Bootstrapping

=Defined= “Bootstrapping” is a term used to describe the techniques for getting by on as few resources as possible and using other peoples’ resources whenever possible. Bootstrapping is the antithesis of the big-money, venture-capital-backed “give us $10M to finance our business plan” approach because the practicing entrepreneur begs, borrows, and/or leases everything he or she needs to start and operate the new venture. Bootstrapping is essentially a model for starting a business without any money (or as little as possible).

Bootstrapping can have several major benefits. First, it helps the young company learn about its market and customer preferences before making any major (and often irreversible) capital investments. Second, the bootstrapping approach forces entrepreneurs to be laser-focused on key resource inputs and performance outcomes for their businesses. Finally, deferring large commitments of capital gives the start-up the flexibility to pursue emergent opportunities that were not known when the venture was first created.

Common bootstrapping themes include:

 * Hiring as few employees as possible. Typically the greatest expense any business has is its payroll.
 * Leasing or sharing as many resources as possible. Many start-ups borrow space from larger, established companies. Leases usually don’t require down payments or large deposits.
 * Using other peoples’ money. Entrepreneurs can effectively do this by getting customers to pay in cash or convert their credit purchases into cash as soon as possible. And by establishing good relationships with key suppliers to get favorable payment terms (e.g., 90 days to pay for inventory or pay based on a consignment model). Whenever possible, deal with wholesalers instead of retailers for your inputs because they are experts at working with their customers and have already set up necessary consumer and industrial channels.

Specific bootstrapping techniques include:
= = =Ethics and bootstrapping= Ethical issues arise whenever bootstrapping tactics are employed to let a new venture survive long enough to use other sources of financing. When an entrepreneur bootstraps, by definition he or she is attempting to make the new venture appear more successful than it really is in order to get credibility in the market. Entrepreneurs must be careful not to pursue that image “at all costs,” because those costs can be too great. Lying to survive by misrepresenting who the entrepreneur is or by misrepresenting how long the company has been in business is not an acceptable business practice.
 * Using student interns
 * Getting referrals from loyal customers
 * Avoiding the hiring of employees until absolutely necessary
 * Using independent contractors when appropriate
 * Motivating employees without using money
 * Getting favorable credit terms from suppliers
 * Making sure accounts receivables become cash as fast as possible
 * Keeping operating costs as low as possible

Software maker Intuit spent several years as a bootstrapping start-up and learned that earning its customers’ trust was essential to its long-term success. It had been a common practice in the software industry to use promotional schemes to load retailers with excess product in the belief that the retailer would push that product to get rid of it before taking on a competitor’s product. As a result, Intuit’s retailers were not burdened with excess inventory, and Intuit avoided the boom-and-bust cycle that typifies the software industry in the 1980s.

On the other hand, some techniques that have been described as bootstrapping may be regarded by some as unethical. Philippe Kahn, CEO of Borland International in the 1980s, "creatively" found a way to get favorable terms for a key advertising campaign that ultimately led to his company's survival and long-term success. Debbie Gordon started her business Snappy Auctions in 2006 by buying several pairs of top-brand women's shoes from an outlet store, selling them on Ebay, and then taking advantage of the store's 30-day return policy by returning those that did not sell.