BOOTSTRAP FINANCE Chapter 7

Transcription

1 BOOTSTRAP FINANCE Chapter 7 Faculty of Management and Computing The Maldives National University Prepared by: Ahmed Munawar The Importance of Getting Financing or Funding The Nature of the Funding and Financing Process. Few people deal with the process of raising investment capital until they need to raise capital for their own firm. As a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area. Why Most New Ventures Need Funding. There are three reasons most new ventures need to raise money during their early life. The three reasons are shown on the following slide. 1

2 Why Most New Ventures Need Funding? Three Reasons Start-Ups Need Funding What Makes Entrepreneurial Finance Different from Traditional Finance...? 1. Lack of history upon which to assess risk. What s the β? Without it, what should the market risk premium be?... Criteria to identify if big winner potential exists. 2. Lack of ability to compare against other firms when industry is new. 3. Lack of short term profit potential in the immediate future. 4. Lack of liquidity... CASH IS KING!!! 2

3 Implications...! Entrepreneurial finance involves useful ways of thinking about cash, risk, and values. Teaches skepticism (there are fewer true opportunities from a financial perspective than we often think!). Helps us identify the right questions to ask and narrow down the potential options, which in turn enable us to make better decisions. Ex: Is Fit an Opportunity? Discovery Driven Planning. Implications...! Explicit and hidden costs of using other people s money Danger of misallocation... Throwing money at symptoms Diminished flexibility... Operational lock Credibility issues... What to you mean, didn t we get it right the 1st time? If I use X financing now and Y financing later, have I created incentives for all stakeholders to work together? 3

4 Alternatives for Raising Money for a Start-Up Firm Personal Funds Equity Capital Debt Financing Other (Creative) Sources Sources of Personal Financing Personal Funds Friends and Family Bootstrapping 4

5 Financing a Small Business - Modest Growth Figure 9.1 Pre-launch Start-up Growth Transition Bootstrapping Self, friends, and family Equity financing Debt financing Financing a High-Growth, High-Potential Venture Figure 9.2 Pre-launch Start-up Growth Transition Bootstrapping Seed financing from angels Equity financing from VCs Debt financing 5

6 What is Bootstrapping? Defined as the process of finding creative ways exploit opportunities to launch and grow businesses with the limited resources available for most start-up ventures {Englewood Cliffs, NJ: Pearson/Prentice-Hall}. Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary. Because it is hard for new firms to get financing or funding early on, many entrepreneurs bootstrap out of necessity. Why Bootstrap? Often necessary for small businesses to get started Difficulty in raising money for growth Preserves the value and wealth of a business Extend the Runway Reduce risk associated with debt financing 6

7 Rules of Bootstrapping Rule #1: Overhead matters Rule #2: Employee expenses are usually the highest single recurring cost Rule #3: Minimize operating costs Rule #4: Marketing matters, but know your customers and how they make decisions Bootstrapping Administrative Overhead Space Furnishings and office equipment Administrative salaries 7

8 Bootstrapping Employee Expenses Employee stretching Independent contractors Employee leasing and temporary employees Student interns Equity compensation Non-monetary benefits Bootstrapping Operating Expenses Outsourcing Just-in-time inventory techniques Effective cost accounting 8

9 Bootstrap Marketing Know your customer Focus on the impact of message, not volume Focus on benefits for customer Understand the market niche Spend your marketing dollars wisely Marketing is a process, not an event The Basic Bootstrap Marketing Tools Word of Mouth Business cards Blogs Brochures Banners and signs Newsletters Direct mailing/ ing Publicity 9

10 Word of Mouth Motivate customers to talk about business Create incentives to spread the word Ask customers to sell Create a buzz campaign Viral marketing Business Cards Design is important Include needed data about business Use quality paper Use color Include description and/or slogan Use both side of card 10

11 Blogs Be consistent in blogging Do not blog merely to promote business Take time to create quality blog Be patient blogging takes time to build following Be cautious what you write! Examples of Bootstrapping Methods Buying used instead of new equipment Coordinating purchases with other businesses Leasing equipment instead of buying Obtaining payments in advance from customers Minimizing personal expenses Avoiding unnecessary expenses Sharing office space with other businesses Applying for and obtaining grants 11

12 Axioms from successful entrepreneurs 1. Get operational quickly. 2. Look for quick break-even, cash-generating projects. 3. Offer high-value products or services that can sustain direct personal selling. 4. Forget about the crack team. 5. Keep growth in check. 6. Focus on cash, not on profits, market share, or anything else. 7. Cultivate banks before the business become creditworthy. Abandoning the Rules in growth and change 1. Emerge from its niche and compete with a large company. 2. Offer more standard, less customized products. 3. Bring critical services in-house. 4. Change management's focus from cash flow to strategic goals. 5. Recruit higher priced talent, perhaps encouraging early employees to move on. 12