According to Investopedia, bootstrapping is “A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to fund and build a company from personal finances or from the operating revenue of the new company.” For example, when I started my first company, I used the Family, Friends, and Fools (FFF) method of financing. I used $100,000 of my own money along with another $50,000 from my family and any fool crazy enough to give me their money to fund my company.

So, let’s talk about some of the advantages and disadvantages of bootstrapping a start-up.

Advantages and Disadvantages:

CONTROL

When financing a start-up not through conventional means like a bank, but through unconventional means like joining an accelerator, venture capital, strategic partners, or angel investors, you must give up your precious equity in the company. It is important to remember that each one of these alternative financing arms have their own motivations, goals, and interests when they choose to invest in your start-up.

Time and time again, I’ve seen clients who gave an alternative financing institution a large part of equity in their company for little support and direction in return. Their interests are not necessarily the same, and then the clash begins. It can be particularly challenging trying to navigate these outside pressures.

By self-funding or funding through Family, Friends, or Fools (FFF), you get to answer to yourself only. This allows you the freedom to lead as you wish, set your own agenda, and most of all, keep the equity in your company. However, there are some downfalls to this.

Have you ever heard the saying “It’s not what you know, but who you know?” That is a very accurate statement when it comes to start-ups. Alternative funding sources are usually full of connections that you do not have access to. They will help you get meetings with the right people, connect you with valuable partnerships, open up markets, and give you increased visibility that you would otherwise not normally have. Lacking these connections, you’re on your own in many ways to find and build support, knowledge, networking, and financing.

As I tell my students, “It’s good to be young, because you can bounce back.” But what about the credibility you need to get to the right people? Not having outside investors may hurt your company’s credibility in the beginning. The question I always ask before I invest in a start-up is, “What kind of experience do these people have in running a business. How well do they listen, and who are their mentors?”

While bootstrapping gives you complete control over your company, self-funding may also shine a light on your company’s lack of resources and business experience. On the other hand, being supported by well-respected and credible investors gives many potential customers the confidence to buy in.

EQUITY

Not having investors allows you to keep 100% of your company. If you become a success through bootstrapping, at a later date you can seek additional funding for a much larger pie and do so on your terms. This means you can negotiate a smaller equity investment than you would negotiating while you are a start-up, because the investor has to take less risk when you come to them at a later stage of the company’s growth.

When bootstrapping, you tend to gain a lot more from your company if it becomes successful, but you will also lose much more if it doesn’t. Remember that the losses will be absorbed by you. Having an investor does allow you access to much-needed cash, but at a price: equity of your company. However, along with that much-needed cash comes a lot of experience, mentorship, and a strategic partnership that will help your company grow at a much faster rate with less mistakes—if you choose the right investment partner. Bootstrapping is risk-taking; you stand to gain a lot more if your company is a success, but if it’s not, all that loss is yours and yours alone.

TIME

Organic development is very time-consuming. When I started Credit Justice Services, it took us three years to get traction. Once the traction hit, however, our expansion was crazy. Yet, if we were to have an investor in the beginning, the growth would have been much faster. Without a large amount of cash on hand, the company would not be able to develop key components as quickly as we desired.

A certain amount of revenue is always required for expansion, research and development (R&D), employees, and marketing. This can happen at an accelerated rate with access to a capital investor. Without that access, some growth milestones will take longer to reach, and targets might have to be pushed further down the line.

In my experience bootstrapping my companies, time was usually a large obstacle I had to overcome. For the first three companies I started, built, and sold, I did so as a full-time airline pilot. I was fortunate that I had a schedule that allowed me 15 days off a month. That’s not common for most people, so they’re left with a minimal amount of time to devote to the start-up, especially if they have other obligations in their lives. This leads to the project taking a longer period of time to execute—sometimes years.

Start-Ups Should Learn the Following Before Proceeding:

• Is it better to have control over your business, but slower growth?

Money helps fuel growth. Money allows you to expand your employee base, market, advertise, and do R&D for a more rapid expansion in a shorter time period.

Bootstrapping means you may not have significant resources to draw on and you will need to dial back your costs. You might even need to keep your full-time job while you launch your business, which will slow down your growth process.

So, the question to ask is, “Can I accept that my start-up’s growth will likely be slower?” But remember, in return, you’ll maintain complete control over your business and its profits.

• Can you partner with an existing company to expedite growth (i.e., distribution, vendors, manufacturers)? 

