Bootstrapping Definition

Cite this article as:"Bootstrapping Definition," in The Business Professor, updated February 26, 2019, last accessed August 12, 2020, https://thebusinessprofessor.com/lesson/bootstrapping-definition/.

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Bootstrapping Definition

Bootstrapping refers to a situation whereby an entrepreneur starts a small business and develop it into a company using the little capital at their disposal without relying on other external sources of finance. An individual is referred to as bootstrapping when he uses his personal finances or operating revenues generated from a new company to start and grow a company to a higher level. Besides, the term bootstrapping can also be used to describe the procedure used of calculating zero-coupon yield curve from the figures provided in the market.

A Little More on What is Bootstrapping

The company bootstrapping arises when the owner of the business with a little or no capital asset. This differs from the notion that, starting a company require the entrepreneur to determine sources and raise huge finance for business set up. Instead, bootstrapped entrepreneurs start their businesses based on personal savings, lean operations; cash runways sweat equity and quick inventory turnover to develop and become successful in the business. For example, an entrepreneur or a business can use preorder services for its products and use the money received for the orders to acquire, build and deliver the products to the clients.

In investment finance, the concept of bootstrapping is mostly used to create and build a spot rate curve for the zero-coupon bond.

Examples of Bootstrapping

The concept of bootstrapping is used in most cases to fill the gaps that occur in the yield for Treasury security or coupon treasury strips. For example, since the government does not offer their treasury bills every time, the bootstrapping method is used to determine the missing figures and derive the yield curve. The method uses interpolation to calculate the yields for zero-coupon treasury securities with various maturities. The use of bootstrapping methods has more benefits compared to the venture capital method since it enables the entrepreneurs to control their financial decisions effectively. However, despite the benefits of this model, it has also some weaknesses. One of the weaknesses of the model is that it may create unnecessary financial risks to the entrepreneur. Moreover, bootstrapping may not avail enough capital resources to allow the company to grow and become successful at a reasonable rate.

 

Nonetheless, many companies have grown and succeeded from using the bootstrap operation. For example, Galen Ward and Douglas Cole found the home search platform Estate as a bootstrapped business and later grew into a company with huge resources and investments.  After dropping out of school, the two colleagues decided to start a business based on the little saving they had at that moment. The two began with a total amount of $4,000 from their personal savings which they used to purchase cheap servers, pay incorporation fee, and pay for the miscellaneous expenses.  From an initial investment of $4000, the company grew tremendously and reported revenue of $1 during Feb 26, 2014. Besides the company also reported to 17 workers from 2 at the beginning. In addition, the company is free to decide whether to use the revenue in the current to invest for future growth of the company.

