Bootstrapping in small firms: An empirical analysis of change over time

https://doi.org/10.1016/j.jbusvent.2005.06.007Get rights and content

Abstract

While bootstrapping is widely utilized as a strategic practice of small firms and has been regarded in the entrepreneurship literature as an important topic of study, little has been done to link bootstrapping to organizational theory. This paper presents hypotheses and an empirical study regarding bootstrapping and organizational development for small firms. The results of the study indicate that different types of bootstrapping are utilized at different periods in the life of a small firm, and that the methods utilized coincide to some extent with organizational theory predictions.

Section snippets

Executive summary

It has been well documented that small firms face constraints in obtaining financing from traditional outside parties due to information asymmetries and transaction costs. From research and anecdotal evidence, we know that small firms respond to these constraints via bootstrapping, or finding creative ways to avoid the need for external financing through reducing overall cost of operation, improving cash flow, or using financial sources internal to the company. Yet, despite our knowledge of its

Bootstrapping and capital constraints

Bootstrapping has taken on many definitions in the literature, but there has been some recent consensus that it is a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors (Winborg and Landstrom, 2001, Harrison and Mason, 1997). By this definition, bootstrapping includes a combination of methods that reduce overall capital requirements, improve cash flow, and take advantage of personal sources of financing. Bootstrapping in this

Sample

The sample for this study was selected from a university-owned database of retail and service firms in the Midwestern United States. A survey based on bootstrapping techniques identified by Winborg and Landstrom (2001) was sent to the firms in this database, and 183 firms responded to the survey for a response rate of 28%. Firms that were less than 2 years old were eliminated from the sample to provide time for changes in bootstrapping use to occur, and firms that were greater than 40 years old

Analysis and results

To verify Winborg and Landstrom's (2001) grouping of bootstrapping methods into the four categories related to the propositions in this paper (customer-related, delaying payments, owner-related, and joint-utilization), a principle components analysis with Varimax rotation was performed on the survey responses to bootstrapping use for the twenty-five methods (see Table 2). Evidence from the eigenvalues and scree plot indicate that three factors are appropriate, with the Kaiser-Meyer-Olkin

Implications and future research

As one of the first empirical investigations into bootstrapping in small firms, this study shows promise for future empirical work in this area to aid in theoretical and practical understanding of how bootstrapping is utilized in new and small firms. While this study does not clear up all of the questions about the nature of bootstrapping, it does indicate that organizational theory may play an important role in the bootstrapping techniques used. Specifically, certain techniques utilized may

Acknowledgements

A special thanks to Tara Smilanich, for her assistance with background research and data compilation, to Dr. Nancy Carter, for her comments and assistance with the direction of the paper, and to Jim Weinert, for his continued support of our research program.

References (45)

  • L. Bechetti et al.

    The determinants of growth for small and medium sized firms: the role of the availability of external finance

    Small Bus. Econ.

    (2002)
  • A. Berger et al.

    Relationship lending and lines of credit in small firm finance

    J. Bus.

    (1995)
  • A. Bhide

    Bootstrap finance: the art of start-ups

    Harv. Bus. Rev.

    (1992)
  • R. Brockhaus

    Risk-taking propensity of entrepreneurs

    Acad. Manage. J.

    (1980)
  • D. Brophy

    Financing the growth of entrepreneurial firms

  • R. Carpenter et al.

    Is the growth of small firms constrained by internal finance?

    Rev. Econ. Stat.

    (2002)
  • R. Chaganti et al.

    Predictors of capital structure in small ventures

    Entrep. Theory Pract.

    (1995)
  • A. Cooper et al.

    Entrepreneurship and paths to business ownership

    Strateg. Manage. J.

    (1986)
  • J. Egeln et al.

    Firm foundations and the role of financial constraints

    Small Bus. Econ.

    (1997)
  • A. Filley et al.

    Characteristics and measurement of an organizational typology

    Acad. Manage. J.

    (1978)
  • G. Gendron
  • R. Goldsmith

    Reducing spurious response in a field survey

    J. Soc. Psychol.

    (1989)
  • Cited by (0)

    1

    Tel.: +1 651 962 5125.

    View full text