Financial Bootstrapping
-An Empirical Study of Bootstrapping Methods in Swedish Organizations
Master thesis within Corporate Finance
Author: Evelina Karlsson & Jacob Wallén Tutors: Andreas Stephan & Jan Weiss Jönköping May 2011
Acknowledgements
We would like to express our gratitude for making this master thesis possible. First of all we would like to send many thanks to our tutors Andreas Stephan and Jan Weiss for assist-ing and guidassist-ing us through difficult times and for all the feedback we have received throughout this process.
We would also like to thank Jan Svensson and everybody involved from Coompanion, for their inputs and desire to collaborate with us.
We are also thankful for all the comments from the fellow seminar students at JIBS for helping us improve this master thesis.
Furthermore, we are very grateful for all the answers we got from all the investigated or-ganizations and for the time they spent responding to our questionnaire.
……… ………
Evelina Karlsson Jacob Wallén
Master Thesis in Corporate Finance
Title: Financial Bootstrapping – An Empirical Study of Bootstrapping
Meth-ods in Swedish Organizations.
Author: Evelina Karlsson & Jacob Wallén
Tutor: Andreas Stephan & Jan Weiss
Date: [2011-05-31]
Subject terms: Financial bootstrapping, organizations, Sweden, small business fi-nancing.
Abstract
Small and recently started-up organizations find it hard to acquire external capital from fi-nancial institutions, such as banks, venture capitalists and private investors. Information asymmetry is the main reason behind this financial gap, from both a demand-side and sup-ply-side standpoint. However, small organizations and start-ups do not need financiers to launch themselves, and the solution to the financial shortages is not necessarily by financial means. By being creative, resources can be acquired through different means, known in re-search as financial bootstrapping.
Previous studies have been focusing on bootstrapping application in companies, and have not included any kind of associations in their investigations. This thesis aims to enlighten the area of bootstrapping usage in associations while comparing similarities and differences with companies. The thesis will also provide a base of knowledge for the collaboration company Coompanion, who requested to increase their understanding within the area of financial bootstrapping.
A survey was conducted and 44 responses were received with a mixture of companies and associations. The survey included questions regarding the organizational profile, personal profile and handling of finance. The interactive questionnaire was distributed to the man-agers by email and the data gathered from the respondents was inserted and analyzed using Excel, SPSS and Gretl.
The results demonstrate that organizations prefer internally generated money as a first re-sort before using external finance, consequently following the theories of pecking order. Organizations that need more capital are inclined to use more bootstrapping techniques compared to organizations with no need for further capital. The survey indicates that some bootstrapping methods are more commonly used, such as: Same terms of payment to all customers, Best terms of payment from suppliers, Buy used equipment instead of new, Sell on credit to customers, Make customers pay through installments on ongoing work and Obtain some kind of subsidy.
Table of Contents
1
Introduction ... 1
1.1 Choice of Subject ... 1 1.2 Background ... 2 1.3 Problem Discussion ... 3 1.4 Coompanion ... 3 1.5 Purpose ... 4 1.5.1 Research Questions ... 4 1.6 Structure of Thesis ... 4 1.7 Results ... 52
Frame of Reference ... 6
2.1 Introduction to Previous Studies ... 6
2.2 Small Corporations, Associations and Cooperatives ... 6
2.2.1 Economic and Non-Profit Associations ... 7
2.2.2 Cooperatives ... 7
2.3 The Resource Dependence Theory ... 8
2.4 Financial Gap ... 8
2.4.1 Information Asymmetry ... 9
2.4.2 Transaction Cost and Control Cost ... 9
2.5 Capital Structure ... 10
2.6 Pecking Order ... 11
2.7 Business Life Cycle ... 12
2.7.1 Introductory Stage ... 13
2.7.2 Growth Stage ... 13
2.7.3 Maturity Stage and the Possibility of Decline ... 15
2.8 Financial Bootstrapping ... 15
2.8.1 Bootstrapping Techniques ... 16
2.8.2 Groups of Financial Bootstrapping Methods ... 17
2.8.3 Most and Least Usual Bootstrapping Techniques ... 18
2.8.4 Advantages and Disadvantages of Financial Bootstrapping ... 19
2.9 Hypotheses ... 19
3
Method ... 21
3.1 Methodological Approach ... 21
3.2 Research Approach ... 21
3.3 Deciding on Research Method ... 22
3.4 The Research Process ... 22
3.5 Research Design ... 23
3.6 Writing a Questionnaire ... 24
3.6.1 Structure of the Questionnaire ... 25
3.6.2 Distribution of the Questionnaire ... 26
3.7 Selection of Participants ... 26
3.8 Analyzing Quantitative Data ... 27
3.9 Primary Data Responses ... 27
3.10 Creditability and Reliability ... 29
3.11 Factor Analysis ... 29
4
Empirical Findings ... 31
4.1 Questions ... 31
5
Analysis ... 41
5.1 Analysis of the Hypotheses ... 41
6
Conclusion ... 54
7
Discussion ... 55
8
Policy Recommendations ... 56
Figures
Figure 2-1 Capital Structure Decision Model ... 11
Figure 4-1 Year of Registration ... 31
Figure 4-2 Type of Business 1 ... 32
Figure 4-3 Type of Business 2 ... 32
Figure 4-4 Industry ... 33
Figure 4-5 Stage of Development ... 33
Figure 4-6 Financial Sources ... 35
Figure 4-7 Turnover in 2011 Expectations ... 36
Figure 4-8 Gender ... 37
Figure 4-9 Age of Respondents ... 37
Figure 4-10 Highest Formal Education ... 38
Figure 4-11 Field of Highest Education ... 38
Figure 4-12 Involvement in Successful Start-ups ... 39
Tables
Chart 4-1 Frequency Table of Need for Further Capital ... 34Chart 4-2 Frequency Table of Chance of Obtaining Long-term Finance From Banks ... 34
Chart 4-3 Frequency Table Chance of Obtaining Long-term Finance From a New Owner ... 35
Chart 5-1 Frequency Table Financial Sources ... 42
Chart 5-2 Cross Tabulation between Sum of Bootstrapping and Need for Further Capital ... 44
Chart 5-3 Descriptive Table of Sum of Bootstrapping Usage, Total Sample46 Chart 5-4 Descriptive Table of Sum of Bootstrapping Usage, No Further Capital Needed ... 46
Chart 5-5 Descriptive Table of Sum of Bootstrapping Usage, Need for Further Capital ... 47
Chart 5-6 Descriptive Table of Sum of Bootstrapping Usage, Companies . 48 Chart 5-7 Descriptive Table of Sum of Bootstrapping Usage, Associations49 Chart 5-8 Descriptive Table of Sum of Bootstrapping, Age 20-35 ... 50
Chart 5-9 Descriptive Table of Sum of Bootstrapping, Age 36-50 ... 51
Chart 5-10 Descriptive Table of Sum of Bootstrapping, Age 51-70 ... 51
Chart 5-11 Descriptive Table of Sum of Bootstrapping, Age 20-50 ... 51
Chart 5-12 Descriptive Table of Sum of Bootstrapping, Age 36-70 ... 51
Chart 5-13 Descriptive Table of Sum of Bootstrapping, Introduction Stage 52 Chart 5-14 Descriptive Table of Sum of Bootstrapping, Growth Stage ... 52
Appendix
Appendix 1 ... 61 Appendix 2 ... 62 Appendix 3 ... 63 Appendix 4 ... 64 Appendix 5 ... 68 Appendix 6 ... 69 Appendix 7 ... 71 Appendix 8 ... 72 Appendix 9 ... 73 Appendix 10 ... 74 Appendix 11 ... 76 Appendix 12 ... 77 Appendix 13 ... 78 Appendix 14 ... 791
Introduction
This first chapter will give the reader an introduction to the thesis, by explaining different concepts that are important for the subject, background information introducing the purpose and the questions that will be answered throughout the paper. This section will also provide information about Coompanion and the con-stituent of the thesis.
