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Anabela Schinck 1, Soumodip Sarkar 1,2

1 CEFAGE-UE 2 Department of Management, University of Évora, Portugal

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Financial Bootstrapping: a critical entrepreneurship skill

Anabela Schinckb

Soumodip Sarkar 1, a, b

aDepartment of Management, University of Évora, Portugal

bCEFAGE-UE

1 Corresponding author. Email: ssarkar@uevora.pt

2

Abstract

Bootstrapping finance involving the use of resources to start and

grow a venture at the lowest possible or even at no cost, acquires

especial significance in times of a credit crunch. In this paper we

explore, for the first time the use of bootstrap finance techniques in

a small country European case. Based on a sample of ninety-nine

Portuguese firms we first determine the most popular bootstrapping

strategies, and then we test a set of hypotheses involving several

socio-demographic and economic variables, some for the first time

in the literature. The results yield some very interesting insights on

small business strategies of non-conventional methods of financing.

This paper also reveals how these strategies are related to

characteristics of the small business owner, namely gender and

education, as well as two business characteristics of the firm, that

of firm size and internationalization.

Keywords – Entrepreneurship; financial bootstrapping; small firm financing

JEL Classification – L26, M13, G31, G32

Introduction

An entrepreneur must be able to coordinate resources in a successful way, using for that specific

skills. Brush (2008) lists three main skills that influence the ability of entrepreneurs to reach

success: these are visioning, bootstrapping and social skills. In this paper we focus on the second of

these three skills, bootstrapping.

Small businesses especially those operating in smaller markets, are often not in the radar of

venture capitalists, and their higher transaction costs translates into higher financial costs (Storey

1994), obligating recourse to alternative forms of financing. In this paper, financing of small

businesses, in a small European country, Portugal, is analyzed. The study of financial bootstrapping

is a complete new issue in the country so this work is extremely important to tame, for the first

time, the country reality regarding this area of knowledge. On the other hand, after knowing better

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our firms’ reality, we test several hypotheses in order to better understand relations between a set of

variables and the use of financial bootstrapping methods. This will allow us to better understand

who really uses these financing strategies.

Our study defines bootstrapping as the skilled art of being able to use resources, start and

grow a venture at the lowest cost possible (or at no cost), not relying on long-term financing. To

achieve this often requires the use of several methods selected by owner-manager, according to the

characteristics and needs of the individual firm. This can be an important way for a small business

to gain competitive advantage by developing an internal philosophy where it is accepted and known

that every cent counts and should be used the optimum way possible.

The paper is organized as follows. First we provide a literature review presenting the key

aspects of bootstrapping, including its relation and importance to small firms, as well as the

methods and techniques most frequently employed by owner-managers. Then in section 3 we

present the research design with the two principal questions of the study- which financial

bootstrapping methods are most used and the characteristics of bootstrappers. This section also

presents the set of four hypotheses to be tested, followed by the data collection process. In section 4,

we present the results including that of the four hypotheses tested, and finally section 5 discusses

the conclusions.

Literature Review

Bootstrapping

The need for finance for both current as well as capital requirements can be one of the most

challenging aspects for firms, especially start-ups and small businesses. The current pessimism

regarding prospects of economic growth, coupled with a credit crunch increasingly adds pressure on

the owner-manager to explore less expensive solutions for their financial requirements.

Given that most small firms don’t work under the same conditions as large firms, with the

former having special difficulties in access to credit, raising capital can be an ardous task. Small

firm financing is often difficult due to the higher level of associated risk and due to the lack of

guarantees that can be given to investors. Owing to these constraints firms are forced to engage in

practices that include negotiating, sharing or borrowing in order to be able to have a larger control

of their external environment. Jennings and Beaver refer to the inability of small firms to control the

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external environment and also their limited capacity to forecast, even if it’s for a small period (cited

in Ekanem 2005, 300).

Bhide (1992) was one of the first authors to seriously consider bootstrapping – tapping less

conventional financing techniques, and its potential to help small firms and start-ups in their first

steps. According to this author entrepreneurs choose to bootstrap to minimize the need for financing

or to achieve it at low cost, without relying on bank expensive financing.

As referred by Sherman (2005) bootstrapping can be seen as an art. This takes us to the real

question – that to achieve success, entrepreneurs need to manage cash in a resourceful manner.

