesses in the U.S., only 5,948 received funding from the $614 billion invested in 2017. Over 99% of ventures are self-funded through personal savings, family, friends and other sources.

Here are a few research backed findings that you may not know about bootstrapping.

Bootstrapping is positively associated with venture growth when:

Researcher Tom Vanacker and his colleagues conduct a longitudinal study on the relationship between financial bootstrapping and new venture growth on 214 new ventures over 5 years of business to find evidence that founders who use their own resources, hire as needed and take advantage of government grants and subsidy finance while speeding cash collection from customers exhibit higher subsequent growth than bootstrapped founders who use personal bank loans, delay customer and supplier payment.

Lesson learned: if you use resources more efficiently and minimize debt, you are more likely to grow stronger and faster.

Bootstrapping has a diminishing marginal return unless:

Using a sample of 103 technology firms, researcher Pankaj Patel and his colleagues find evidence that excessive bootstrapping negatively affects venture growth beyond a certain point in the life of the business unless its combined with strategic alliances. Such alliances for resource sharing and cost minimization purposes compensate for the lack of capital and propel healthy growth.

As shown in the figure below, when the number of employees in the firm is used as a proxy for growth, the use of strategic alliances increases the marginal benefit of bootstrapping while minimizing the downside from extreme and extended bootstrapping.

Lesson learned: There is a limit to the benefits of bootstrapping but it is a long way from the start. First, maximize use of bootstrapping strategies, and second, build key partnerships for faster and stronger growth.

Bootstrapping strategies change over time

When Baremetrics founders were burning more cash that what they were making, they didn’t go back to their consulting days to cover the difference. That would only mean less focus and thus even lower returns for their company. Research findings by Jay Ebben and Alec Johnson confirm this observation.

Following previous findings and using survey answers from 146 bootstrapped firms, the authors identify four main bootstrapping strategies:

  1. Getting funded by the customer through advance payments. This approach also includes picking the right customers and ceasing relationships with late payers.
  2. Delaying payments includes leasing instead of buying, negotiating an extension with suppliers and manufacturers.
  3. Investing personal assets includes using savings, personal loans, help from friends and family.
  4. Joint utilization of resources involves exchanging products and services with other firms including equipment, skills and office space.

Findings show that bootstrapping through personal assets and joint utilization decrease as resources become available and the firm gains legitimacy. As the firm grows, strengthen its brand and relationships with its customers, it increases its use of customer related techniques (number 1 above) and decreases its reliance on partners (delaying payment) in an attempt to become better customers to their suppliers and manufacturers.

Lesson learned: When bootstrapping your venture, at the beginning focus on the customer and on gaining the trust of other stakeholders (exp. suppliers and manufacturers). Those, in addition to your personal assets, will help you get your venture off the ground. As you grow, know your opportunity cost. The strategies will change. For instance, Baremetrics decided to cut salaries instead of taking consulting projects or getting more funding. This approach may not have been the optimal at the beginning.

Bootstrapping is different for technology vs. non-technology companies

Since the acquisition of capital and risk of technology firms are higher due to the relatively longer and more uncertain lead time to commercialize a product, technology based companies are more likely to bootstrap than non-technology firms. These findings stem from a research conducted by Howard Van Auken in which he assessed the importance of bootstrap financing for 44 technology and non-technology based firms.

Results further show that technology based firms emphasize more on the importance of pre-orders and timely customer payments than delaying payments to their suppliers and manufacturers. For tech based firms, maximizing inflow is more important than minimizing outflow.

Lesson learned: Focus on the value proposition. That’s what’s going to fund your venture. If you deliver value since day one, you will maximize inflow while building trust with your suppliers, who by the way could be your employees, and with this, minimize outflow.

Next, I want you to download this checklist of 30 bootstrapping strategies that tech and non-tech companies use then get back to me with what applies to you, why and how you will use it to achieve your business goals (respond to my email after downloading).

Did you find something surprising in the findings above? write a comment below.

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