Finding the right partner can be tricky; believe me when I say a bad partner is worse than a bad marriage. So, try to team up with vendors. For example, I would go to my wholesale manufacturer and ask for generous payment terms, sometimes as much as a three months payment plan. This will allow you to start your business without investing in inventory. A service provider may offer to finance inventory in exchange for performing other jobs for you, like equipment sales or a maintenance contract.

This enables you to keep the equity in your company, not take on an equity partner, and keep much-needed cash on hand.

• Do you need capital to test your idea? Customer Discovery first may show you don’t.

(Steve Blanks Driving Corporate Innovation)

Customer Discovery determines if there is a want or need for your product/service.

Here are a few ways to validate your idea that don’t involve significant investment (these methods are expanded upon in depth in my previous articles):

1. Customer Discovery – Find the pain points of the customer. Learn as much as possible about their needs and wants.
2. Customer Validation – Go back to the customer with a Minimal Viable Product (MVP) and confirm the customers pains and gains.
3. Customer Creations – Get-Keep-Grow your customer base by using the funnel method.
4. Company Building – This is very important and the most cash-bleeding part of the four-step process, so be sure to hire slowly, deliberate, and conserve cash.

• Can I afford to risk financial/emotional failure?

Creating a start-up will be the biggest emotional roller coaster you will ever get on. Dealing with government regulations, taxes, employees, vendors, and customers is at times like living in a pressure cooker.

You will experience setbacks, roadblocks, and naysayers, which are all amplified when you have limited money to throw at these problems. The only way to overcome this is by pure grit and creativity, but it can also be incredibly rewarding when it works and you watch your business grow! So, should you bootstrap your company?

If you’d like more information, please feel to contact me directly at dmuir@muirandassociates.net or go to my academic web site for more white papers and research at https://douglasmuir.academia.edu/

As an entrepreneur for over 25 years, I agree with Plaut when he says that when measuring the most renowned cities in the world for start-ups, you can be sure that Tel Aviv will be one of the first names to come up; but why exactly has the Israeli city garnered such a glittering reputation in the start-up community? Why does it seem to surpass its fellow middle eastern countries?

The Reluctant “Start-Up Nation”

Israel has plenty of innovators and researchers and is pumping out new, innovative ideas and research at record speed. Yet, a lack of infrastructure inside Israel to trade amongst its small economy pushes the startup community to look outside the country to sell its products and services. This may be preventing the emergence of companies on a global scale.

The Israeli nation has 34 political parties, yet only two dominate the political system: the Likud (conservative) and the Labor (social democrats) parties. The reluctance of the two political parties to embrace capitalism as a populist platform compared to the quasi-socialist laws that exist today is baffling. Despite the stifling laws and monopoly of some industries in Israel, the start-up community within Israel continues to grow at a rate admired by the world.

Plaut separates the political hype from reality—economic liberalism is still strong in Israel.  The same people looking toward the Scandinavian democratic/socialist approach as a form of governance also own the high-tech companies within Israel.  There is not a political party, neither right nor left, that publicly favors greater privatization of government run agencies.  While all parties are superficially opposed to monopolies and cartels, not one will instill free market competition or put antitrust policies in place.  All the parties ran on a left-centered or far left socialist platform.  None of the parties are for privatizing state-owned lands, non-state-financed universities, expansion of school choice, or use of vouchers.  No party ran on a platform to seriously reduce the dimensions of the Israeli welfare state.  So, how can a moderately taxed, fast-growing economy sustain such laws? Plaut says it’s the rhetoric of the politicians—they say one thing to the public and do another in secret. Israeli Prime Minister Benjamin Netanyahu (of the Likud party) talks about the status quo and then tries to bring in competition to their ports to fight the unions.  The financial markets are at .025 percent short term lending rates (Trade Economic, 2019).

The Israeli government has taken a big interest in the innovation and entrepreneurship community. It spends more than any other developed country on research and development.  Partnerships between the country’s private and public sectors fuel experimentation and innovation.

One initiative taken by the Israeli government in 1991 was to set up a Technological Incubation Program. The program currently includes 24 incubators: 22 in technology, one in industrials, and one in biotech, and is mostly privatized through public initiatives.  Start-ups are incubated for two years with funding ranging from $500,000 to $800,000, only to be paid back once the start-up begins generating revenues (Israel Innovation Authority, 2019).

Why Does Entrepreneurship Succeed?