More than an art, a philosophy or a way of life, bootstrapping is a also skill (Bhide 1992; Sherman

2005). Freear, Sohl and Weltzel (1995) considered the concept of bootstrapping beyond the earlier

stages of start-ups. For these authors bootstrapping is also important in the firms’ rapid growth

stages to acquire resources in a creative way. This ability to think creatively allows, in the end, the

entrepreneur to achieve financing using non-conventional sources.

Some advantages of bootstrapping identified by Van Auken (2004, 2005) include: 1) easy to

obtain financing; 2) convenient; 3) associated with minimum requirements; 4) doesn’t require the

preparation and presentation of a business plan or collateral (Van Auken 2004). On the other hand it

was also pointed out, (Van Auken 2004), that for some small firms, with limited viability, easy

access to bootstrap financing turns into a disadvantage when one considers that a firm without a

fundamentally sound structure succeeds in self financing and thus stays in the market for some time,

even without fundamental viability.

With respect to the motives for using financial bootstrapping, the three motives most

frequently mentioned were lower costs, lack of capital and risk reduction. Besides these, other

motives include – the possibility to manage without external finance, saving time, increased work

satisfaction, freedom of action, a desire to learn, trust in relatives and friends and to gain legitimacy

(Winborg 2009).

The practice of bootstrapping among small firms

A wide variety of bootstrapping methods are available for firms. The use of several methods as a

source can be undertaken individually or as a complement to other traditional sources of financing.

Harrison and Mason (1997) found that between 80 to 95% of all small firms used one or more

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bootstrapping method/technique (Ebben and Johnson 2005). Harrison, Mason and Girling (2004)

describe that bootstrapping strategies can assume two forms. First it involves creative ways of

acquiring finance without recourse to banks or raising equity from traditional sources (Freear, Sohl

and Weltzel 1995). This easier option of financing is associated with reducing costs associated with

standard bank loans or other institutional sources commonly used, most of them proving to be much

too expensive for small businesses and start-ups. . The second form includes strategies for

minimizing or eliminating the need for finance by securing resources at little or no cost (Winborg

and Landstrom 1997).

The several strategies, from which a bootstrapper can opt for, can be considered under two

different contexts – before/during the initiation of activity, and after this stage, when the company is

already in the market and needs to overcome some of the financing obstacles.

Sherman (2005) lists some techniques and strategies that are preferentially adopted by the

entrepreneur. It is important to note that many of these are not only related to the initial stage of a

firm, but presented as a golden rule in the development of all operations, and should be considered

at all stages of firm development. A bootstrapping entrepreneur knows that the firm can and should

be launched without delay: it is a frequent strategy that allows all operations to start within a short

period and with only enough amount of initial research (Sherman 2005). The bootstrapper decides

to launch into the market with the aim of generating immediate cash flows even if long-term goals

are neglected. They also rely on a customer’s loyalty relationships and referrals, since they are the

cheapest form of advertisement possible (Sherman 2005).

In the very beginning of a firm´s life it can be very important to recognize how goods can

have different grades of importance regarding the stage of development of the firm. This means that

what can be considered to be trash to one firm can be a treasure for another. A good could be used

as a new resource for a firm or as a shared resource by two or more companies.

Following Winborg and Landstrom’s clusters, in this paper we follow the six bootstrapping

methods (Winborg and Landstrom 2000). These strategies cover the majority of the activities

usually understood as bootstrapping:

1) Delaying Payments

2) Minimizing Accounts Receivable

3) Minimizing Investment

4) Private Owner Financing

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5) Sharing Resources with Other Businesses

6) Use of Government Subsidies

If a firm needs to pay an account within a specific, relatively short-term period, there are

some strategies that fit within the first category of “delaying payments”. A good strategy may

involve negotiating some specific terms with suppliers, such as extending the average payment

period. This can be seen as an effective technique to reduce short-term expenditure. This category

can also involve negotiations with regards to equipment leasing, under better terms that would

allow allocating the value expended, through a longer period. By decelerating outflows, the money

can be used to meet other requirements within the firm.

A similar approach can be found in the category of “minimizing accounts receivable”.

