Beyond environmental scarcity
Bootstrapping as smart entrepreneurship
Acquiring resources to pursue opportunities is a key challenge in the entrepreneurial process: you have the idea, now how do you fund its realisation?
Vlerick Professor of Corporate Finance, Sophie Manigart, and colleagues have conducted a study and published a paper* to deepen our knowledge of an approach to acquiring funding called ‘bootstrapping’.
In the literal sense of the word, ‘bootstrapping’ is pulling yourself up to a standing position by tugging on your own bootstraps – the little loops (or straps) of leather that help you pull boots on. The term has come to mean getting a new venture up and going without external help.
Entrepreneurship scholars identify bootstrapping as a strategy for acquiring resources that start-up entrepreneurs use to overcome resource constraints in their environment. Key assumptions in discussions of bootstrapping, however, are that bootstrapping is an approach driven by environmental necessities, and that the entrepreneur who resorts to bootstrapping is unable to acquire funding in any other way.
Bootstrapping is not for dummies
Prof Manigart and her colleagues analysed the bootstrapping behaviour of 298 start-up ventures and found that, beyond perceived environmental factors, the individual characteristics of the start-up entrepreneurs, and factors relating to how ‘embedded’ the entrepreneurs are in their environment, determine the entrepreneurs’ bootstrapping behaviour.
The authors explore the relevance of an entrepreneur’s human capital (academic education and entrepreneurial and managerial experience) and social capital (further distinguishing between strong connections and weak connections). They find that the use of bootstrapping strategies in start-up ventures is an individual entrepreneur’s choice beyond what a venture’s environment dictates.
What inspired the study?
Sophie Manigart: “One of the major problems that entrepreneurs face when they want to build a growth-oriented venture is securing sufficient resources. Usually, they first think of funding from traditional sources. But what they frequently overlook is that, within their own way of organising, they can achieve many of their goals without raising a lot of money.
“But, of course, this approach – starting with as little money as possible – runs counter to the more ‘heroic’ route of raising money from a venture capital investor or a business angel. In fact, in continental Europe, an entrepreneur who starts small is regarded as lacking ambition.
“What we find is that it’s not an either/or choice, but rather that clever entrepreneurs combine external funding with bootstrapping activities. Bootstrapping is a skilful method of organising and creatively using limited resources – it’s not a tactic for second-rate entrepreneurs who have no other alternative.”
Key findings for practitioners
- Perceived environment:
The study’s first finding is that start-up entrepreneurs will engage in bootstrapping activities when they perceive the environment in which they are operating as hostile to raising funding.
The researchers find that the entrepreneur’s perception of business environments as hostile (or with insufficient access to external financial capital) leads to a higher propensity to engage in bootstrapping activities. This suggests that accessing resources through bootstrapping strategies supplements market-based resource acquisition strategies in start-up ventures.
- The entrepreneur’s individual background:
The second finding is that bootstrapping activities are largely a result of the entrepreneur’s individual background – specifically, when the entrepreneur has higher levels of human and social capital.
Entrepreneurs with greater levels of human capital in different areas employ more bootstrapping activities. In addition to environmental constraints, their behaviour is driven by who they are, who they know, and what their experience has been.
Entrepreneurs with managerial experience, and those who have pursued higher academic education or specific business training, engage in bootstrapping to a greater extent. This shows that both specific experiences and education can affect bootstrapping. However, surprisingly, it appears that, with regard to preferences and abilities to engage in bootstrapping or to engage in alternative approaches to acquiring resources, prior entrepreneurial experience does not have a strong impact.
Moreover, with regard to the social capital of start-up entrepreneurs, when they have a lot of connections with the business community, they will typically engage much more strongly in all kinds of bootstrapping activities. These entrepreneurs draw especially on their weak connection network for bootstrapping activities, but not on their strong connection network. These findings supplement previous research that states that start-up entrepreneurs with more contacts are more likely to launch and successfully establish new ventures.
The researchers conclude that entrepreneurs have decisive influence on the destiny of their start-up ventures and should be placed centre stage in the strategy-formulation process in which bootstrapping appears to play a central role.
Professor Sophie Manigart
By skilfully organising and creatively using limited resources, entrepreneurs can achieve many of their goals without raising a lot of money.
* “Beyond Environmental Scarcity: Human and social capital as driving forces of bootstrapping activities”, by Dietmar Grichnik, Institute of Technology Management, University of St. Gallen (Switzerland); Jan Brinckmann, ESADE Graduate School of Business (Spain); Luv Singh, WHU – Otto Beisheim School of Management (Germany); Sophie Manigart, Vlerick Business School and Ghent University (Belgium). Journal of Business Venturing