Financial Bootstrapping in IT companies: a study of motives for bootstrapping finance in software development firms

University essay from Lunds universitet/Företagsekonomiska institutionen

Abstract: Sufficient access to financial resources is important in sustaining a business especially in the early phases. First years in business development are very critical since owners learn by doing mistakes in order to get a proof of concept of the business idea. Being aware of this fact, external financial institutions try to avoid taking part in highly risky endeavours. Although there are financial options like funds from venture capitalists and business angels in early phases, only few companies receive funding. Therefore, majority of companies have to bootstrap to deal with lack of financial resources. Bootstrapping can be referred to as a creative means of overcoming financial constraints in order to acquire resources without borrowing money or raising equity from traditional sources (Freear, Sohl and Wetzel, 1995). Bootstrapping techniques may change depending on the industry context and entrepreneur’s values and goals. Unlike other industries, software industry has its own specific characteristics such as spread of technology, fast paced developments and high dependency on human intelligence. This research attempts to explore the motivation and influencing factors behind bootstrapping choices, the way bootstrapping techniques are used based on those motives and change of bootstrapping methods over time in software companies. A case study of four entrepreneurs in software development industry in Sweden was undertaken for that purpose. The study reveals that motivation for using bootstrapping is influenced by different company characteristics and context of software industry, which are high dependency on human intelligence, fewer capital requirements for starting a company, spread of free open-source tools and entrepreneur’s personal goals and perception of the risk. These bootstrapping motives encourage use of certain bootstrapping techniques that are found to be more important and common among entrepreneurs. This study also suggests two factors that change motivation over time such as entrepreneurial expertise and change of external conditions.

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