Ideally a firm would want its clients to pay as soon as possible or even before the delivery date of

the goods and services, to get cash in hand. It becomes necessary to choose customers who pay

quicker at the expense of those who are commonly considered to be bad payers. Other techniques

referred to by Winborg and Landstrom (2005) include speeding up of invoicing, interest charges on

overdue accounts or ceasing business relations with late payer to be sure that the company’s best

interest is fulfilled.

The option of “minimizing investment” could be very relevant to the bootstrapper where

some strategies include buying used equipment at lower cost, asking for a considerable discount for

cash or even hiring temporary staff. It can be important to develop negotiation skills and use them

to get better terms from suppliers.

Human resources management is another important area where bootstrapping can be used.

This is an important and sensitive area of a firm, since a large part of its budget is dedicated to the

payment of its human resources as well as being the core of all the produced work. A bootstrapper

will use “private owner financing”, such as the resources of family and friends to work with low or

no salary, or providing free work, in order to reduce costs. Obtaining loans from family and friends

is also a good technique, as well as the use of personal credit cards for small amounts. Also,

whenever possible working from home, teleworking, can be a good strategy to completely eliminate

the cost of renting a commercial space.

When all of these are not possible or when the firm needs an additional option, sharing

resources with other businesses becomes another viable possibility to be considered. This type of

sharing is related either to physical space or to the sharing of a wide variety of goods and

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equipment, sometimes even sharing human resources (Neeley 2003). At this point one can consider

different approaches, related to the purchase of raw materials or other materials together with other

firms and thereby minimizing the costs associated with transportation, storage and even getting

volume discounts. This opportunity can be considered as a way of establishing partnerships between

firms, in a somewhat symbiotic relation, where both could benefit from the best advantages

possible. Partnerships can provide great advantages, especially considering that small firms

generally have far fewer resources.

With regards to the European Union context, and specifically for the relatively poorer, small

country case of Portugal, it is possible for firms to use “government subsidies” that could be

assigned to specific business areas, under particular conditions. These subsidies can be achieved

either directly from the state or from specific European Union programs, according to the area that

is being considered and the needs of the firm.

Factoring in the temporal dimension, according to Ebben and Johnson (2005), it is expected

that categories “delaying payments”, “minimizing accounts receivable”, “minimizing investment”

and “private owner financing” would tend to increase over time. This last owner related set of

techniques might decrease if there is an increase in the sources of financing outside of the small

firm. On the other hand if these are used in addition to techniques involving delaying payments,

their usage tendency would increase. Some authors consider the possibility of “sharing resources

with other businesses” to decrease over time as it is expected that a firm, as long as it starts to be

able to reach other sources of financing, they start to rely less on strategies that involve sharing

resources (Ebben and Johnson 2005, 857).

Method

This is the first empirical study conducted in the small country case of Portugal focusing on the use

of bootstrapping methods. Besides analyzing bootstrapping strategies, this paper also explores how

these strategies are related to other characteristics of the small business owner, namely gender and

education, as well as the business characteristics including firm size and internationalization.

The small European country case of Portugal, with low growth (and dim growth prospects),

high unemployment coupled with difficulty for small businesses in obtaining credit, is an

interesting case study given that while economic slowdown is a generalized phenomenon in the

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OECD context the economic and consequential financial crisis in Portugal is particularly acute.

Bank credit is generally constrained and for small firms, acquisition of capital is especially

problematic.

The design of the study can be considered in two different stages. In the first stage we

analyze the financial bootstrapping methods used by owner-managers. The survey questions were

based on Winborg and Landstrom’s previous research (Winborg and Landstrom 2000), adapted to

the Portuguese small business reality. We tested several bootstrapping methods studied identified

by these authors as well as other methods that were adapted to the Portuguese context, mainly

considering the use of subsidies and grants for innovation. Following the determination of the most

popular bootstrapping methods we then proceed to create a clustering division to better understand

this small country case.

In the second stage, we proceed to analyze a set of hypotheses involving owner and firm

characteristics, together with the use of financial bootstrapping. The following set of four

hypotheses would be tested, the first two involving owner characteristics and the next two involving

firm characteristics:

H1 – Women tend to use more often financial bootstrapping methods than men

Women entrepreneur´s ability to bootstrap was a focus of attention of several authors (Hill, Leitch

and Harrison 2006; Brush, Carter and Gatewood 2006), with Carter, Brush and Greene (2003) the

first to analyze differences between genders and the use of financial bootstrapping methods. They

advocate that women use personal or family funds more often than men to finance their own

business. This comparative analysis between genders and its relation with the use of financial

bootstrapping methods has had so far few empirical contributions, in which this paper aims to

further contribute.