The amount of sheer innovation coming out of Israel is truly impressive. How and why the Israeli people became so innovative can be credited to the fact that they need such innovation in order to exist.  It serves as a survival mechanism, the fact that they are so flexible, so quick with ideas, so innovative.  That’s what keeps them alive here, not only financially but literally.  Built in the wake of the Holocaust, Israel declared its independence in 1948 and was attacked by five of its neighboring countries simultaneously. Innovation took on a whole new meaning as its role became akin to survival, making the difference for Israel between existence and obliteration. For Israelis, there is a real cultural understanding from a young age that they need to be quick and innovate in all areas of life.

The numbers of mergers and acquisitions happening in Israel is staggering. The Israeli cybertech start-up, Sygnia, was acquired by Singapore’s Temasek Holdings for an estimated $250 million.  The return for the Israeli-owned firm was over 50 times the initial investment.  Last year, Intel purchased an Israeli company called Mobileye—a pioneer in autonomous car technology—for $15.3 billion (Haaretz, 2019).

Tech start-ups may not be the first thing that comes to mind when many people think of Israel—the country’s political strife is what makes headlines—but Israel’s achievements in innovation and entrepreneurship are remarkable by any measure for a tiny, embattled nation of 8.8 million people that has only existed for 70 years.  Just look at Tel Aviv and its strong and mature start-up ecosystem, with easy access to many experienced angel investors, venture capital firms, mentors, and talent.  This ability to get much-needed cash for start-ups is a must in a small economy like Israel, and there is a good reason for why Tel Aviv is nicked name the Silicon Valley of the Middle East.

In the Tel Aviv tech scene, where sharing knowledge is considered the norm, all start-up entrepreneurs have adopted an open-door type of policy for the sharing of information.  Companies are able to easily get really great tips from seasoned techies and mentors.  This is the opposite of the United States, where all employees in the tech industry must sign a non-compete and non-disclosure contract before being hired.

Another important factor in Israel is that it has a young, diverse, and creative population.  It’s an inspiring place to live and work, with a talented pool of Universities offering a wealth of people to recruit from. Universities in the country produce plenty of research, much of which can be turned into viable and marketable products.  In that, Israel has plenty of experience: two out of the three oldest university-based technology transfer companies in the world are in Israel.  One is Yissum, which is owned by the Hebrew University of Jerusalem and in 1964 became the third tech transfer company ever to be set up.  The first one was in Wisconsin in the U.S. and the second was Yeda, at the Weizmann Institute (also in Israel).  Tech transfers allow investors to come into the University and purchase research at an early stage, and in return, the University gets a licensing agreement.  This helps to perpetuate the cycle of research, development, and money.

Conclusion

Despite its small population of only eight million, Israel is a global leader in the fields of science, technology, and innovation.  Known after the best-selling book as the “Start-Up Nation,” Israel continually ranks at the top of global business and technology rankings. It is ranked as first in the world for innovation capacity, first for business expenditure on research and development (R&D), and first for entrepreneurship, (IMF and WEF Global Competitiveness Index, 2018).

Although Plaut describes the two fractured government parties of Israel as having more of a Scandinavian type of socialist approach, the government of Israel nonetheless protects and even encourages innovation and entrepreneurship.  Israel has expended 4.38% of its GDP on R&D—the highest percentage in the world (Innovation for Growth, 2013).  By maintaining a strong scientific and technological infrastructure and leveraging the close links between academia, industry, and government, Israel produces innovation and technology well beyond what is expected of its tiny size. The way Israeli youth are trained to innovate for survival, the community spirit around entrepreneurship, the government cultivating innovation, and the financial ability to fund start-ups, are all reasons for why Israel is known as the “Start-Up Nation.”

References

Haaretz. (2019). Singapore investment giant buying Israeli cybertech firm Sygnia for around $250 million. Retrieved from https://www.haaretz.com/israel-news/business/singapore-investment-giant-buying-israeli-cybertech-firm-sygnia-1.6568986

Innovation for Growth. (2013). OECD science, technology and industry scoreboard [PDF File]. Retrieved from http://www.oecd.org/sti/scoreboard-2013.pdf

Israeli Innovation Authority. (2019). Taking innovation to the next level. Retrieved from https://innovationisrael.org.il/en/

Plaut, S. (2016). Israel’s socialist dream vs. capitalist realities. Retrieved from https://www.meforum.org/6046/israel-socialist-dreams-capitalist-realities

Trade Economics (2019). Israel interest rates. Retrieved from https://tradingeconomics.com/israel/interest-rate

U.S. Small Business Administration. (2016). Frequently asked questions. Retrieved from https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf