SID440565536

Entrepreneurial Finance: The Role of

Bootstrapping in EPC Strategic Plan
Carlos A. Monteverde
Sustainability and Business, University of Sydney

1. Introduction
In the domestic and international arena, entrepreneurship serves a catalyst
for economic development and value creation (Kirchhoff 1991, Benneworth
2004, Grilo 2006). EPCs aim is to be that catalyst within remote communities
in Australia. Presently, EPC is an early-stage social enterprise looking to
alleviate unemployment by empowering Aboriginal youth population with
economic opportunity. Based in the city of Broken Hill, EPC combines the
breakthrough potential of clean solar energy technology with a deliberately
youth-centered direct sales workforce to enhance living standards for even the
most remote communities in New South Wales. As a new enterprise with
limited financing options and even more limited capital resources, EPC
currently faces a challenge to launch its operations.
Providentially, one of the most academically-studied functional areas within
entrepreneurship has been entrepreneurial finance. Special emphasis has been
given to venture capital and angel finance as flagship topics within literature
(Fletcher 1995, Harris 1995, Cowling and Westhead 1996, Hamilton and Fox
1998, Cassar 2004, Rouse and Jayawarna 2006, de Bettignies and Brander 2007,
Carter et al. 2007, Franke et al. 2008 cited in Lam 2010). Though relevant,
according to Harrison (2004, p.307) institutional venture capital and business
angel finance are used by only a small proportion of new and growing
ventures.
As a resource-constrained start-up, possibilities are low for EPC to obtain
angel or venture financing at this stage. Accordingly, EPC can wait until they
raise enough money [to start operations] or use their own savings to achieve
some intermediate milestone before contacting outside investors
(Schwienbacher 2007, p. 754). The present report examines the second option
of how EPC may start even with their current limited resources. This paper
also discusses the definition of boot-strapping as a non-traditional funding tool
and its importance as well as its appropriateness in the context of EPC. More
importantly, the paper addresses boot-strapping implementation methods

directed at EPC and their employees along with entrepreneurs and society in
general.
2. What is boot-strapping?
The first reference to financial bootstrapping in the literature define it as a
way of securing the use of resources without relying on long-term external
finance (Freear, Sohl and Wetzel Jr. 1995 cited in Winborg 2009, p. 72).
Further, according to Winborg and Landstrom (2001, pp. 235-36), bootstrapping is defined as the use of methods for meeting the need for resources
without relying on long-term external finance from debt holders and/or new
owners. Likewise, Timmons (1999 cited in Harrison, Mason and Girling 2004,
p. 308) refers to bootstrapping is a way of life in entrepreneurial companies.
Boot-strapping can be segmented in two main forms (Harrison, Mason
and Girling 2004). Freear et al (1995a, b cited in Harrison, Mason and Girling
2004, p. 308) explains that the first form involves creative ways of acquiring
finance without recourse to banks or raising equity from traditional sources.
Further, 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, Winborg and Landstrom 2000, Winborg and Landstrom
2001, Winborg and Johannisson 2001 cited in Harrison, Mason and Girling
2004, p. 308). As one example of how boot-strapping works, entrepreneurs are
unable to raise outside capital, they are restricted to whatever amounts they
can contribute from their own personal savings and attract from family and
friends (Harrison, Mason and Girling 2004, p. 308) in order to grow and start
competing (Smith and Smith 1998 cited in Harrison, Mason and Girling 2004,
p. 308).
3. The importance of boot-strapping
Ebben (2009, p. 349) explains that empirical and anecdotal evidence suggests
that small firms bootstrap out of necessity rather than proactively. In fact,
many small entrepreneurial firms view boot-strapping see it as simply doing
whatever it takes to get by. Considering the inadequate assets of EPC, the
importance of boot-strapping tends to be crucial to their own survival as a
start-up (Ebben and Johnson 2006, Winborg 2001).
In addition, Timmons (1999 cited in Harrison, Mason and Girling 2004, p.
309) argues that bootstrapping strategies can be a major competitive
advantage by creating a discipline of leanness where everyone involved knows
that every dollar counts permeate the firm . Also, the principle of CYE Conserve Your Equity- becomes a way of maximizing shareholder value
(Timmons 1999, p. 39 cited in Harrison, Mason and Girling 2004, p. 309). This
financial self-restraint can prove to be a strong edge for EPC (Timmons 1999
cited in Harrison, Mason and Girling 2004).
Baker et al (2000 cited in Ebben 2009, p. 349) also argued that due to
overconfidence and general inexperience of entrepreneurs, financial capital is
generally not invested wisely when it is available, putting firms at a significant
disadvantage. In the case of EPC, as the company would ultimately be run by
inexperienced people (with no formal education in some cases); boot-strapping