H2 – Entrepreneurs with higher education levels tend to use more often financial

bootstrapping methods

It is known that higher education levels of small firm owners have a positive influence on the

capacity to raise funds, consequently, better access to capital (Carter, Brush and Greene 2003),

including in terms of the opportunity to start own business (Neely and Van Auken 2010). A

determinant variable studied by several authors, albeit only for descriptive analysis, was the level of

education of small business owners. The statistical relation between education and the use of

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financial bootstrapping methods however was previously only studied by Neely and Van Auken

(2010). They explored this relationship and found a positive direct relationship: highly educated

entrepreneurs use more financial bootstrapping methods than less educated.

H3 – Small firms tend to use financial bootstrapping methods more often than larger firms

Most research on bootstrapping was conducted considering small firms (Winborg and Landstrom

2000; Van Auken 2004; Ekanem 2005), probably motivated by the initial capital investment to be

made, mostly, by personal equity (Van Auken 2004). Research findings show that larger firms

report overall higher use of financial bootstrapping methods when compared with smaller firms,

regarding methods related with product development. However in the methods related to business

development, higher utilization levels were found for small firms (Harrison, Mason and Girling

2004).

H4 – Firms’ with internationalization activities use more financial bootstrapping methods

This relationship between internationalization and financial bootstrapping has hitherto not been

explored in previous studies. Firms with more international activities are also the ones less

conservative with respect to the use of bootstrapping financing methods. It is expected that firms’

with internationalization activities have different financial needs which, considering the current

economic context, can mean that also have the need to seek low-cost financing, thus use more

financial bootstrapping methods.

Questionnaire design

The survey was carried out in 2009 via a four-part questionnaire that was used to gather information

about bootstrapping practices used by small firms in Portugal. It was based on an analysis of the

literature review, however mostly on Winborg and Landstrom’s prior research on bootstrapping

methods. Other sources were used regarding questions on entrepreneurial characteristics,

internationalization and innovation behaviour.

The questionnaire contained four sections:

1) The first section asked about individual characteristics of the firms’ founders (age, marital status,

gender, among others);

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2) The purpose of the second section was to gather information about the small business: essentially

firm legal typology, existence or not of joint-stock in the setting up of the firm, turnover and capital

structure;

3) The third part included questions related to the firm’s innovative capacity, the introduction of

new innovative products in the market;

4) The last section intended to explore financial bootstrapping methods currently used by managers

and their knowledge about the concept. A twenty four-item Likert scale considering the utilization

of financial bootstrapping methods by the firm was included.

Data gathering process and sample

We performed several tasks related to the pre-test and validation of the questionnaire. First, the

validity of the constructs was assessed with the cooperation of academics belonging to the

university of the authors. Then, a pilot test was conducted with 10 firms of varying sizes and sectors

to ensure clarity and their relevance, to assure accuracy and content validity.

To select the sample, a national database of more than 100000 entries (INE) considering

micro, small and medium national firms, was used. From this database, a sample of 2000 firms was

randomly selected.

The questionnaire presented was designed and sent to the manager of the firm, which in

most cases was also the firm owner. To allow for the answer to be delivered more quickly, the

questionnaire was sent by e-mail and also made available online through the use of a web-site.

Some questionnaires were delivered personally to managers participating in technological or

business fairs, in 2009, in Portugal.

From all the questionnaires sent, considering a response rate of 13.95%, a total of 279 were

received and, from this list only 99 answers were considered valid (mostly due to excessive missing

values). From all answers considered, only two missing values were observed, so there was no

evidence of non-response bias.

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Results and discussion

The data was first subjected to univariate statistics (means and frequencies) in order to provide a

better understanding of the sample. The distribution of the variables is presented in Table 1 below.

