Seeding the cloud: financial bootstrapping in the computer software sector

Abstract

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

Acknowledgements

The authors gratefully acknowledge the comments and suggestions of two anonymous referees, participants at the Middlesex University SME finance conference and the assistance of Maria Smihily at Eurostat, Brussels.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

^1. We adopt Butchart's (1987) broad definition of high-technology firms, and all ventures in our sample fulfil the definition of start-ups provided by Burgel et al. (2000), as independently held firms younger than 10 years operating in a high-technology sector.

^2. Harrison, Mason, and Girling (2004) list ‘research grants’, and Winborg and Landström (2001) list subsidies from ‘County Administrative Board, County Labour Board, Swedish National Board for Industrial and Technical Development, and foundation Innovationscentrum’ as sources of bootstrap finance. Some may consider grant funding a formal source of finance, although given the irregular availability and uncertainty of success in obtaining grants, we follow the aforementioned authors and include it as a bootstrap technique.