Bootstrapping re-defined: a comprehensive strategy for startups

David Shelters has been a founder or advisor to tech startups for the past twenty years in both the US and Asia. Currently, he is the editor of Thailand Startup Review, a comprehensive blog and reference resource covering the Thai startup community. His recently published book, Art of Bootstrapping, discusses how an effective bootstrapping strategy can be conceived, planned, and executed. Publishizer, a Singapore-based crowd publishing platform, is conducting the pre-orders campaign, and their site can be found here.

Disclaimer: the opinions expressed in this piece are the author’s own and not those of his employer or colleagues.

Given the current global startup environment, I believe a re-definition of the term bootstrapping is in order. I believe bootstrapping is more than just an adverb and should be viewed as a comprehensive strategy for tech startups.

What is bootstrapping?

Historically, bootstrapping has been a term used to describe the efforts made by individuals to overcome a nearly impossible obstacle or to improve oneself through self-sustaining efforts requiring no assistance from others. The saying, “to pull oneself up by one’s bootstraps” has been a common Western expression during the previous two centuries. In modern business language, bootstrapping has primarily meant founding/starting a new business without external funding.

In the glossary of my first book, Start-Up Guide for the Technopreneur, I defined bootstrapping simply as “the practice of sustaining operations and development without raising external capital.” At present, the meaning of the word tends to be limited to financial situations.

I will now argue that bootstrapping is much more as it applies to entrepreneurial ventures. By definition, an entrepreneurial venture is a business undertaken knowingly without initial resources sufficient enough to achieve its objectives. The resources critical to be acquired by any entrepreneurial venture include financial, knowledge-based, and relational resources. Any decision or pursuit through which a startup tries to acquire any one or a combination of such resources at a cost, in both financial and non-financial terms, less than the cost of securing the investment funding or other traditional financing otherwise needed to acquire such resources may be considered a bootstrap.

Three types of resources

The three resources vital for every tech startup are financial, knowledge-based, and relational resources. Financial resources include all monetary and tangible assets of a venture. Knowledge resources include the aggregate skills and experiences of the founders, employees and advisors, intellectual property possessed, the learning achieved and the principles and processes that are followed.

The learning achieved includes institutional knowledge, best practices used and what has been specifically learned on the target customers, marketplace and product. The principles and processes to be adhered to include the values and organizational structure of the startup and the processes followed to reduce waste and improve execution.

The relational resources of a startup include the personal connections of the founders and employees, online presence, the chemistry, incentive and morale of the team. Relational resources also include relations with various stakeholders and other external parties such as media, government regulators and trade associations.

Garnering third-party credibility is often an underestimated relational resource, and branding represents the most potent relational resource. Acquiring relational resources is primarily about acquiring the most valuable asset of any startup venture – trust.

Why bootstrap?

Bootstrapping is very important for the following reasons. First of all, it reduces or avoids the dilution of the Founders’ Equity. Before founders get excited about securing equity funding they should remind themselves that equity funding dilutes their equity interest, likely leads to the forfeiture of a certain amount of decision-making control and creates external obligations that must be honored now and in the future. Founders should ask themselves, “Is the equity round currently being considered necessary, and is it worth it?”

Secondly, necessity breeds innovation. Founders may not like to hear this but the act of bootstrapping creates an environment of palatable risk in which resides the source of the greatest innovation and the likelihood of optimal efficiency.

Finally, it demonstrates “skin-in-the-game.” When it is time to solicit for investment funds prospective equity investors will be heartened by your personal commitment and trust that your managing team will allocate their invested funds wisely. Later we will discuss the condition when a bootstrapping strategy is to be finally abandoned.

Components of a bootstrapping strategy

Prevailing conditions

Formulating a plan

So when is it time to discontinue a bootstrapping strategy?

Concluding remarks