1.1 Choice of Subject
In 2010, 67 303 new companies, associations, cooperatives, and faith communities etc. were registered with the Swedish Companies Registration Office (Bolagsverket, 2011). De-spite the differences in company form, all share a common need for resources. For each start-up the financial possibilities and capital requirement are different and previous re-search has found that it is not a pre-requisite for a start-up company to be financed by for example a bank or other financial institution (Landström, 2003; Winborg, 2009). It was as early as 1930 when the problems facing small organizations while applying for external cap-ital were observed for the first time (Landström, 2003). In the MacMillan report from Great Britain, they identified a tendency for the small companies to be discriminated by the financiers, which is closely related to the financial gap and information asymmetry (Land-ström, 2003).
The problem with raising money for start-up firms is mainly due to a requirement of “care-ful market research, well thought-out business plans, top-notch founding teams, sagacious boards, quarterly performance review, and devilishly complex financial structures” (Bhide, 1992, p.109). Banks and financial institutions selectively choose companies for investments and the involvement of the financiers has occasionally been decreasing due to a decline in the venture capital and risk capital market (Landström, 2003). The decreasing involvement can also be traced to something known as the financial gap, which is based upon an infor-mation asymmetry between the financiers and the start-ups. Landström (2003) argued that the information asymmetry is rooted in the fact that the economic information flow, such as annual and quarterly reports, from a start-up or a smaller business does not have the same quality as from a larger company. This in turn increases the risks and the cost of con-trol from the financier’s side. The financial statement in private companies “only tells us half the story” (Levin, I. R. & Travis, R. V., 1989, p. 30). Furthermore, the risk for bank-ruptcy is higher for a start-up company than for an established company (Storey, 1994; 1998), which gives the financial institution another incentive not to invest money. The in-formation asymmetry is however not one-sided; young companies tend to have vague ideas about their market and product. Thus an experienced financier might have an upper hand in such a scenario, and the entrepreneurs might not know what is needed from them in or-der to attract external capital (Winborg, 2003). To conclude, a financial gap can originate both from a demand-side standpoint, as well as the supply-side standpoint.
However, start-up companies do not need financiers to launch themselves. Susan Greco (2002) investigated the Inc 500, the 500 fastest growing organizations in the USA in 2002, and found that a company started with less money up front is equally likely to succeed as a
well financed company. The solution to the financial shortages is necessarily not by finan-cial means. But creative companies can access required resources through different means, without burdening the balance sheet at all, or at least at a minimum (Winborg, 2003). These alternative solutions to reach resources are within science known as “financial bootstrap-ping” (Winborg, 2003), later referred to as financial bootstrapping or merely bootstrapping. According to Winborg (2008), financial bootstrapping is applied when internal or external financial means are absent. In one research the businesses examined by Winborg “managed to develop by means of bootstrapping and had no or only marginal long-term external fi-nance over a five-year period” (Winborg, 2009, p.71). Furthermore, “business founders seek to manage without long-term external finance, instead relying on financial bootstrap-ping” (Winborg, 2009, p.74). Bhide (1992) mentions that in courses and literature about new ventures the emphasis is on fund raising and not the possibility of bootstrapping your business. However, interviews carried out by Bhide and his associate found that 80% of the investigated companies were financed through the founders’ personal savings (Bhide, 1992). So why has bootstrapping been “viewed as the last resort” (Winborg, 2009, p.72) for so long?
1.2 Background
The term ‘bootstrapping’ has in the past been defined in several manners by different re-searchers. Bhide (1992, p. 110) chose to define bootstrapping as “launching new ventures with modest personal funds”. Three years later Freear, Sohl and Wetzel Jr. (1995, p. 395) went a little further and explained bootstrapping as “highly creative ways of acquiring the use of resources without borrowing money or raising finance from traditional sources”. In three more recent studies bootstrapping has been referred to as “the highly creative acquisi-tion and use of resources without raising equity from tradiacquisi-tional sources” (Van Osnabrugge & Robinson, 2000, p. 24), “methods for meeting the need for resources without relying on long-term external finance from the debt holder and/or new owners” (Winborg & Land-ström, 2001, p. 235) and as a “combination of methods that reduce overall capital require-ments, improve cash flow, and take advantage of personal sources of financing” (Ebben & Johnson, 2006, p. 863).
These definitions all have in common a sense of accomplishing something by an individu-al’s own efforts and initiative. Entrepreneurship is thus a major factor that impregnates the area of bootstrapping. As mentioned earlier all entrepreneurs do not have access to larger sums of capital when starting a venture. But rather by using different tools and techniques the entrepreneurs successfully make the most of the restricted capital available. This goes in line with the origin of the term bootstrapping. The axiom “to pull oneself up from the bootstraps” refers to independence and self-reliance, and probably originated from success stories of people able to pull themselves out of poverty and reach economic success in the early 1900’s America (Cornwall, 2010).
For entrepreneurial companies, “bootstrapping is a way of life” (Timmons & Spinelli, 2009, p. 112). Despite the limited resources these organizations have, they strive to be effective, and if successful this is a powerful competitive advantage. For these entrepreneurs cash is
less vital, resources need not be owned, rather a level of control of these resources is enough. Every dollar within the organization counts and leanness is crucial. (Timmons & Spinelli, 2009).