can serve as an important risk-management tool to prevent the squander of

funds. Moreover, Winborg (2009, p. 71) claims that the findings presented by
Winborg (2001) indicate a positive influence on profitability from using some
kinds of financial bootstrapping methods, which adds to its relevance for
social enterprises.
4. The implementation of bootstrapping
Among the main reasons for using bootstrapping as a funding option are
the lower costs for the firm as well as allowing management without incurring
into external finance. According to Winborg (2001), bootstrapping techniques
can be divided into six main areas. The rest of this section shows the analysis
of the different six areas and the way they can be implemented into small firms,
particularly in the EPC context. (Winborg 2001)
(1) Owner-provided financing and resources Winborg and Landstrom
(2001 cited in Ebben 2009, p. 347) points out that common techniques
include withholding the owners salary to bartering for goods or
having family members work in the business. In the EPC case, the firm
would be conformed as a trading cooperative with young individuals
from the Broken Hill community as employees. They would own the
enterprise as well as acting as the main salesforce for the company. By
initially forfeiting part of their salary (in exchange of companys
ownership as well as installation of sample solar systems for their own
households), costs can be decreased while empowering employees at
the same time.
(2) Accounts receivable management methods One of these methods is
trade credit. For example, an EPC supplier would normally extend the
company credit (trade credit) after [being] a regular customer for 30,
60 or 90 days (without charging interest) (Entrepreneur, n.d.).
Nonetheless, within the first few orders, suppliers are going to want
to make every order C.O.D (cash or check on delivery) (Entrepreneur,
n.d.), until EPC establishes their capacity to pay bills on time
(Entrepreneur, n.d.). Entrepreneur (n.d.) explains that while this is a
fairly normal practice, if EPC wants to raise money during the startup period, negotiation for trade credit is key (Entrepreneur, n.d.).
Another bootstrapping method in receivables management is known
as factoring. According to Entrepreneur (n.d.) this is a financing method
where a [company] actually sell [their] accounts receivable to a buyer
such as a commercial finance company to raise capital. A "factor"
would buy EPCs accounts receivable, usually at a discount rate
(Entrepreneur, n.d.). Thus, the factor then becomes the creditor and
assumes the task of collecting the receivables as well as doing all
proper documentation and paperwork (Entrepreneur, n.d.). This
would enhance EPC liquidity and working capital (Entrepreneur, n.d.).
(3) Sharing or borrowing of resources from other firms This bootstrapping
area involves using resources from allied companies as well as having

access to free or subsidized assets such as infrastructure or equipment

(Ebben 2009). For EPC, renting a small office or working from home
would considerably reduce their overhead costs. Ideally, EPC can
negotiate access to the Broken Hills community centre to equip it as
headquarters for their business operations at a minimal or zero cost. In
addition, special deals for access to hardware and equipment can be
negotiated with foundations supporting small businesses. Lastly,
EPCs can bootstrap its operations by turning the planned Sydney
University pro-bono project into their official business plan, reducing
costs in consulting fees.
(4) Delaying payments This strategy may involve EPC negotiating
some specific terms with suppliers, such as extending the average
payment period (Schinck and Sarkar 2012, p. 6). Schinck and Sarkar
(2012, p. 6) explains that this can be seen as an effective technique to
reduce short-term expenses. Also, EPC can negotiate equipment
leasing, under better terms that would allow allocating the investment
through a longer period (Schinck and Sarkar 2012, p. 6). Schinck and
Sarkar (2012, p. 6) also clarifies that by decelerating cash outflows,
EPC can use that money to meet other requirements within the firm.
(5) Minimization of resources through formal routines EPC can also gain a
competitive advantage and improve its profitability at an early stage by
hiring low-cost labour. Also, choosing an industry type that required
low start-up capital such the commercialization of solar panels (as
opposed to PV manufacturing/installation) would help EPC to face
the challenges of every new enterprise.
Further, a tentative step within EPCs strategic plan is to secure a jointventure participation with one established PV installation company.
EPCs employees would act as that companys salesforce in regional
markets in Australia; with the established firm also having the potential
of leverage the alliance as part of their corporate social responsibility
program. On its behalf, EPC would minimize the usage of nonavailable resources (capital-intensive PV, expertise, logistics, training,
etc.) and thus diminish start-up costs.
(6) Use of government subsidies In Australia, the solar PV industry has
been largely subsidized by the Federal and State government. Policies
such as the RET and the emissions trading scheme has been essentially
driving the high demand for PV systems in Australia (SBS, 2014). In
looking for additional funding, EPC should apply to government R&D
and business grants considering its trying to commercialize PV
systems.
The methods analysed so far usually are to be implemented in the early phases
of EPCs operations. As of now, it is predictable that due to lack of established
reputation, operating experience, and other aspects, [EPC] will be more at the
mercy of outside parties compared to more established firms (Ebben and
Johnson 2006, p. 855). As EPC develops, dependencies will change as they
obtain legitimacy with their operations (Ebben and Johnson 2006). As the