References for Bootstrapping

Academic Research on Bootstrapping

  • Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching practices versus current business practices?, Lahm Jr, R. J., & Little Jr, H. T. (2005). Journal of Entrepreneurship Education, 8, 61. This paper examines the existing research about bootstrapping how it helps the entrepreneurs to achieve their dreams. The author presents that despite the widespread use of bootstrapping, the current research about the concept is limited. The academic resources used in schools and technical training colleges not cover the concept of bootstrapping deeply. Most of the scholarly materials only devote some few paragraphs or pages about the concept. Therefore, the author advocated that the concept should be given more attention, especially when designing the academic materials used in schools.
  • Financial bootstrapping in small businesses: Examining small business managers’ resource acquisition behaviors, Winborg, J., & Landström, H. (2001). Journal of business venturing, 16(3), 235-254. This paper explores the management problems that affect the operation of small businesses over the recent years. The paper also seeks to explore the financial challenges that affect the operation of the small business. As such, the author argues that the managers of small companies only focus on the internal finance to fund their activities. This has been a significant challenge for the growth and success of small companies. The study further identified six clusters of bootstrapping that affects its operations. The study, therefore, concluded that small business use many ways to get finances to help them achieve faster growth.
  • Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching versus current business practices?, Lahm Jr, R. J., & Little Jr, H. T. (2005, July). In Allied Academies International Conference. Academy of Entrepreneurship. Proceedings (Vol. 11, No. 2, p. 15). Jordan Whitney Enterprises, Inc. This article also explores how the concept if bootstrapping is covered in academic institutions. The author discovered that despite the benefits, the concept had not been given enough attention in the learning institutions. Moreover, despite is benefits to the entrepreneurs, and the students, the concept has limited research and the individuals talking about only provide limited information about it. Therefore, in this regard, the author of this article recommends that the concept should be taken to a higher level since it is both beneficial to the society as well and the individuals who intend to become entrepreneurs.
  • Financial bootstrapping and venture development in the software industry, Harrison, R. T., Mason, C. M., & Girling, P. (2004). Entrepreneurship & Regional Development, 16(4), 307-333. Despite the finance being one of the significant factors that determine the development of business, especially, the technology business, it is major constraints to the growing companies. This paper addresses the role and benefits of bootstrapping in the development of business and products in the privately-owned software industry. The study also revealed that the concept of bootstrapping is widely spread in the countries that have a high level of unemployment compared to those with stable employment opportunity.  Besides big firms tend to use bootstrapping for their product developed as opposed to small firms that tend to ignore the concept.
  • Bootstrapping in small firms: An empirical analysis of change over time, Ebben, J., & Johnson, A. (2006). Journal of Business Venturing, 21(6), 851-865.  Even though bootstrapping is a concept that is widely used as a business strategy by the small firms, and considered to be one of the important topics for the entrepreneur literature, it has not been properly to organisational theory. This paper presents theories and empirical research about bootstrapping and the concept of organizational development for growing firms. The findings of the study show that different types of bootstrapping are used at the different time by the small firms and that the methods applied to concur to some degree with organizational theory forecasts.
  • Bootstrapping, Cornwall, J. R., Vang, D. O., & Hartman, J. M. (2015). In Entrepreneurial Financial Management (pp. 186-202). Routledge. This study presents the realistic view of entrepreneurial finance for the contemporary entrepreneurs. It provides an integrated set of applications and concepts derived from entrepreneur, finance and accounting. The author focuses on the lifecycle of the business considering the sources of finance at each cycle. Besides the author addresses the issue of financial management especially in small firms.
  • Mitigating the limited scalability of bootstrapping through strategic alliances to enhance new venture growth, Patel, P. C., Fiet, J. O., & Sohl, J. E. (2011). International Small Business Journal, 29(5), 421-447. Even though the importance of bootstrapping is widely known, the concept of the declining venture in bootstrapping remains less or unknown to many consumers. This paper test non-linear relationship between the bootstrapping and the venture development. Although the benefits of bootstrapping are widely known, decreasing returns to venture growth from this strategy are less understood; falls in returns
  • Bootstrapping an econometric model: Some empirical results, Freedman, D. A., & Peters, S. C. (1984). Journal of Business & Economic Statistics, 2(2), 150-158. This paper discusses the econometric concepts such as Carlo simulation to determine the distribution error. The bootstrap, like the jackknife, is a technique for estimating standard errors. The idea is to use. The application of bootstrapping to an economic model describes the organizational demand for capital, labor, materials and energy.
  • Beyond environmental scarcity: Human and social capital as driving forces of bootstrapping activities, Grichnik, D., Brinckmann, J., Singh, L., & Manigart, S. (2014). Journal of Business Venturing, 29(2), 310-326. Even though entrepreneurship scholars consider bootstrapping as one of the important approaches to resource acquisition and response to resource constraints in the firm, there is little knowledge about nascent ventures` engagement in the bootstrapping. This paper explores the nascent venture behaviors in the face of bootstrapping. The findings of this study revealed that individual characteristics and environmental factors determine the nascent behaviors.
  • Wild bootstrapping variance ratio tests, Kim, J. H. (2006). Wild bootstrapping variance ratio tests. Economics Letters, 92(1), 38-43. This paper presents that wild bootstrap is one of the measures for improving small size property of variance ratio test. The study discovered that wild bootstrap tests have required size properties and reflect a higher power compared to their alternatives in most cases.
  • Bootstrapping a regression equation: Some empirical results, Freedman, D. A., & Peters, S. C. (1984). Bootstrapping a regression equation: Some empirical results. Journal of the American Statistical Association, 79(385), 97-106. This present paper bootstrap as a technique for approximating standard errors.  The main concept of this study is to present the bootstrap in the form of an econometric equation that describes the demand for energy by industry.

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