Maintaining a bootstrapping culture
Photo courtesy of iStockphoto, Deborah Cheramie
Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University, is finishing up a new book on bootstrapping due out in 2009 and has blogged about it a bit over at The Entrepreneurial Mind.
In his most recent post, Jeff looks again at the reasons companies maintain a bootrapping culture even after they are up and running when obviously they are no longer short of money or potential investment funding.
Jeff concludes there are at least three reasons entrepreneurs keep up their bootstrapping ways even when they no longer need to:
• Keeping control
First, bootstrapping over the long-term can help a business avoid the need to secure external financing and keep 100% of the ownership in the entrepreneur's own hands. By being more efficient throughout the life of the business, cash flow is optimized and the entrepreneur can build cash reserves that can be used to fund future growth.
• Creating wealth
Second, bootstrapping increases the income that the business can generate for its owners over the long-term. It also helps them to build more wealth from the venture. Cash flow is what allows the entrepreneur to take income out of the business, and successful use of bootstrapping helps to generate more net cash flow. This is just as true in a mature business as it is in a start-up. The value of a business is based primarily on its ability to generate cash flow into the future. The stronger the cash flow the higher the value of a private business. Bootstrapping, therefore, helps build wealth for the entrepreneur by increasing the value of the venture by increasing its new cash flow over time.
• Being a good steward
Third, there is an ethical reason to continue bootstrapping over time. They bootstrap to be good stewards of the resources that have been put into the business.
I can think of at least one more good reason for continuing to bootstrap a business even after it is no longer necessary, one alluded to by bootstrapping guru and start up entrepreneur Greg Gianforte:
It never fails to amaze me that our country's MBA programs, for example, almost universally neglect Bootstrapping principles. It's the classic "book smarts" vs. "street smarts" scenario being played out on The Apprentice every week on TV. Somehow, we've developed a business culture that believes business is more about borrowing money than making it. The fruit of this culture includes high-profile corporate failures, a new wave of burdensome regulation, and public mistrust of the business community.
In a day and age when getting funded has replaced creating value and entrepreneurs seem more interested in spending money than making it, I think we need bootstrapping more than ever.
June 23rd, 2008 at 3:41 pm
I think another reason is that you can never assume your industry is safe from a downturn.
What would happen if you lost half of your customers because a better mouse trap was invented or people stopped using film in their camera?
Everyone should try to stay lean and be able to adapt quickly.
June 23rd, 2008 at 8:43 pm
Probably a good way to look at the bootstrapping ethic in good times or bad, Ron. On the other side of the scenario you suggest is that in a time you are doing well there may be a temptation to borrow or take large outside investment to expand instead of simply using revenue to grow your business. Of course, this good time may be followed by bad in which you may be hard pressed to meet the obligations that come with that money. If you had simply stayed with the bootstrapping approach perhaps the money spent to expand slowly from your own revenue might have translated to additional income to help you withstand the harder times.
June 25th, 2008 at 11:57 am
I think that is why there is such a high premium placed on entrepreneurs that have done it before, even if they have failed. Once you go through the (painful) cycle, you are more careful and do not get caught up in your own ideas as much. You are better at assessing the opportunity and risk as an investor instead of as an idealistic entrepreneur.