More “Interruptions” for NTBFs’ Developments
4.3.3 Resource-Based Views
4.3.3.1 Bootstrapping a Technology Startup
Initial and growth financing of NTBFs relies very often on the founder’s (founders’) own funds and 3F funding as resources and subsequently on cash flow from business operations (Figure I.52; Table I.23 (for Inc. firms), Table I.24, Table I.25, Table I.26).
That means initial funding of a technology venture occurs to a large extent by “boot- strapping” (bootstrap financing). However, there is no generally agreed upon defini- tion of the notion “bootstrapping.” Often, it means “to start a firm by one’s own efforts and to rely solely on the resources available from oneself, family and friends.” [Dorf
and Byers 2007:411-413] However, for most cases of German NTBF foundation dealt with in this book the startups did not rely only on resources available from the founder(s), family and friends.
A more elaborate definition is given by Eckmann [2008]: “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 external start-up capital.”
Here, on the one hand, emphasizing “creative acquisition and use of resources” opens the spectrum of accessible resources and methods of financing. On the other hand, it remains unspecified what actually “traditional” would embrace. Eckman adds a specification: “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.”
Wikipedia 83 emphasizes that “financial bootstrapping is a term used to cover different methods for avoiding using the financial resources of external investors.” And, more- over, bootstrapping can be defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors.” (Em- phases added)
Emphasizing the notions “avoiding” and “minimize” the author thinks that last definition provides the necessary scope to discuss bootstrapping in the context of technology entrepreneurship where a wide variety of financial and other resources and methods of financing are available for entrepreneurs (ch. 1.2.7.3; Figure I.59, Table I.30).
The financial requirements of the startup and the availability of capital in the market will determine if bootstrapping is an appropriate means (ch. 1.2.7.1). But choosing that way is also related to attitudes toward the various sources of capital for technology entrepreneurs (Box I.20). Software-based ventures typically require less start-up capital than, for instance, either electronics or biotechnology ventures, thus is more likely to rely solely on personal funding (ch. 3.4). Furthermore, growth orientation (Table I.63, ch. 4.1) will also influence the decision for bootstrap financing.
Bootstrapping is often associated with the opportunistic adaptability approach of tech- nology entrepreneurship when time and effort trade-off are considered: Many months spent trying to raise money (with no guarantees!) versus same time spent starting business, establishing proof of customer and product and building traction.
The interconnections of bootstrapping and opportunistic adaptability are lucidly de- scribed by Klaas Kersting [2012], the co-founder of German Gameforge AG and Flaregames GmbH (B.2). He put it into several steps for “Building a Startup” with the premise “fail early, fail often – and learn” (ch. 5.1).
Find some money. (Hint: friends, family or fools are a good starting point.) Focus and prioritize (Hint: Just do the important things.)
Get to market fast. (Hint: you don’t know the market until the market knows you.)
Know your numbers. (Hint: you cannot know too much.)
Avoid overhead. (Hint: you might not need to hire your cousin as a consultant just yet.)
Cash flow is everything. (Hint: buy low, sell high; collect early and pay late.) Key questions for bootstrapping are:
How much cash do you need, and when (Figure I.57)?
If nothing changes, when will you run out of money?
For the early phase of NTBFs it is often difficult to separate acquisition of financial re- sources and methods of financing by business operations. Bootstrapping in the broad sense is characterized largely by high reliance on any internally generated monetary reserves. For understanding the role of business operations for bootstrapping basics of accounting and financing one can refer to Dorf and Byers [2007:403-436] and the author’s Course Material (Handout Lectures 10-13; pp. 1-18) of the Technology Entrepreneurship Web.
Bootstrapping offers many advantages for technology entrepreneurs and is a good method to get a startup operating and well positioned to seek equity capital from out- side investors at a later time – if needed. In particular, a business that makes money builds its credibility – with suppliers, employees and customers. Keeping costs con- sciously below revenues will position the company to survive in lean times which will always come!
Fundamentally, NTBFs and RBSUs have the possibilities to go for capital fo- cusing on research and development grants, scholarships, financial contribu- tions or subsidies of federal or state governments, NGOs and national science organizations (such as, NSF or DFG) or grants for technology projects, which are sometimes cooperative projects (ch. 1.2.6, 1.2.7).