1.3 Problem Discussion
Financial intermediaries and banks have shown more interest in investing money into larger businesses rather than investing in small start-ups, where the future of the business is somewhat uncertain. This creates a shortage between demand and supply of financial means. Accordingly, most start-ups do not have the possibility to receive external funding (Harrison, Mason & Girling, 2004) and thus bootstrapping is an option that opens up for new opportunities. This is not saying that the need for capital and fund raising ends after the launching of a business, but is a continuous process. Capital or resources are needed in all aspects of the organization’s operations (Skärvad & Olsson, 2011). However, the prob-lem of raising money is larger for smaller start-up organizations than for organizations that have been around for longer periods of time.
Coming up with ways to bootstrap requires a certain level of creativity, and some business owners might need some assistance in finding these methods where they can save money. Where previous studies have focused on small start-up companies, this thesis will gather data from a broader group of business types in an attempt to expand the usage of boot-strapping and the most successful practices. The research group will include relatively new-ly established businesses, associations and cooperatives, which were started within 10 years. Hereafter, businesses, associations and cooperatives will be referred to as organizations as a collective noun. This thesis can be of assistance to people who plan on starting a new busi-ness, association or cooperative, to come up with ways in which they can bootstrap, i.e. save money, and consequently find where they can best focus their limited resources. The thesis can also be helpful for firms giving advice or educating already established as well as potential corporations.
1.4 Coompanion
The authors of this thesis came in contact with the term financial bootstrapping after an encounter with a corporate advisory firm, which needed help with researching the area of bootstrapping usage in Sweden. Coompanion is a cooperative organization situated in 25 locations in Sweden, with approximately 130 business advisors and experts within process management and democratic entrepreneurship (Coompanion, 2010a; 2010b). All the offic-es are locally owned and run; however they cooperate between the local branchoffic-es. They operate in the enterprise business, providing advice, information and training within coop-erative entrepreneurship (Coompanion, 2010a). “Increase the opportunities and reduce the risks – start your own business together.” (Coompanion, 2009) This quote is a good reflec-tion of the area and purpose of Coompanion; they believe that more business opportunities come from sharing and building together. By having a larger network, where competencies and risk taking can be shared, the boundary to business enterprise is reduced and successful organizations can be created (Coompanion, 2010a).
The advisors and experts at Coompanion share a lot of insight and experience in several ar-eas concerned in building new enterprises. They have numerous tools, which can be used in helping entrepreneurs start their collaborative projects (Coompanion, 2010b). However, they experience a lack of knowledge in bootstrapping. Being able to give more concrete ad-vice on ways to bootstrap would extend the competence within the cooperative, and ex-pand the ways in which individuals can receive advice.
1.5 Purpose
The purpose of this thesis is to provide a description of bootstrapping techniques that have been successful in past start-up organizations, and aims to investigate the most and least common methods currently used. By investigating different organizational types and indus-tries the thesis aims to find differences in the usage of bootstrapping methods. It will ana-lyze the motives behind bootstrapping, to see if the organizations are experiencing any need for capital and if they believe to be able to receive external capital from banks and new owners.
The thesis will also be conducted as an information gathering for Coompanion to increase their knowledge and competence in this area to further their organizational skills.
1.5.1 Research Questions
Given the information that has been provided so far, the primary question can be nar-rowed down to:
• What are the most common current financial bootstrapping methods used by small businesses, associations, and cooperatives in Sweden?
While answering this primary question, secondary questions will follow:
• Do the financial bootstrapping methods differ between the organizational types? • Can a difference in usage of bootstrapping techniques be detected between the
stages of development?
• Does a high demand for capital lead to a larger number of bootstrapping tech-niques?
• Or have organizations that use financial bootstrapping minimized their need for capital?
1.6 Structure of Thesis
Chapter 1 – Introduction. This chapter will focus on providing a background on the subject, as well as clarifying the purpose and research questions of the thesis.
Chapter 2 – Frame of Reference. The second chapter will cover the theories that the thesis is based upon, and the theories that will be compared with the empirical findings and thus formulate the analysis.
Chapter 3 – Method. In this chapter the methods used in the process of the thesis are dis-cussed and explained.
Chapter 4 – Empirical Findings. Chapter four is a presentation of the findings that have been achieved in the process of the paper.
Chapter 5 – Analysis. This chapter will provide comments, interpretations and reasoning re-garding the empirical findings.
Chapter 6 – Conclusion. The concluding remarks will answer the research questions stated in the introduction and give a clear picture of bootstrapping usage in Sweden.
Chapter 7 – Discussion. In the discussion chapter further comments, reasoning and interpre-tations to the study are formulated. It will also give recommendations on how to carry out future studies.
Chapter 8 – Policy Recommendations. This chapter will function as a short summary of recom-mendations for organizations who wish to get information on ways to bootstrap.
1.7 Results
The results have found that financial bootstrapping techniques are used by the organiza-tions included in this study. Some methods are more commonly used than others. The study indicates that a higher need for capital leads to an application of more bootstrapping techniques. Generally, the empirical findings imply that the pecking order theory is applied in the investigated organizations.
2
Frame of Reference
The purpose of this chapter is to provide the theoretical frame of reference that constitutes the basis of the empirical studies performed. First a short introduction to previous studies will explain the shortcomings that this thesis wishes to fulfill. Followed by theories concerning small businesses, associations and cooperatives, the problems small businesses often face when applying for external capital, the life cycle businesses go through, and a thorough background to what financial bootstrapping is. The majority of the theories includ-ed in the frame of reference has only been concerninclud-ed about companies. Despite this the authors believe that the theories can be applied to all organizations concerned and all theories in this section are relevant for the study.
2.1 Introduction to Previous Studies
Bootstrapping research has so far only been enlightened for small enterprises in specific in-dustries and the possibility for them to explore the advantages that follows (Ebben & Johnson, 2006; Freear et al., 1995; Carter & Van Auken, 2005; Harrison et al., 2004; Win-borg, 2003; Winborg & Landström, 1997, 2001). However, no research has been completed to cover the areas of cooperatives, organizations and associations. Through an empirical re-search this thesis will be able to compare the results from Winborg and Landström in their earlier studies and to review what bootstrapping techniques that are most commonly used and the underlying reasons for the application. The thesis will focus upon connecting earli-er conducted research and existing litearli-erature with a new empirical research and the impact bootstrapping can have on cooperatives, organizations and associations as well as enter-prises.
Literature about bootstrapping has mainly been provided by authors from Sweden, the US and the UK. The focus in this thesis will be put on the use of bootstrapping in Swedish businesses, however, information about how bootstrapping is used within companies in the rest of the world will provide vital information about the differences and similarities of the implementation of bootstrapping.
