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