Table 1 – Sample description

Sample (%) Sample (%)

Firms' size Country Zone Micro 82.8 Alentejo/Algarve 15.1 Small 13.1 Azores/Madeira 2.0 Medium 4.0 Beira Litoral 12.1 Development stage Estremadura e Ribatejo 45.6 Introduction 54.8 Minho e Douro Litoral 23.2 Expansion 45.2 Trás-os-Montes e Alto Douro 2.0 Founder’s academic level Firm legal typology Less than 4 years 7.1 Individual entrepreneur 13.1 4 to 9 years 4.0 Sole proprietorship 18.2 9 to 12 years 24.2 Limited company 62.6 University degree 41.4 SA (Corporation) 5.1 Pos graduate study 10.1 Other 1.0 Masters 11.1 Subsidiaries abroad PhD 2.0 Yes 4.0 Gender No 96.0 Male 77.8 Export activities Female 22.2 Yes 33.3 Prior experience as entrepreneur No 66.7 None 8.2 Innovation activities (in three previous years) More than one 91.8 Yes 45.5 Profits (in previous year) No 54.5 No profits 37.4 Introduction of an innovative product (in 3 previous years) Less than 15% 38.4 No 49.5 Exceeding 15% 24.2 Yes (Market needs research) 31.3 Yes (developing new technology) 19.2

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The entrepreneurs were mostly males (77.8%) and had an average of 35 years at the time of

start-up with firm headquarters mostly located in the capital, the Lisbon area (45.6%). The most

represented business area was "wholesale and retail trade industry (repair of motor vehicles and

motorcycles) at 28.3%, followed by “Professional, scientific and technical activities” at 23.2%. At

the time of the firms’ installation, 64.6% of the founders had a bachelor degree or higher. Firm’s

size was considered according to the Portuguese Law (DLnº 372/2007. 6th November).

With regards to market localization, all of the respondents reported selling in the Portuguese

market, with 65.7% of them exclusively so. Outside of Portugal, the most common countries of

internationalization were within the European Union, especially neighboring Spain.

With regards to the need for external capital, the entrepreneurs admitted to its need towards

the following ends (Table 2):

Table 2 – Need for external capital

Yes No (%) (%)

Bank Capital 24.7 75.3

Equity capital increase 35.6 64.4

Capital that brings expertise 27.4 72.6

Capital that brings market knowledge 27.8 72.2

These results show that firms face the need for funding, regardless of the purpose. We

pretend to find out what importance bootstrapping will have as a funding option.

After the sample descriptive analysis, we then focused on financial bootstrapping methods

used by the firms. First a variable cluster analysis was performed, allowing the grouping of

financial bootstrapping methods into categories of likeness and then hypotheses testing were

conducted with analysis of variance (ANOVA) and t-test (difference of means). All results are

presented with a confidence interval of 95% (p-value < 0.05).

Focusing on the first part of our research question, financial bootstrapping methods will now

be explored in some detail, with the aim of uncovering which of these are practiced by Portuguese

small business owners.

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To begin with, we found that 83.8% of the small business owners surveyed didn’t know that

the expression “financial bootstrapping” described the ability to raise funds using less expensive

and non-conventional methods. As an overwhelming majority of the entrepreneurs didn’t recognize

this expression or its significance, it is an interesting indicator in that the use of these methods is

done instinctively, according to their needs and own experience and not as a formal financing

method.

Financial bootstrapping methods were presented to firms’ owners on a twenty-four item

Likert scale. Our aim was to discover which of the financial bootstrapping methods were used by

them at least once and which of them were never used. These questions were mostly based on

Winborg and Landstrom’s previous work to which we added some specific questions adjusted to the

Portuguese reality, particularly with regards to the use of subsidies, support from the government,

as well as the use of idea competitions. Bootstrapping practice by Portuguese small businesses are

as follows:

Table 3 – Financial bootstrapping methods used by Portuguese managers

Financial bootstrapping method The firm has used The firm has never used

(at least once)

Buy used equipment instead of new 45.5% 54.5%

Use borrowed equipment from others 44.4% 55.6%

Hiring temporary instead of long-term workers 60.6% 39.4%

Use of interns at no cost or low cost 51.5% 48.5%

Purchasing process coordinated with other firms 47.5% 52.5%

Leasing of equipment 57.6% 42.4%

Practice trade instead of selling or buying 56.7% 43.3%

Offer discounts to those who pay cash 52.5% 47.5%

Buying on consignment 36.4% 63.6%

Having the best conditions possible with suppliers 88.9% 11.1%

Delayed payment to suppliers 52.5% 47.5%

Withhold manager salary if necessary 59.6% 40.4%

Use of manager’s private credit card 45.5% 54.5%

Tasks or jobs in other companies 54.1% 45.9%

Get payments from customers in advance 52.5% 47.5%

Get capital from a “factoring” firm 15.3% 84.7%

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Loans from family and friends 32.3% 67.7%

