Seeding the cloud: financial bootstrapping in the computer software sector

Abstract

Seeding the cloud: Financial bootstrapping in the computer software sector.This study investigates resourcing of computer software companies that have adopted cloud computing for the development and delivery of application software. Use of this innovative technology potentially impacts firm financing because the initial infrastructure investment requirement is much lower than for packaged software, lead time to market is shorter, and cloud computing supports instant scalability. We test these predictions by conducting in-depth interviews with founders of 18 independently owned nascent enterprises, of which three quarters have adopted cloud computing. We identify particular bootstrapping methods used by start-ups in the computer software sector. Cloud computing enables firms to develop and launch products with minimal resources, reducing barriers to entry, with consequent increased competition. The primary business bootstrapping technique is foregoing wages, supplemented by small amounts of grant funding. Customers are a source of knowledge and expertise for product development, which occurs in an iterative process. Product bootstrapping techniques have changed in response to technological innovation, although methods to acquire tangible assets are identical over time. Astutely applied, financial bootstrapping is a resource management strategy essential to the growth and survival of high technology firms.Keywords: software industry; bootstrapping; cloud computing; social networks; private equity; business angels; disruptive innovation IntroductionHigh technology based firms are an important source of employment creation, economic growth and technological innovation (Colombo et al. 2010;Freear, Sohl, and Wetzel 2002;North, Baldock, and Ullah 2013;Rasmussen and Sørheim 2012). Central to the development of a high technology small firm sector is a considerable level of start-up activity and new firm formation. A barrier to this expansion, however, is the ability of firm founders to acquire adequate finance for their nascent ventures (Basu and Parker 2001;North, Baldock, and Ekanem 2010). This is particularly evident for introduction of technological innovation for new firms in the computer software sector.We contextualise our findings in relation to the literature by comparing bootstrapping techniques used by firms in our sample with those used by computer software firms studied by Wetzel (1995), andGirling (2004).We address the dearth in the literature identified by Grichnik et al. (2014) Resourcing implications for software firms adopting cloud computingCloud computing refers to applications delivered as services over the internet, and the hardware and systems software in datacentres that provide those services (Armbrust et al. 2009). Thus, cloud computing may be conceptualised as a combination of three layers of abstraction: software-as-a-service (SaaS), platform-as-a-service (PaaS), and infrastructure-as-a-service (IaaS) (Weinhardt et al, 2009, Vaquero et al, 2008. The first layer is the focus of our study, and ...

Start‐up financing: How founders finance their ventures' early stage

“…The amount of external funding is captured as the sum acquired from external sources, including external debt and equity. Because the bootstrapping literature demonstrates the importance of subsidies, these are also included in the amount of external funding (Mac an Bhaird & Lynn, ; Winborg & Landström, ).…”

“…Entrepreneurs who do not have adequate from these traditional sources raise additional capital (Carpenter & Petersen, ) from such methods as bootstrapping to overcome problems associated with scarce resources (Harrison et al, ). Mac an Bhaird and Lynn () demonstrate that new business owners who use bootstrapping to finance new software ventures relied on substantial amounts of personal savings. Because a substantial initial financial resource base from personal savings lower the need for bootstrapping behaviour, we hypothesizeHypothesis The amount of initial funding from personal sources is negatively related to the use of owner‐financed bootstrapping.…”

Finance pathways for young innovative small‐ and medium‐size enterprises: A demand‐side examination of finance gaps and policy implications for the post‐global financial crisis finance escalator

“…Various studies (Gill, ; Mason et al, ; North et al, ) have used the finance escalator to highlight potential supply‐side finance gaps, while others such as Harrison () and Baldock and Mason () used it to track the changes in availability of finance, post‐GFC, in the United Kingdom. Recently, highlights of the evolving U.K. finance escalator include: (a) the withdrawal of early stage bank debt finance (Cowling, Liu, & Ledger, ; North et al, ); (b) the withdrawal of private VC from early stage and even early growth stage finance (Baldock & Mason, ; Mason et al, ); (c) the increasing role of public VC funding in early and early growth stage financing (Mason & Pierrakis, ; North et al, ); (d) the increasing role of grant funding in early stage finance, extending beyond initial PoC funding (Baldock & Mason, ; North et al, ); (e) the emerging role of new and alternative forms of equity finance in early stage funding, such as through corporate‐sponsored accelerators and seed equity crowdfunding platforms (Collins, Swart, & Zhang, ; GLA, ); and (f) the increasing incidence of bootstrapping/bricolage techniques and financing models including self‐funding, consultancy income, and collaborative (e.g., licensing and joint venturing) arrangements (Mac an Bhaird & Lynn, ).…”

Determinants of equity financing: a demand-side analysis of Irish indigenous technology-based firms

“…Third, this work uses a unique database which spans technology-based manufacturing and knowledge-intensive service sectors thus adding to existing sector specific studies (Hoenen et al, 2014;Munari & Toschi, 2015). The sample spans Irish technology-based manufacturing and knowledge-intensive service sectors, building on existing sector-specific studies (Hogan & Hutson, 2005a, 2005bHogan et al, 2017;Mac an Bhaird & Lynn, 2015). Finally, we provide novel empirical evidence in the Irish context.…”

“…Using the same database, Hogan et al (2017) revisit the issue of funding for software firms, extending the analysis to the determinants of private-equity and venture capital funding (Hogan et al, 2017, page 243). Focusing only on internal funds and angel finance, Mac an Bhaird and Lynn (2015) investigate financial bootstrapping in eighteen Irish computer software companies. This paper, through the adoption of a broad definition of equity finance (encompassing angel, venture capital and government-sponsored funding), builds on these studies to provide greater insight into the demand-side determinants of equity finance.…”