capital-constrained EPC becomes a consolidated firm, leverage with banks,

investors, customers, and suppliers may change (Ebben and Johnson 2006, p.
855). Then, Ebben and Johnson (2006, p. 855) propose that the types of
bootstrapping techniques that are available and desirable for the firm may be
then modified in the long-term.
5. How can bootstrapping be learned?
Mainstream entrepreneurship education tends to focus on teaching
entrepreneurs how to get hold of funding. As such, constructing a business
plan which targets external finance and develops understanding of the criteria
of investors has been the main learning outcome of these initiatives.
Conversely, this practice can at best help only a very small number of
entrepreneurs who have excellent business ideas to gain access to external
finance. At worst, it can easily mislead a significant number of entrepreneurs
about the real world of entrepreneurship and result in frustration in trying to
gain access to external finance (Winborg and Landstrom 2001). Rather than
over-emphasizing business planning and access to finance which in most cases
can only result in frustration and wasted time, it is suggested then that formal
and informal entrepreneurship education should focus more on empowering
entrepreneurs by enhancing their knowledge in the real world of
entrepreneurs(Bhide 1992, Ebben and Johnson 2006, Winborg and Landstrom
2001)
Consequently, according to Williams (2001 cited in Ekanem 2005, p. 303)
learning in small firms is a complex process of continual trial and error. Matlay
(2000b cited in Ekanem 2005, p. 303) also points out that it is often
unintentional, incidental or accidental. Further, it is also a process of learning
by doing; of learning by copying; of learning by problem solving and
opportunity taking; and of learning from mistakes (Gibb 1997 cited in Ekanem
2005, p. 303). According to Enkanem (2005, pp. 315-316) the evidence
suggests that rather than focusing on formalized training courses teaching
prescriptions, a more productive approach might be to place [EPC]
entrepreneurs into potential learning situations. Enkanem (2005, p. 316)
further adds that this means creating a decision making environment which is
sensitive to the motives and values of ownermanagers. This approach would
also involve gearing training activities to practical problems, tailor-made and
specific to the business in an informal manner (Enkanem 2005, p. 316)
Conclusions
According to Ebben and Johnson (2006, p. 862) researchers have
found that different types of entrepreneurs set up different types of
organizations, with different goals, structures, and financial management (e.g.,
Cooper and Dunkelberg 1989, Filley and Aldag 1978). Furthermore, less
experienced entrepreneurs seek less outside equity because they are unaware
of outside sources (Chaganti et al. 1995 cited in Ebben and Johnson 2006, p.
862) or because they do not have enough resources/networks to access to
traditional funding sources. Therefore, capital-constrained entrepreneurs often
resort to alternative funding methods as bootstrapping to start their
operations.

In this paper, the role of bootstrapping as a funding preference has been

scrutinized in the framework of an Australian social enterprise named EPC. It
has been noted that bootstrapping methods include a combination of methods
for that reduce overall capital requirements, improve cash flow, and take
advantage of personal sources of financing (Ebben and Johnson 2006, p. 853).
In the context of EPC, the suitability of bootstrapping as a funding alternative
has been established based on EPCs low experience/expertise and limitedresource firm profile. Further, the importance of bootstrapping has been
analysed in terms of providing a competitive advantage to small capitalrestricted companies and in many cases contributing to these firms not only
growth, but also mere survival. Other advantages from bootstrapping include
higher business valuation due to less money been borrowed and a cost-savings
culture ingrained in the company from early on and no interest expenses.
Lastly, the distinctiveness of the small firm demands for financial management
strategies tailored to its needs rather than scaled-down versions of those
developed for the different needs and situations of large companies (Jarvis et
al 1996 cited in Ekanem 2005, pp. 300-301). This funding gap that small and
capital-constrained firms experience is not static and concrete, but dynamic
and manageable (Lam 2010, p. 285). With the spread of bootstrapping and
other funding alternatives, it is now within the entrepreneurs power and ability
to make a difference and ultimately narrow the gap (Lam, 2010).

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