2.2 Small Corporations, Associations and Cooperatives
Small businesses differ largely from large businesses; Storey and Greene (2010) have identi-fied multiple aspects apart from size by which small and large businesses differ radically from each other. These aspects include a larger risk of failure, less market power, lower wages and an autonomous way of running the business (Storey & Greene, 2010, p. 8-10). There is no common definition of a small firm, but governmental bodies in several coun-tries have released rather different definitions. In 1971 the Bolton Report was released that provided a definition of small businesses, which has been one of the most influential defi-nitions used. This definition required that firms, in order to be labeled as small, had to have only one person in charge of owning and managing the business, be legally independent and have a small piece of the market share (Storey & Greene, 2010). A similar definition was in 1953 made public by the Small Business Act, where they view small businesses as
independently owned and operated firms, which do not have a large part in the market in which they operate (Storey & Greene, 2010).
The reason for lacking a common definition of a small firm is because the industries and sectors demand different levels of sales and employment (Storey, 1994), what may be re-garded a small business in one sector might be rere-garded as a large business in another. By U.S. agencies small businesses are often defined as businesses with fewer than 500 or 100 employees, whereas the European Union characterizes small firms as firms with fewer than 50 employees and micro enterprises with less than 10 employees (Walters, 2002). Sin-gle-person enterprises are not included at all in many of the statistical investigations, which is surprising since 75% of all enterprises in the U.S. are as a matter of fact self-employed enterprises (Walters, 2002).
Considering that nine out of ten small enterprises have less than 10 employees, they thus belong to the group of micro enterprises. The importance of these types of organizations for the survival of society is immense, small businesses have a direct affect on the Swedish GNP that is larger than that of medium-sized and large businesses (NUTEK, 2005).
Due to these differences in definitions, and the exclusion of single-person enterprises, a lot of the research done on small enterprises is not easily comparable, and since the specific needs and characteristics of these types of firms have been neglected, further studies need to be carried out. Even more so, since small businesses are the most common size of en-terprises in the world, as a matter of fact 99% of all businesses in Europe belong to the small business sector (Enterprise and Industry thematic site on EUROPA, 2010), they ought to be given priority.
2.2.1 Economic and Non-Profit Associations
An economic association’s purpose is to pursue business, giving it similar needs concerning its corporate management as a limited company. The definition of an economic association is an association, whose design is to foster the economic interest of its members, through economic activities and it consists of at least three members. Non-profit associations exist in three forms, namely non-profit organizations that foster its members’ economic inter-ests, associations that through non-economic activities foster non-profit interinter-ests, and as-sociations that through economic activities foster non-profit interests. Thus, comparing a non-profit association to an economic association, the non-profit organization does not combine its economic activities with the purpose to foster its members’ economic interests (Hemström, 2010).
Despite this, these associations, like all organizations, need capital in order to survive (Hemström, 2010).
2.2.2 Cooperatives
There are two definitions of cooperatives that are used today, one of which was defined by the International Cooperative Alliance in 1995, and reads “a co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and
cul-tural needs and aspirations through a jointly-owned and democratically-controlled enter-prise” (Zamagni & Zamagni, 2010, p. 23). The second definition was written by the US Department of Agriculture in 1987 and says that a cooperative is “an enterprise owned and controlled by its users, which distributes benefits based on the use they make of it” (Za-magni & Za(Za-magni, 2010, p. 24-25). A cooperative is built on an idea of collaboration, in which people with limited resources together can solve their needs, which can be econom-ic, social or educational (Bartilson, 1990).
A cooperative is not a business type according to Swedish legislation, but rather they ought to follow the same legislation as economic associations (SFS 1987:667).
2.3 The Resource Dependence Theory
According to the resource dependence theory the survival of all organizations depend on how efficiently the organization is able to attract and keep their resources. All organizations are at some point dependent on others to receive the resources they require, and are thus forced to perform transactions with all sorts of organizations in their environment (Pfeffer & Salancik, 2003).
Resources are “all assets, capabilities, organizational processes, firm attributes, information, and knowledge” (Barney, 1991, p. 101) that allow the firm to become more efficient and ef-fective. The resources tend to be divided into categories, and Barney used three categories and distinguished between physical resources, human resources and organizational re-sources (Barney, 1991). Physical rere-sources include physical items used in a firm, such as equipment, premises, machines, and raw materials. Human resources are resources con-nected to the management and employees at the firm and include training, experience, in-telligence, relationships, education and skills. Organizational resources comprise of the or-ganizational planning used in the firm, and the controlling routines, internal and external relations and reporting structures (Barney, 1991).
Where resource acquisition in the past has been regarded to be dealt with by using financial means, some researchers have found that resources can be retrieved by using other than fi-nancial means. Starr and MacMillan (1990) choose to emphasize the power of social net-working, and relations to friends, former employers and employees, customers and suppli-ers, when acquiring resources. By borrowing, sharing or acquiring resources below market value, resources can be achieved using low or no cost at all.
Resource dependence theory is thus highly connected to financial bootstrapping, as finan-cial bootstrapping is concerned with how the personal network is exploited to acquire re-sources at low or no cost.
2.4 Financial Gap
Financial options and capital resources in the Swedish market have been fluctuating a lot during centuries. Causes for the fluctuation have been widely discussed; some argue that it arises due to the supply level of risk capital and venture capital. The major problem howev-er, is not the supply level but rather the knowledge and information about the demand for
capital (Landström, 2003). According to Vanacker and Manigart (2008), the financial mar-kets are imperfect and financial decisions are difficult to assess and there might be serious consequences for making the wrong decision. Consequently, a large reason for the financial gap to occur is the informational knowledge between the two parts. The gap of infor-mation is known as inforinfor-mation asymmetry and refers to the fact that a company has more information and knowledge about a project or themselves, compared to a financial institu-tion and vice versa, the financial instituinstitu-tion has more informainstitu-tional knowledge regarding the state of the financial market (Landström, 2003).
However, there is more to the financial gap than just the presence of information asym-metry. According to Landström (2003) there are several incentives for financial institutions not to invest in small start-up companies. First of all, the risk of investing is high due to the proportions of bankruptcies and corporate failures for start-ups. Secondly, the financial in-struments used when analyzing the financial capacity and future progressions are inferior, since they are created for large companies. Thirdly, the transaction and control cost is high, small companies need smaller investments and the cost of controlling a small investment is higher than controlling a large.
Furthermore, financial institutions are not solely responsible for the financial gap. The owners and managers of the start-up companies are often negative in the aspect of acquir-ing external capital and rather employ a peckacquir-ing order (Myers, 1984), described later on in the chapter.
2.4.1 Information Asymmetry
Informational knowledge often varies at the financial markets, a state of perfect infor-mation, where all agents and players have access to the same information level and makes correct decisions is not likely, consequently the prediction of future events is imperfect. As described earlier the information asymmetry can be defined as the gap of information be-tween a company and a financial institution. Information asymmetry is generally present for smaller companies and start-ups that cannot provide as good internal economical in-formation as larger and more developed companies can (Parkin, 2010).
Information asymmetry is one of many reasons for the presence of financial bootstrapping. Since small companies find it harder to gain financial trust from banks and financial institu-tions than larger corporainstitu-tions, new ways to exploit money has been developed. There are two problems that might occur when a state of information asymmetry exists, adverse se-lection and moral hazard. Adverse sese-lection occurs when a financial institution enters a con-tract with another party, and where one of the parties uses private information to their ad-vantage. Moral hazard is the occurrence of using private information to their benefit after entering a contract deal (Parkin, 2010).
2.4.2 Transaction Cost and Control Cost
“Transaction costs are the costs that arise from finding someone with whom to do busi-ness, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled” (Parkin, 2010, p.242).
According to Landström (2003) small companies and start-ups usually require less capital and financial aid compared to larger companies. This means that the cost of controlling the investment for the bank or financial institution is greater, accordingly investments focuses on larger corporations. Furthermore, due to the transaction cost and control cost smaller companies are not as attractive for the financial institution and the profit margin for con-trolling a small investment in a small start-up company is not high enough for the bank compared to the risk that the bank is undertaking, so investment opportunities in smaller start-ups are often discarded.
2.5 Capital Structure
According to Matthews, Vasudevan, Barton and Apana (1994) capital decision structure are different depending on the size of the company. A larger company consists both of a larger information decision process and decisions that are being based on a greater informational base, compared to smaller and micro companies. Previous research has explained the fact that several persons involved in a decision process make a better decision compared to a single person. Furthermore, decisions are based on “processing capabilities, experiences, preferences and biases…” (Matthews et al., 1994, p. 353) and including more people into a decision process should make for a better outcome.
Matthews et al. (1994) developed a model for describing the capital structure decision for a privately held firm and the reasons for how the structure is composed. The figure is based on the owner/manager’s own personal variables, such as the need for control, risk propen-sity, experience, social norms and personal net worth combined with external variables such as market conditions, financial condition and organizational form. Consequently the personal variables and external variables affects the owner/manager’s belief about debt fi-nancing and therefore also the decision of bringing external capital, if possible, into the firm or not (Michaelas, Chittened & Poutziuris, 1998).
The personal factors are the decisive factors behind the capital structure decision. Figure 2-1 found below was composed by Matthews et al. (2-1994) and describes the relation between the personal factors, which directs the decision of structure, and the external factors which demands the owner/manager to reconsider the desired structure.
Figure 2-1 Capital Structure Decision Model (Source: Matthews, et al., 1994)
2.6 Pecking Order
Small companies have a high degree of control aversion, i.e. discard and dislike of outside control, and this is subsequently related to the ambition of growth. Cressy and Olofsson (1996) observed this matter and found the two concepts of control aversion and ambition of growth were negatively correlated with each other. Start-up companies that are encom-passed with lower risk aversion will accept external finance and therefore move along the so-called pecking order (Landström, 2003).
Myers coined the Pecking order in 1984, stating that companies follow an order of prefer-ence of financial means. Myers found that firms generally preferred internal financing compared to external financing. The pecking order consists of the following financial steps:
• Firms prefer internal finance.
• Companies adapt their dividend payout ratio to the investment opportunity • Sticky dividend policies
• If external finance is needed, companies will choose the safest security first. (Myers, 1984)
Depending on the level of risk aversion a company will pick an alternative higher in the or-der rather than further down and therefore not risking the use of external capital. The level of risk aversion depends also on the sector and what kind of business the company is un-dertaking. The reason for companies to apply a pecking order is the existence of infor-mation asymmetry and the fact that the company at hand has greater inforinfor-mation about their operations than the financial institution or bank (Landström, 2003). Carole A. Howorth (1999) developed a simplified model of the pecking order, which addressed that
small corporations differ in their risk aversion and stated that a company can truncate the pecking order at any certain time. This means that a highly risk averse company does not even consider moving down the pecking order.
Due to information asymmetry the outside investors can ask for a high rate of return and interest rate, this causes the manager to prefer to reinvest earned money and use the re-tained earnings as a way of financing the company, rather than taking in an outside inves-tor. Only when internally generated means are insufficient the manager will consider taking a more costly option, moving along the pecking order and thus seeking for outside inves-tors. Consequently a manager rather takes higher debt before reflecting upon the options of private investors and venture capitalists, and practices the possible advantages and op-portunities the pecking order provides. As a last resort the manager/founder will consider the possibility of obtaining new equity as an option (Vanacker & Manigart, 2008).
Vanacker and Manigart (2008) believe that the pecking order is more applicable and useful for larger companies compared to smaller companies even though the smaller companies are more exposed to the information asymmetry factor. However, according to Landström (2003) start-ups and small companies will use their own earnings and savings rather than taking on new loans and debt, which proves that the pecking order is present in small companies and start-ups as well. First when leaving the start-up phase other routes to fi-nancing will be pondered, such as banks, financial institutions, venture capitalists and in-dustrial partners.
2.7 Business Life Cycle
”Originally proposed in the marketing literature, the product life cycle has become a rally-ing point for how a number of different disciplines view the evolution of new industries” (Klepper, 1997, p. 145). The product life cycle (PLC) has been widely discussed and ana-lyzed, it encompasses different stages and Klepper (1997) mentions the explanatory stage, intermediate development stage and the mature stage. However, Kotler, Wong, Saunders and Armstrong (2005) mention an expanded model with five stages, product development stage, introduction, growth, maturity and decline. This model provides an enlarged infor-mation flow and can originate certain occurrences to a more specific stage of the product development. Klepper (1997) argues that the PLC can be applicable even on corporations, analyzing the fact that it is not only a product that has a life cycle, but also corporations. Winborg (1997) discussed the fact that businesses moves along several stages as it continu-ously develop and underlines the discussion previcontinu-ously conducted by Scott and Bruce (1987) and Churchill and Lewis (1993). The different stages of a business life cycle differs among the authors and critics, however the authors of this thesis have applied a four-step business life cycle, closely related to the approach made by Scott and Bruce (1987) as well as Churchill and Lewis (1993).
2.7.1 Introductory Stage
The first stage of the business life cycle is the introduction stage. In the introductory stage the company progress is very basic and in this stage the products and services of the com-pany should be developed. However, the products and/or services are not completely fin-ished and there is still room for much improvement (Klepper, 1997). The major problem for the organization is to minimize the costs and development expenses as well as finding new customers and obtaining sales.
During the introductory stage the organization is simple and the founders are the driving force behind any possible expansion, but foremost the incentive is just to keep the compa-ny alive and establish itself at the market. The search after customers is of great importance to gain new sources of financial streams, and in the early stage of the business life cycle re-sources from relatives and friends is another source of finance that is commonly used (Churchill & Lewis, 1983; Scott & Bruce, 1987). According to Bhide (1992) the strategies and product development is hard to foresee for a financial institution and therefore provid-ing the company with financial help is difficult.