Delaying payment of VAT 18.2% 81.8%

Subsidies and support from Social Security or IEFP*44.4% 55.6%

Grants for innovation such as those from ADI**,

NSRF, FINICIA and others 26.3% 73.7%

Use of Business Angels 7.1% 92.9%

Use of Venture Capital 7.1% 92.9%

Use contests of ideas to obtain financing

& advertising 25.3% 74.7%

Use of outsourcing for projects that exceed

the company's resources 46.5% 53.5% Note: *IEFP: Institute of Employment and Vocational Trainning; **ADI: Innovation agency

With the exception of accessing venture capital and business angels (which going by our

definition and those of most authors, may not be considered bootstrapping) most bootstrapping

measures were applied by small business owners, with obtaining the best possible conditions from

suppliers an overwhelmingly applied technique.

Instead of adopting the six-factor classification proposed by Winborg and Landstrom (2000)

and later assumed as given and used by other authors (Ebben and Johnson, 2005; Van Auken, 2005;

Carter and Van Auken, 2005), we chose to first perform cluster analysis to the variables included in

the financial bootstrapping methods’ Likert scale. Our decision is related with the fact that financial

bootstrapping methods used in our Likert’s scale were not exactly the same as those used by the

referred authors, but adapted to the Portuguese reality. This could lead to a different clustering

alternative between methods as we later verified. All financial bootstrapping methods were

clustered in four groups, using variable clustering:

Table 4 – Variable clustering of financial bootstrapping methods

Cluster Financial bootstrapping method

Cluster 1 - Use of interns at no or low cost

Methods involving the acquisition - Use of Business Angels

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of subsidies and investors - Grants for innovation such as those from ADI, NSRF,

FINICIA and others

- Use idea contests to obtain financing and advertising

- Subsidies and support from Social Security or IEFP

- Use of Risk Capital

Cluster 2 - Purchase process coordinated with other firms

Methods involving firms’ internal - Delay payment to suppliers

Management processes - Use of outsourcing for projects that exceed the company's

resources

- Tasks or jobs in other companies

- Get payments from customers in advance

- Buy used equipment instead of new

- Use borrowed equipment from others

- Hiring of temporary instead of long-term workers

- Loans from family and friends

Cluster 3 - Withhold own salary if necessary

Methods involving delaying costs - Use of manager’s private credit card

- Delay payment of VAT

Cluster 4 - Leasing equipment

Methods used to minimize - Get capital from a “factoring” firm

Investments - Practice trade instead of selling or buying

- Offer discounts to those who pay cash

- Buying on consignment

- Having the best possible conditions with suppliers

These results would help us to describe and better understand financial bootstrapping

practices in our population. Since we did not use exactly the same methods suggested by Winborg

and Landstrom, our clustering division provided us with four groups.

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A first cluster, containing methods involving the acquisition of subsidies and investors, can

be easily compared to Winborg and Landstrom's sixth category. Even though they only included

government subsidies, our questions were broader and included not only government subsidies but

also ideas competitions and the use of risk capital or business angels.

Clustering together methods that involve firms' internal management processes allowed us

to group all financial bootstrapping methods related to internal policies, such as human resources,

logistics or even financial management. In fact, these methods are considered by the other authors

as methods used to minimize investment and private owner-financing, However this can be grouped

logically as part of the firm's internal management processes.

Related to both delaying payments and private owner-financing, our third cluster includes

the use of three methods mainly used to reduce short-term costs. Finally our last cluster, “methods

used to minimize investments” includes methods defined by Winborg and Landstrom with the same

designation and also some included by them as “sharing resources with other businesses”. The main

goal of this method is to minimize investment made by the firm, therefore considered appropriate to

be included in this last cluster.

The second part of our research question involved the testing of a set of hypotheses

involving several socio-demographic and economical variables relating to financial bootstrapping

practice.

H1 – Women tend to use more often financial bootstrapping methods than men

In our sample, we found that women are more likely to bootstrap than men (p = 0.034) reinforcing

the results obtained by Neeley and Van Auken (2010).

Table 5 – Use of financial bootstrapping methods by gender

Male Female

(average value) (average value) p-value

Methods involving the acquisition

of subsidies and investors (Cluster1) 1.7 2.1 0.135

Methods involving firms’ internal

management processes (Cluster2) 2.3 3.1 0.001

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Methods involving delaying costs (Cluster3) 2.4 2.3 0.807

Methods used to minimize investments (Cluster4) 2.8 2.7 0.676

All methods 2.3 2.7 0.034

Looking in detail at each of the four methods, results show that women use more methods

involving firms’ internal management processes (p=0.001). Neeley and Van Auken (2010) found

that women use more methods associated with conserving cash or improving cash flows and,

similar to what we found, women tend to use less methods that include delaying costs.

H2 – Entrepreneurs with higher levels of education tend to use more often financial

bootstrapping methods

In our study sample we found that higher utilization of financial bootstrapping methods exists

among lower educated managers, statistically significant (p = 0.012) considering methods used to

minimize investments. Regarding all other methods’ clusters there was not find any statistically

significant relation.

Table 6 – Use of financial bootstrapping methods by managers’ level of education

Cluster 1 Cluster 2 Cluster 3 Cluster 4 (average value) (average value) (average value) (average value)

Less than 4 years 1.7 2.2 2.4 2.9 4 to 9 years 1.7 2.7 3.2 4.2 9 to 12 years 1.4 2.4 2.3 3.1 Degree 1.9 2.3 2.3 2.6

Post graduate Study 2.1 3.1 2.6 3.1

Masters 2.1 2.5 2.2 2.0

PhD 2.3 2.9 2.7 2.0

p-value 0.408 0.377 0.937 0.012

H3 – Small firms tend to use financial bootstrapping methods more often than larger firms

Considering the number of medium firms in our sample we decided to create only two groups of

firms: micro and small/medium.

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We find the use of bootstrapping methods with higher levels of utilization by larger firms however,

no statistically significant relation was found. The same question was studied by Harrison, Mason

and Girling (2004) and also by Willoughby (2008) with similar results: these authors found that

small firms are more likely to use these methods in order to overcome financial needs. This

strengthens the clear difference between firms: micro, small and large firms have different financial

needs and can follow different strategies to achieve. It is worthwhile to note the possible influence

of cultural, economic and social factors in a country context when studying bootstrapping

techniques.

Table 7 – Use of financial bootstrapping methods by firms’ dimension

Micro Small/Medium

(average value) (average value) p-value

Cluster 1 1.8 1.8 0.928

Cluster 2 2.4 2.5 0.848

Cluster 3 2.4 2.3 0.794

Cluster 4 2.7 3.2 0.123

All methods 2.4 2.5 0.520

Large firms tend to use more financial bootstrapping methods, as verified by the average use

of two of our clusters: methods used to minimize investments are a clear option for large firms as

well as those involving firms’ internal management processes. Larger firms should have a better

internal organization regarding all its internal processes, avoiding thus unnecessary costs and this is

reflected in the use of financial bootstrapping. Moreover, all large firms’ financial management

tends to be more complex compared to a small firm and this prompts the need to make higher use of

financial bootstrapping methods.

H4 – Firms with internationalization activities use more bootstrapping methods

This is another area where our study is a first in the literature on small firm bootstrapping finance,

where we explore the linkages between internationalization and bootstrapping. We find that firms

which have export activities use more bootstrapping methods (p = 0.026) and, likewise, those that

have subsidiaries abroad (p = 0.005). The certain “proactiveness” that is latent in small firms that

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internationalize is also evident in the use of non conventional financing methods, that are inherent

in bootstrapping finance.

Table 8 – Use of financial bootstrapping methods by internationalization activities

Export Activities Subsidiaries Abroad Yes No p-value Yes No p-value

Cluster 1 2.1 1.7 0.038 3.0 1.8 0.392 Cluster 2 2.6 2.4 0.516 3.5 2.4 0.055 Cluster 3 2.7 2.2 0.077 2.8 2.3 0.512 Cluster 4 3.1 2.7 0.033 3.9 2.8 0.032 All methods 2.6 2.1 0.026 3.4 2.3 0.005

Both firms that started export activities and have subsidiaries abroad use more methods used to

minimize investments (p=0.033; p=0.032) and those with export activities use more methods

involving the acquisition of subsidies and investors (p=0.038).