Learning the nuts and bolts of running a business takes time. Start learning from the birth of the firm.
The portfolio of bootstrapping targeting sources, methods and activities minimizing ex- ternal financing (debt and equity) focuses simultaneously on expenses versus profits and cash flow. Superior execution is the key for the components of such a portfolio.
Basic operating expenses comprise (“buy low”):
Location selection (cost of renting offices and laboratories, etc.; in an incuba- tor, science or technology park – ch. 1.2.6) and networking including utiliza- tion of infrastructure of the parent organization, if the startup is a spin-out (RBSU) or the founder of an NTBF has strong ties to research institutes or academia.
Renting (or leasing) sophisticated technical instruments or devices rather than purchasing them.
Outcontracting selected activities of the NTBF’s value chain through external contract services (ch. 4.3.1) or strategic alliances.
Profit orientation means
Go fast to market (customers); have the ability to adjust to a rapidly changing industry or environment; build experience and know-how as you go.
Focus on cash-generating activities (Hint: Just do the important things.).
Look for quick breakeven (ch. 1.2.7.1, Figure I.53).
Offer high-value products or services that can sustain direct personal selling:
(Bootstrapping) entrepreneurs should pick high-value products and services where personal salesmanship can replace an expensive marketing scheme.
Meet customers’ specifications; do not overshoot (Figure I.88).
Provide high-value service and support to customers.
Focus on one offering (of probably few more) which represents a “cash cow.”
Learn from the customer(s) and adjust the business model, if needed.
An issue of going fast to market is the question of how to bring the product to market.
Is it going to require a change of behavior on the part of intended customers? Most startups underestimate the difficulty, not to mention the time and money required, to get a product launched and established in the marketplace.
Overcoming customer inertia is easier and cheaper if a product offers some tangible advantage over the alternatives. Concrete product attributes – with data to support – can lead to sales. Make the risk of dealing with the startup small for the customer as compared with the risks associated with not solving his/her problem (ch. 4.2.1.1).
Cash flow management (“is everything”):
Keep cost to a minimum and have positive cash flow (ch. 4.2.3).
Adjust the revenue (income) and expenses (loss) curves, the profit curve.
Carefully track currency exchange rates, if the startup has international ori- entation.
In particular, “working capital” (ch. 1.2.7.1) is primarily concerned with the day-to-day operations rather than long-term business decisions. Managing working capital has to ensure a company has sufficient cash flow in order to meet its short-term debt obliga- tions and operating expenses.
Following Investopedia “working capital management” is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital (Figure I.130), current assets (essentially cash, accounts receivable, inventories) and current liabilities (such as accounts payable), in respect to each other (“collect early and pay late”; defer your payments as long as possible).
The accounting entry accounts receivable (giving credit or allowing late payment by customers) are assets of the customer and must be financed by the startup. Accounts payable are a way of financing the startup’s assets.
Accounts Receivable (collection of what a business/startup is owed)
The receivable conversion period (RCP) is the time be- tween the sale of the final product on credit and cash re- ceipts for the accounts receivable (cf. DSO).
Inventories The inventory conversion period (ICP) refers to the length of time between purchase of raw material or input for produc- tion of the goods or service, and the sale of the finished pro- duct.
Accounts Payable (Payment of what a business/startup owes)
The payable deferral period (PDP) is the time between the purchase of raw material or input on credit and cash pay- ments for the resulting accounts payable.
“Days sales outstanding” (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money (Investopedia).
Be careful with discretionary expenses, such as
Going for a highly professional representation on the Web.
Sales and marketing programs.
Growth initiatives.
Keep growth in check:
Start expanding, once the new venture starts growing while keeping the cost curve below the revenue curve (Box I.20).
Expand at a rate that you can afford and control. This enables you to develop management skills slowly and to iron out problems under less pressure.
Re-invest profit for growth; target investment and innovation persistence (Figure I.117, Figure I.127).
Invest in new people if there is no other alternative, not in advance of needs (Box I.20).
Hire workers the business needs (but only pay what you can afford).
Develop people internally (Figure I.121).
Cultivate banks before the business becomes creditworthy:
Keep good financial records, sound balance sheets.
Look for bank overdrafts and line of credits.
Prepare early for the next step of financing (ch. 1.2.7.3).