Venture Financing:

Step-by-step Guide

Bootstrapping

The Most Common Source of Initial Equity for Entrepreneurial Firms

What is Bootstrapping?

Bootstrapping is a means of financing a small firm through highly creative acquisition and use of resources without raising equity from traditional sources or borrowing money from a bank.

In short, "bootstrapping" means starting a new business without start-up capital. It is characterized by high reliance on any internally generated retained earnings, credit cards, second mortgages, and customer advances, to name but a few sources.

Why Bootstrapping?

Bootstrapping is the most likely source of initial equity for more than 90% of technology based firms. Venture capitalists are rarely able to fund small start-up firms (in US, seeking lees than $5 million), regardless of the quality of the venture, because of their very specific investment criteria and high costs of due diligence, negotiating, and monitoring. Bootstrapping offers many advantages for entrepreneurs and is probably the best method to get an entrepreneurial firm operating and well positioned to seek equity capital from outside investors at a later time.

Bootstrapping Options

Bootstrapping options available to entrepreneurs can be divided into four categories:

1. Product development

2. Business development

3. Minimization of capital needed, and

4. Meeting the need for capital.