Conclusions

Small firm financing for both current as well as capital requirements, can be one of the most

challenging aspects for small businesses. In a small country context, with economic difficulties

coupled with a credit crunch, there is an immense pressure on owner-managers to explore less

expensive solutions for their financial requirements.

Financial bootstrapping therefore requires the entrepreneur to “corral resources, steal

personnel time, conceal development activities, and curry personal favors to secure the resources

needed for their new ventures” (Starr and MacMillan 1990, 81). Despite its importance, this area

has been subjected to limited analysis, especially when one takes into account not only the

strategies used, but also business owner as well as firm characteristics associated with

bootstrapping.

Using a sample of 99 firms, the paper first analyzed the strategies used and then in the

second stage, using variables such as gender, level of education, firm dimension and

internationalization, the paper corroborates previous work in some areas and sheds new light on

others. We go further in exploring in detail bootstrapping methods, with a clustering division

adapted to this small country reality, and at same time, seeking a better understanding of the

manager and firms' characteristics, using statistical inference.

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The firms in our sample were mostly micro (82.8%), in a newly created or expansion stage

with the owners mostly males with a bachelor degree or higher. These firms were located mainly in

Lisbon, followed by the north of the country. Their market is mostly domestic, however slightly

more than a third had export activities in several countries, mostly within the European Union and

especially in Spain.

With respect to the use of bootstrapping as a financing mechanism, we found that 83.8% of

the sample did not know the expression financial bootstrapping to describe the ability to raise funds

using less expensive and non-conventional methods. However, all of them use at least one

bootstrapping method: having the best conditions possible with suppliers as the most used method

(88.9%) while the use of Business Angels or recourse to risk capital were much less prevalent

(7.1% each).

Between the perception of what financial bootstrapping is, and its effective use by

Portuguese firms, the results obtained should however, be treated with some caution. The specific

example for this observation is related to questions such as “delaying the payment of VAT”, “hiring

temporary instead of long term workers” or even “use of interns at no cost or low cost”, can induce

the owner-manager to provide a socially acceptable answer since he does not want to publicly

acknowledge failure to pay timely legally required taxes or to disclosure its human resources policy.

All bootstrapping methods explored were found to be clustered into four groups: 1) Methods

involving the acquisition of subsidies and investors; 2) Methods involving firms' internal

management processes; 3) Methods involving delaying costs and 4) Methods used to minimize

investments.

Our clustering division has some differences when compared to the Winborg and Landstrom

classification. All methods were included in different groups, except for our second cluster

“methods involving firms' internal management processes” which includes more heterogeneous

methods but all related to the internal management of the firm.

We found that, as already found by Carter, Brush and Greene (2003), women are more

likely to bootstrap than men.

For the first time in this literature, we found that firms that had export activities use more

financial bootstrapping methods as well as those that have subsidiaries abroad. This is the first work

to show a connection between the propensity to internationalize with that of the practice of

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bootstrapping. As internationalization can be an important factor of competitive advantage for

firms, it would be important to explore in more detail in future studies, as to how this factor induces

the increased use of financial bootstrapping methods.

Although this study is a first not just in the country coverage, but also in terms of the

hypotheses involved, we believe that a larger sample, would have allowed an even better

understanding of the small country reality and even allow us comparing our results with other

European realities. An alternative might be to consider a business area and explore bootstrapping

practice only in this specific business area. Another drawback of our study was that the data was

collected in a single point in time and this doesn’t allow an understanding of the existence of

differences across firms’ life cycles or even the country’s economic cycle. With a larger sample, a

longitudinal study could have provided better this information. Despite the drawback of the sample

size, the scope of the study where multiple factors were studied, including gender, education levels,

innovation as well as internationalization in understanding bootstrapping methods, make this an

important contribution to our understanding of non-conventional financing methods.

22

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Acknowledgement:

We are grateful to Ricardo Melro, for his invaluable assistance in helping with the survey, both for

the pretests as well as the data collection.

We are also grateful to the Science and Technology Foundation (FCT) of the Ministry of Science

and Technology of Portugal for support to carry out research for this paper under the program

FEDER/POCI 2010.