Startups are newly established businesses that aim to bring innovation to the market. The startup ecosystem improves year by year with the progress of technology. Freshly established startups must catch up with the market due to the disruptive nature of startups. Otherwise, they would have to accept failure. Considering this fact, newly established startups face severe problems; one of the most critical issues is financial problems. Generally, startups cannot easily find investors, especially newly established ones, but some techniques help navigate financial difficulties. Bootstrapping is one of the most well-known ways to sustain a startup in its early stages. The question is: Is bootstrapping useful? It can depend on the circumstances that the startups experience. Which firms should use bootstrapping, and which firms should not? We are going to discuss bootstrapping in this week’s blog.
Bootstrapping is a popular way for young and small companies to acquire resources without outside investment. It can be a challenging but rewarding way to build a successful business in the early times of a startup. The logic behind bootstrapping is to create a more sustainable financial system that is less reliant on debt and more focused on long-term investment. The relationship between bootstrapping and startup growth depends on the strength of the startup's dependence on financial partners, which can be reduced with bootstrapping, and the strength of new inter-organizational dependencies created through bootstrapping. In short, bootstrapping can be a good financial solution, but it depends on the level of dependence of the startup. Firms with a high level of reliance on financial investors are expected to benefit from bootstrapping. And there are some methods to bootstrap the startup and the methods are not equal.
As I mentioned before, bootstrapping techniques are helping startups when they are at an early age. Because if a startup is newly established, it can have a problem with finding funding and investments. But they need capital to sustain the venture. Where does come this money from then? The internal investments which are called make bootstrapping. The internal fundings come from the FFF. FFF is known as in business jargon, Family, Friends, and Fools. That is because if a startup is newly established, they can find money just from people who trust the founder of the startup, or the people who invest in the startup are fools. It is kind of a joke, but it has a basis. This type of bootstrapping is called ownerrelated bootstrapping and it is the commonly used one. Owner-related bootstrapping is the use of funds from the founder and their family. While this may affect the founder's personal relationships, it does not create dependencies at the company level and therefore constitutes internal funding. This technique decreases investments in daily operations, thereby increasing the availability of cash. Secondly, the other bootstrapping technique can be government programs. Government can create a supportive environment for startups, such as by providing tax breaks or regulatory relief. And this technique does not create a dependency on firms. That is because it is useful for newly established startups.
One of the most used bootstrapping techniques is the customer-related bootstrapping. Customer-related bootstrapping techniques include delaying payments to have an internal cash flow. For example, startups can negotiate cash sales instead of credit sales. They can also delay payments to suppliers, which will allow them to keep more resources for other uses. This strategy can lead to create dependency on customers and suppliers and this situation can lead to uncertainties about the success of the startup. In short, with this technique, there are risks to the customers and suppliers. And these risks level depends on according to customer and suppliers’ behavior. For example, suppliers may decide to stop providing raw materials to a startup, or customers may demand more favorable payment terms or stop buying from the firm altogether.
Another bootstrapping technique is the joint-utilization bootstrapping technique. For example, startups can share premises or equipment with other businesses, or they can join forces to purchase supplies or services. This bootstrapping technique can help startups to save money and establish new relationships with other businesses. It sounds good but it can be risky. For example, when using joint equipment, the owner of the equipment may decide to use the equipment more in the future, which could reduce the amount of time that the startup can use it. Joint-utilization bootstrapping is therefore expected to increase the startup's dependence on another organization.
In conclusion, so many startups can face financial problems, especially newly established ones. There are some techniques to avoid facing these problems strongly and one of the commonly used ways is bootstrapping. With bootstrapping startups can finance their ventures without external debts or funding. That is because bootstrapping can be a useful and efficient technique to finance businesses.
Efe Orhan Kan
Startup Sales Support