According to Markova and Petkovska-Mircevska (2009) a start-up company needs to find funding from internal sources, consisting of the 3Fs, founder, family and friends. The more a founder can stretch the internal funding’s from the 3Fs the longer the start-up is protect-ed from external risk capital and therefore exposprotect-ed to a lower debt risk comparprotect-ed to a situ-ation where external capital is brought to the firm at an earlier stage.
Scott and Bruce (1987) address likely crises than might occur in the introductory stage. They mean that if the company shifts focus from staying alive and reinvesting earned mon-ey into the business and instead focuses on earnings and winnings there is little hope for the continuance of the company. The founders and managers of the company also need to remember to further and develop their informational systems and to continue to advance their internal structure and development of the product or service. When the company reaches a phase of high productivity the founder/manager needs to collaborate with people who can handle supervisory roles, so that the manager can focus the attention on a more administrative role.
Companies fighting to stay alive and highlight problems that need to be answered such as reaching enough customers and expanding the business from key customer as well as fo-cuses on cost management, will be able to move forward and reach stage two, the growth stage (Churchill & Lewis, 1983).
2.7.2 Growth Stage
The growth stage is the second step in a business life cycle, this stage consists of the com-pany gaining sales and taking off, the comcom-pany consists of a working structure or at least progresses into a better and more functioning one. The company now reaches enough cus-tomers to be able to develop further. However, the risk of not succeeding is still present and the founder/manager still bears the financial burden. Furthermore, the company still needs to focus on investing earning and cash flow form the daily business into the
organi-zation. The company has started to bring new employees into the business and the founder can be more focused on the administrative role of the business. In this stage, the company could be faced and exposed to credit problems, and the founder/manager is still the prime financial source. Seeking new capital and financial aid will bring the company to the bank-ing sector (Scott & Bruce, 1987). Brbank-ingbank-ing new employees into the company is of great im-portance; Bhide (1992) mentions that a small company cannot hire a manager that de-mands a high salary. The problem for the company is to find someone who can work hard, has the right competence and yet does not request a too high salary.
In the growth stage the numbers of competitors and possible competitors are still uncertain and the number of new entries are highly dependent on the success of the first mover and, “if barriers to entry are low the entry of new businesses will be simplified, increasing com-petition and making success based purely on differentiation more difficult” (Scott & Bruce, 1987, p. 49).
Early on in the growth stage the company is striving to increase sales and revenues, howev-er, the founder/manager still finds it hard to get any return on the investment. The compa-ny is also trying to develop the product/service as well as the possibility of elaborating with new products to reach a bigger market. The internal information system and accounting delegations will be more visible and planning scheme will not only be focused on the up-coming sales, but also instead focused on a larger view (Churchill & Lewis, 1983).
The company might be confronted with some problems early on in the growth stage; these can include a large amount of new entry companies and a demand that over exceeds the capacity. The entry companies are often large and are trying to differentiate the market and product, while being able to use economies of scale to push the price of the prod-uct/service down to increase their competitive advantage. If in fact the company is faced with a demand that exceeds the capacity, new investments will be needed to be able to real-ize the orders (Scott & Bruce, 1987).
Later on in the growth stage, the company consists of a more decentralized governance system and the different parts of the company need to collaborate well with each other in order to handle this phase. If in fact the company has reached this point without the need of external capital, the company is almost certain to need further economic help, rather than just the earnings, in order to expand and still be competitive in the market.
During the later part of the growth stage the company has reached a position where the founders can sell and make a considerable profit. The company will continue to grow and if it grows correctly and not too fast the stage of maturity will be reached (Churchill & Lewis, 1983). However, there are some implications for the company late in the growth stage. Scott and Bruce (1987) state that companies on the verge of stepping into the ma-turity stage face problems with internal information flow, because the company needs to put more focus on customer needs, instead of focusing on internal development. The in-formation problem is due to that the company is decentralized and the “founder will find himself getting further and further from the coal face” (Scott & Lewis, 1987, p.51) and in-stead watching the company from a helicopter view.
2.7.3 Maturity Stage and the Possibility of Decline
During the process from being a start-up company and moving through each phase, the company probably has gone from being small into a having a larger operation and might have moved past the problems of being a small company. The maturity phase will test the company’s ability to allocate money the right way. Controlling the financial means from the growth phase and striving to stay competitive in the market is difficult (Churchill & Lewis, 1983; Scott & Bruce, 1987).
The corporation needs to put focus on cost efficiency management and to continue devel-oping the productivity to be competitive in the market and keep the market share that has been reached through the previous steps. According to Scott and Bruce (1987) the compa-ny needs to put a great amount of effort and money into marketing in order to keep the competitive advantage.
However, there is a possibility for the company to decline and to decrease in size, depend-ing on how well the management handles the business development. As in the case of the product life cycle, the product can reach the stage of decline meaning the product sales are going down in a faster rate and eventually vanish out of the market. This could as well oc-cur in the case of a company depending too much on a single product/service and under-mining the product development. It is of great importance that the company continues their innovative development and price competition to be able to stay competitive in the market (Scott & Bruce, 1987).
2.8 Financial Bootstrapping
The assumption has in the past been that organizations traditionally acquire their resources from financial capital, normally in the shape of long-term loans from external financial in-stitutions (Winborg & Landström, 1997). This has lead to that the majority of research made on the subject is of the supply of capital, and the lack thereof. In more recent years the studies have been shifted so that finance in businesses includes other resources than mere capital (Winborg & Landström, 1997).
Bhide (1992) talks of the ‘Big Money’, where raising funds from external players is of empha-sis. In order to raise big money the entrepreneurs need to carry out careful market research which is both time and money consuming, they need to write business plans that are well thought-out, have knowledgeable boards of directors, and complex financial reports and structures (Bhide, 1992). Despite this focus on external capital, and raising money, there is a lot of proof that firms can manage well without an extensive level of start-up capital. More than 80% of the firms that were contacted by Bhide and his associates (1992) prior to writing the article, where not financed through external capital, but through personal sav-ings, credit cards and mortgages held by the founders. Other researchers on the subject have stated that “it doesn’t matter how much you start with” (Greco, 2002, p.1) and have found that companies who have started with less money are as likely to succeed as those that started with large capital (Greco, 2002).
According to Bhide (1992) some of the entrepreneurs talked of the dangers that were en-tailed in raising external capital. One of the entrepreneurs, the owner of Modular Instru-ments, says that by using bootstrapping methods in the start-up process, concealed prob-lems could be discovered and, thus, solved. “I wrote all the checks. I knew where the mon-ey was going.” (Bhide, 1992, p. 5) Of course more monmon-ey from start means more possibili-ties to hire personnel, pay market priced salaries, and not having to save money in all areas. However, having to save money in some areas might be proven to be a clever step, because it teaches the importance of putting a lot of thinking into all expenses. The start-ups are not attracting their employees by offering high salaries, but rather they provide their work-ers with opportunities to improve their skills and resumes (Bhide, 1992).
