Foundations Business Development Group

Ask 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 include:

Cleaning out your personal savings or retirement accounts
Home equity loans and second mortgages
Credit cards
The friends and family plan
Strategic alliances
SBIR, STTR, ATP and other research and development grants
Outsourcing
Purchasing used equipment
Location, location, location
Bartering your product/service for someone else's
Advances 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
Advance payments from customers, sometimes in return for long term discounts

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 carefully managed.

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.

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.

Outsourcing 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.

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 for success.

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 2001.

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.



	Bootstrapping the StartUp Venture
	Ask 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 include: Cleaning out your personal savings or retirement accounts Home equity loans and second mortgages Credit cards The friends and family plan Strategic alliances SBIR, STTR, ATP and other research and development grants Outsourcing Purchasing used equipment Location, location, location Bartering your product/service for someone else's Advances 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 Advance 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. Credit Cards 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 carefully managed. 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. Strategic Alliances 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. Outsourcing Outsourcing 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. Conclusion 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 for success. 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. About the author: 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 2001. 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.