J. Daniel Kim, Management, The Wharton School; Ndu Ugwuanyi, PhD Candidate, The Wharton School; David Hsu, Management, The Wharton School
Abstract: New ventures are grappling with the rising costs of capital (both debt and equity). As a result, investors of high-growth, technology-based startups are shifting focus to companies that can generate immediate cash. That is, investors are prioritizing cash flow positivity over growth. A recent report has documented that high-growth, technology-driven startups that are bootstrapped outperformed those that are VC-backed on both profitability and growth. Yet, the reason for this performance differential is poorly understood given that bootstrapping is an underexplored phenomenon due to the unavailability of large datasets to answer important questions. Through this study, we first seek to build a large, novel dataset that can facilitate research on bootstrapping. In addition, we immediately respond to two important questions pertaining to why bootstrapped startups may be better able to manage the balance between cash flow positivity and growth. Specifically, the study aims to shed light on the drivers of strategic bootstrapping and document mechanisms through which it impacts startup experimentation. In the process, we link the capital structure decision of bootstrapping to the broader literatures on entrepreneurship and innovation.