Despite what has been said the reasons for why people choose to bootstrap are more com-plex than merely having limited resources (Cornwall, 2010). Some of the reasons might be due to necessity, others are conscious choices made by the entrepreneur. These reasons can be divided into nine categories, which include 1) having no available funding, 2) limited ternal funding for start-ups, 3) choice to minimize external capital, 4) desire to have no ex-ternal investors – 100% inex-ternal ownership, 5) a way to minimize the risk exposure, 6) be-coming more effective as a business because the lack of resources forces the firms to be more flexible and creative, 7) having a need to focus all resources on one business area, and bootstrap all other expenses, 8) increase income for the owner as the cash flow in strength-ened, and 9) a moral reason to be a cautious and careful steward of the resources within the business (Cornwall, 2010). Winborg and Landström (2001) supported this when they found that some business managers keep using bootstrapping techniques even when they experi-ence no need for further capital.
During research that has been made in the past, evidence has been found that companies and people use bootstrapping techniques out of will, by making conscious and intentional decisions (Winborg, 2009).
2.8.1 Bootstrapping Techniques
According to Jeffrey Cornwall (2010) there are four rules that need to be followed in order to be successful in using bootstrapping techniques. The rules include, Rule 1) “overhead matters”, Rule 2) “employee expenses are usually the highest single recurring cost”, Rule 3) “minimize operating costs”, and Rule 4) “marketing matters, but know your customers and how they make decisions” (Cornwall, 2010, p. 16-24). If these four rules are followed, dur-ing start-up and periods of growth, the breakeven point can be reached quicker (Cornwall, 2010).
Overhead costs can be decreased by using numerous techniques, including costs for facili-ties, furniture and other equipment used in the business, communication tools and charges, costs involved in transportation, and accounting and legal services, and by being creative these non-salary costs can be lowered (Cornwall, 2010). Facility costs can be decreased by the use of online virtual offices and working from home, by working out of office spaces that are rent free, or that were accessed through bartering, renting space from business in-cubators that offer the office space at lower cost, or at the cost of equity in the business,
negotiating better deals such as ability to postpone rent etc., and choosing a space that best fits the purpose of the business being it location, price or level of quality (Cornwall, 2010). By thoroughly thinking through the decisions involved in planning and choosing equip-ment, what information technology and means of communication to use, how to plan transportation and insurance costs, and legal and accounting services, important cost cuts can be made (Cornwall, 2010). For most organizations the cost of employment is the larg-est expense that is involved in the running of the business, and there are several ways in which these costs can be decreased. Some creative measures to use are virtual teams, which are not restricted by location, distance, and time, hire temporary personnel, use students to perform certain tasks, or pay the employees using other compensation than salary (Corn-wall, 2010).
Companies can bootstrap by using a variety of techniques; Neeley (2004) has researched over 30 bootstrapping techniques which were divided into 12 categories, Freear et al. (1995) identified 32 techniques divided into product development techniques and business development techniques, and Harrison et al. (2004) followed a similar pattern when divid-ing their 31 methods. Other researchers within the area have had slightly diversifydivid-ing ideas, Winborg and Landström (2001) identified six groups of methods used in small firms, namely “owner financing methods, minimization of accounts receivable, joint utilization, delaying payments, minimization of capital invested in stock, and subsidy finance” (Win-borg & Landström, 2001, p. 243-244). Within these categories 32 different methods were identified.
2.8.2 Groups of Financial Bootstrapping Methods
As mentioned above, researchers have tended to divide the different techniques into groups of methods, to get a better understanding of the techniques used. Lynn Neeley (2004) chose to divide the bootstrapping techniques into 12 categories, which together in-cluded some 30 ways to bootstrap. These categories divided the methods into resources or loans and other borrowings by the owner, resources acquired through relationships or co-operation, bartering goods or services, quasi-equity, financing through customers, asset or cash management, different sorts of leases, outsourcing, subsidies and other incentives, and finally foundation grants (Neeley, 2004).
Freear et al. (1995) used a slightly different approach when conducting their survey, when the 32 methods of bootstrapping were divided into two components: product development techniques and techniques related to business development. They admit that it is not easy to identify the methods that should be allocated in the respective group, as a clear defini-tion of the two groups is difficult to achieve, however the analysis of the methods would get more interesting if the classification was made.
In 1997 Joakim Winborg and Hans Landström used the financial bootstrapping methods that were identified by Freear et al. in 1995 and complemented them with interviews con-ducted prior to the study, and ended up with 32 methods. These methods were later divid-ed into 6 groups, identifidivid-ed by the author through factor analysis. The first group was
la-beled “owner financing” methods, and comprised methods where resources were retrieved either directly or indirectly by the owner/manager or by relatives and friends. The second group included cash management tools, such as managing accounts receivable, and was called “minimization of accounts receivable”. The third indentified group consists of methods were cooperation and sharing is a common factor, these methods include sharing and borrowing resources from others, and the group is named “joint utilization”. Methods that dealt with delaying payments of different sorts were allocated to a fourth group, distin-guished as “delaying payments”. For the fifth group, methods that lead to a decrease in the resources invested in stock were gathered and labeled “minimization of capital invested in stock”. Lastly, the methods related to subsidies from public organizations were included in the sixth group, “subsidy finance” (Winborg & Landström, 2001 p. 243-244). All 32 meth-ods and the six groups can be found in Appendix 1 and 2.
2.8.3 Most and Least Usual Bootstrapping Techniques
In a report released by Joakim Winborg and Hans Landström (2001) they identified the most and least commonly used bootstrapping methods among the firms in their investiga-tion. The six bootstrapping methods that were most commonly used were:
1) “Buy used equipment instead of new” (78%)
2) “Seek out the best conditions possible with suppliers” (74%) 3) “Withhold manager’s salary” (45%)
4) “Deliberately delay payments to suppliers” (44%) 5) “Use routines for speeding up invoicing” (44%)
6) “Borrow equipment from others” (42%) (Winborg & Landström, 2001)
From this list of methods the first five techniques are trying to decrease the strain on the financials of the businesses, whereas the last method eliminates all use of financial means and thus all strain on the business. The sixth method relies on social connections and social transactions.
