bootstrap finance chapter 7 - yoladhiecon.yolasite.com/resources/w7_bootstrap finance.pdf ·...

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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.

Business Entrepreneurship (BUS 301)

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Why Most New Ventures Need Funding?

Three Reasons Start-Ups Need Funding



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.



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



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



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.



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



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



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



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



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!



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.



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.


bootstrap finance chapter 7 - yoladhiecon.yolasite.com/resources/w7_bootstrap finance.pdf ·...

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