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©2008 Prentice Hall Business Entrepreneurship (BUS 301)
Chapter 7
BOOTSTRAP
FINANCE
Faculty of Management and
Computing
The Maldives National University
Prepared by: Ahmed Munawar
©2008 Prentice Hall
The Importance of Getting
Financing or Funding
The Nature of the Funding and Financing Process.
Few people deal with the process of raising investment
capital until they need to raise capital for their own firm.
As a result, many entrepreneurs go about the task of raising capital
haphazardly because they lack experience in this area.
Why Most New Ventures Need Funding.
There are three reasons most new ventures need to raise
money during their early life.
The three reasons are shown on the following slide.
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Why Most New Ventures Need Funding?
Three Reasons Start-Ups Need Funding
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What Makes Entrepreneurial Finance
“Different” from Traditional Finance . . . ?
1. Lack of history upon which to assess risk.
What‟s the β?
Without it, what should the market risk premium be? . . .
Criteria to identify if “big winner” potential exists.
2. Lack of ability to compare against other firms when
industry is new.
3. Lack of short term profit potential in the immediate
future.
4. Lack of liquidity . . . CASH IS KING!!!
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Implications . . . !
Entrepreneurial finance involves useful ways of
thinking about cash, risk, and values.
Teaches skepticism (there are fewer „true‟
opportunities from a financial perspective than we
often think!).
Helps us identify the „right‟ questions to ask and
narrow down the potential options, which in turn
enable us to make better decisions.
Ex: Is “Fit” an “Opportunity”?
Discovery Driven Planning.
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Implications . . . !
Explicit and hidden costs of using other people‟s
money
Danger of misallocation . . . Throwing money at symptoms
Diminished flexibility . . .
“Operational lock”
Credibility issues . . . “What to you mean, didn‟t we get it
right the 1st time?”
If I use X financing now and Y financing later, have I
created incentives for all stakeholders to work together?
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Alternatives for Raising Money for a
Start-Up Firm
Personal Funds Equity Capital
Debt Financing Other (Creative) Sources
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Sources of Personal Financing
Personal Funds
Friends and Family
Bootstrapping
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Financing a Small Business - Modest Growth Figure 9.1
Pre-launch Start-up Growth Transition
Bootstrapping
Self, friends, and family
Equity financing
Debt financing
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Financing a High-Growth, High-Potential Venture Figure 9.2
Pre-launch Start-up Growth Transition
Bootstrapping
Seed financing from angels
Equity financing from VCs
Debt financing
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What is Bootstrapping?
Defined as the “process of finding creative ways
exploit opportunities to launch and grow businesses
with the limited resources available for most start-up
ventures” {Englewood Cliffs, NJ: Pearson/Prentice-Hall}.
Bootstrapping is finding ways to avoid the need for
external financing or funding through creativity,
ingenuity, thriftiness, cost-cutting, or any means
necessary.
Because it is hard for new firms to get financing or
funding early on, many entrepreneurs bootstrap out of
necessity.
Business Entrepreneurship (BUS 301)
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Why Bootstrap?
Often necessary for small businesses to get
started
Difficulty in raising money for growth
Preserves the value and wealth of a business
“Extend the Runway”
Reduce risk associated with debt financing
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Rules of Bootstrapping
Rule #1: Overhead matters
Rule #2: Employee expenses are usually the
highest single recurring cost
Rule #3: Minimize operating costs
Rule #4: Marketing matters, but know your
customers and how they make decisions
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Bootstrapping Administrative Overhead
Space
Furnishings and office equipment
Administrative salaries
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Bootstrapping Employee Expenses
Employee “stretching”
Independent contractors
Employee leasing and temporary employees
Student interns
Equity compensation
Non-monetary benefits
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Bootstrapping Operating Expenses
Outsourcing
Just-in-time inventory techniques
Effective cost accounting
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Bootstrap Marketing
Know your customer
Focus on the impact of message, not
“volume”
Focus on benefits for customer
Understand the market niche
Spend your marketing dollars wisely
Marketing is a process, not an event
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The Basic Bootstrap Marketing Tools
Word of Mouth
Business cards
Blogs
Brochures
Banners and signs
Newsletters
Direct mailing/e-mailing
Publicity
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Word of Mouth
Motivate customers to talk about business
Create incentives to spread the word
Ask customers to “sell”
Create a “buzz” campaign
Viral marketing
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Business Cards
Design is important
Include needed data about business
Use quality paper
Use color
Include description and/or slogan
Use both side of card
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Blogs
Be consistent in blogging
Do not blog merely to promote business
Take time to create quality blog
Be patient – blogging takes time to build
following
Be cautious what you write!
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Examples of Bootstrapping Methods
Buying used instead of
new equipment
Leasing equipment
instead of buying
Minimizing personal
expenses
Sharing office space
with other businesses
Coordinating purchases
with other businesses
Obtaining payments in
advance from customers
Avoiding unnecessary
expenses
Applying for and
obtaining grants
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Axioms from successful entrepreneurs
1. Get operational quickly.
2. Look for quick break-even, cash-generating projects.
3. Offer high-value products or services that can sustain
direct personal selling.
4. Forget about the crack team.
5. Keep growth in check.
6. Focus on cash, not on profits, market share, or
anything else.
7. Cultivate banks before the business become
creditworthy.
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Abandoning the Rules in growth and change
1. Emerge from its niche and compete with a
large company.
2. Offer more standard, less customized products.
3. Bring critical services in-house.
4. Change management's focus from cash flow to
strategic goals.
5. Recruit higher priced talent, perhaps
encouraging early employees to move on.
Business Entrepreneurship (BUS 301)