Another list was created by the least commonly used methods and these were identified to include:
1) “Obtain subsidy from the Swedish foundation “Innovationscentrum” (0%) 2) “Raise capital from a factoring company” (3%)
3) “Obtain subsidy from the Swedish National Board of Industrial and Technical De-velopment” (6%)
4) “Obtain subsidy from the Swedish County Labor Board” (8%) 5) “Share employees with other businesses” (8%)
6) “Share equipment with other businesses” (8%) (Winborg & Landström, 2001) Given these results, the use of subsidies in not common among the companies examined, nor is sharing equipment and employees. These results were not expected by Winborg and Landström (2001) who assumed these methods to be more frequently used.
2.8.4 Advantages and Disadvantages of Financial Bootstrapping
The major advantage that is accomplished when using financial bootstrapping techniques is that the strain on the financials of the business can be decreased or eliminated. Meanwhile the business can still be run so that the objectives can be reached (Winborg, 2003). By do-ing this the strain is actually transferred from the bootstrappdo-ing firm to others. This is of extra importance for organizations in the introductory stage, where the need for resources tends to be larger than the access. Another advantage is that the use of bootstrapping means that new owners need not be brought into the firm, leading to kept control of the organization (Winborg, 2003). Indirectly this leads to less time being spent on trying to at-tract external capital, and more time available for the development of the core activity. To conclude, the last advantage is that organizations can be successful in getting hold of re-sources that cannot be bought, through connections. Special competence and equipment that are crucial for the competitive advantage of the organization can be reached using fi-nancial bootstrapping (Winborg, 2003)
There are also some potential disadvantages to using financial bootstrapping methods. Since bootstrapping often relies of personal connections, using friends, customers, or sci-entists/students at universities, the time frame might be longer than expected and thus im-pede the level of development. Consequently there is risk that competitors who have access to capital are able to develop faster. Another disadvantage lies in the lack of ownership in the resources. Not owning the resources might lead to a certain level of insecurity, seeing as the resources might disappear and thus create a vulnerable state for the organization. Last-ly, there is potential risk that the relations that the organizations rely on are abused and wrecked (Winborg, 2003).
Following the theoretical framework that has been presented so far, eight hypotheses have been formed. By analyzing the empirical findings these hypotheses will either be rejected or accepted. All hypotheses and the underlying reasons for their formulations are listed below.
2.9 Hypotheses
“Statistical hypothesis testing provides managers with a structured analytical method for making decisions of this type. It lets them make decisions in such way that the probability of decision errors can be controlled, or at least measured” (Groebner, Shannon, Fry & Smith, 2011, p. 371). The hypotheses, which follow in the next section, are a development and extension of the research questions stated earlier in the thesis. The hypotheses aim to test and answer the research questions and clarify the usage and techniques of bootstrap-ping.
Freear et al. (1995) mentioned that small companies and start-ups find it hard to attain ex-ternal capital, mainly from financial intermediaries. Accordingly small companies use boot-strapping techniques and as a later resort try to attain external capital. This leads to the first hypothesis:
H1: According to the pecking order small organizations and start-ups prefer internally gen-erated money and private savings as first financial means, secondly through secure loans and as a last resort bringing in new equity.
The first hypothesis leads to a secondary follow-up question which aims to attain knowledge about the usage of bootstrapping techniques and if in fact smaller companies use more techniques compared to larger companies that more easily can gather external fi-nance.
H2a: Small organizations and start-ups find it hard to attain external capital. H2b: Small organizations exploit bootstrapping options.
Companies in different business environments and differences in operation require several various levels of capital and capital structure in order to succeed in the market. The reason for this is the dissimilar overhead costs and expenses some companies are faced with and others not.
H3: Small organizations and start-ups in need of further capital apply more bootstrapping techniques compared to companies with smaller capital needs.
Hypothesis number 3 raises the following questions, if in fact the bootstrapping techniques differ in between the type of organization, kind of industry the company is active in, and if the age of the manager has any affect on the usage of bootstrapping techniques? Compa-nies in different industries are faced with different needs and demands, so the bootstrap-ping techniques might be practiced more or less for certain companies. Hypothesis number 4 is divided into three separate hypotheses 4a, 4b and 4c, where 4a will test if in fact the bootstrapping techniques differ between the types of organization, 4b will test the industry usage, and 4c will test is there is a difference in bootstrapping usage and the age of the manager.
H4a: Bootstrapping techniques differ depending on the type of organization.
H4b: The use of bootstrapping techniques varies depending on what industry the company is active in.
H4c: Younger managers more commonly use bootstrapping techniques.
The business life cycle has previously been discussed and due to the different stages the companies are located in, there could be a difference in the use of bootstrapping tech-niques for attaining and allocating capital.
H5: Bootstrapping techniques and application varies in different stages of the development of the company.
3
Method
In this chapter the authors will examine the different methods that have been applied in this thesis. The reader will also be provided with an insight of the empirical and quantitative methods that have been used. The method chosen in this thesis will be based on the positivistic approach and the research approach has been following the theories of the deductive approach, the reason will be discussed in the following section.
3.1 Methodological Approach
Empirical research amounts from knowledge that originates from our senses and previous encounters, which mean that prior encounters can affect the way a person sees upcoming events. Positivism, a branch from empirical and natural science, states that knowledge has to be verified and have the ability to improve the state of present knowledge. The opposite of positivistic approach is the hermeneutic approach where studying and interpreting the foundations of the human existence is the establishment (Patel & Davidson, 2003).
The positivistic approach is mostly handled in quantitative data gathering whereas the her-meneutic approach focuses on interpreting actions in order to develop new knowledge. In-stead of verifying the results as a positivistic approach, the hermeneutic approach aims at finding a new understanding (Patel & Davidson, 2003). This thesis will be based upon a quantitative research and subsequently follows the positivistic approach.
3.2 Research Approach
According to Saunders, Lewis and Thornhill (2007) method is the process to obtain and analyze data. A research approach can be concluded from two perspectives; the first branch is the deductive theory where research draws from previous knowledge, inquiries and facts (Morse & Peggy, 1995). The deductive research is often known as the top down approach, where gathering information from previous research is a first step, followed by the for-mation of hypotheses, observation of new material and research, and finally allowing for an analysis of the hypotheses and coming up with a conclusion and possible confirmation of the initial, general idea (Saunders et al., 2007). Consequently, the inductive method is a pro-cess where the observance of a phenomenon will bring the researcher to theories and con-clusions (Sekaran, 2003). This thesis will be based upon a deductive research where the ex-isting models and theoretical framework will be questioned by a questionnaire and hypoth-eses. The hypotheses will be rejected or accepted depending on the results.
Since there have been a rather wide variety of authors researching financial bootstrapping within the area of start-up companies, furthering the investigations to associations and co-operatives will broaden the theoretical framework to this area. The theoretical and empiri-cal material has developed during the time frame of this thesis, where the Swedish authors Winborg and Landström (1997;2001) have been used as a foundation for the project con-tinuing to the use of U.K. and U.S. studies.
