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Bootstrapping vs Big Financing for New Business Start-Ups

Jim Correll, director Fab Lab ICC at Independence Community College, Independence Kansas 

We've been conditioned over the years to believe that starting new businesses always requires a formal business education (MBA, etc.) and a lot of start-up capital.  Media outlets have supported this idea by honing in on a select few entrepreneurs that are flamboyant and appear to be high-rollers will to place big bets on their business ideas causing devastating losses when some of those ideas inevitably fail. 

What I've learned over the last 4 or 5 years, through studying interviews with entrepreneurs from around the world and listening to our local and area entrepreneurs as they visit my classes is very different than what we've been led to believe.  Research from the Kauffman Foundation (a global leader in supporting entrepreneurship) shows that less than 3% of all new businesses receive equity investment from non-family investors.  And less than 1% receive venture capital at inception. 

So, how do the other 97% of businesses manage to get off the ground without so-called "adequate" financing?  "Bootstrapping".  Google "bootstrapping" and you'll see many definitions.  The one I like is "get (oneself or something) into or out of a situation using existing resources".  For us, bootstrapping a new business means starting out small enough that existing personal and family finance can get the business started in order to make sure that customers will buy what the entrepreneur has to offer.  Many times, no matter how much planning and research we do, we don't get the product or service offering quite right in the very beginning.  Starting small allows for course corrections and tweaks as we learn what customers really want.  Even if the new venture doesn't fly at all, starting small is much less devastating to personal and family finances.  

The time to consider conventional or venture capital financing to support the growth of the new business is after the tweaks are made and the sales start coming in.  Many venture capitalists (VC's) realize now that most businesses are better off starting small, then finding venture capital after customers start buying and the business starts to grow.  VC's Nathan Furr and Paul Ahlstrom have written a book about this, "Nail It then Scale It: The Entrepreneur's Guide to Creating and Managing Breakthrough Innovation". 

We have many examples of this type of entrepreneurship in Southeast Kansas.  One is Bret Chilcott of AgEagle in Neodesha.  A few years ago, he bootstrapped his way into the agricultural unmanned aerial vehicle (UAV)—now almost all of us use the military vernacular "drone"—market.  Bret went from concept to production in just under two years.  AgEagle is now the global leader in the agricultural drone market.  Although he says he may have waited a little longer than he should have to seek additional capital to support the growing business, he would say that the bootstrapping, with its inherent constrained resources, made him a better innovator and is a primary reason he was able to enter the market in such a short time. 

Occasionally, someone will call me and say something to the effect of "I have this great idea and all I need is funding to launch.  Can you help me find $100,000 in capital?"  That is the time to share the bootstrapping concept and the stories of the many entrepreneurs in our network that have bootstrapped their way to success. 

Jim Correll is the director of Fab Lab ICC at the Center for Innovation and Entrepreneurship on the campus of Independence Community College. He can be reached at (620) 252-5349 or by email at jcorrell@indycc.edu. Archive columns and podcasts at www.fablabicc.org.


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