Bootstrapping
Bootstrapping is a complicated word. Much more complicated than I had imagined until I started looking into it. I would ask you to play along with me and make a note to yourself about what you think of when someone uses the term bootstrapping. I don’t want to bias your thought process by adding a context. The term derives from the small leather loop or tab at the back of a man’s boot that is used to aide in pulling on the boot. Boots have been around since the 12th Century and straps were added as recently as the 14th Century, but they only began being called bootstraps in about 1870. Thirty years later the first alternate use of the word came into vogue. That was to characterize an impossible task. The analogy was simply that one could not pull oneself up by the bootstrap. This is a basic property of physics that reminds us that having a reference point against which the laws of motion interact is necessary. Unless you can have something to exert a force against, pulling on a strap gets you nowhere.
Somewhere around the time of WWI there was a shift to this interpretation. Rather than imply this as a physics problem, the practical reality was that soldiers had bootstraps to help them pull on their own boots unaided by anyone else. It was therefore altered to mean to “better oneself by rigorous, unaided effort.” From there, as the computer era came into vogue, booting became a starting up of the operating system of the computer and the reference of bootstrapping was that the start-up requires a set of operating instructions that operate autonomously to get going. A computer therefore must tell itself to start its operating system even though it has no installed operating system with which to direct its opening. When you stop and think about it, it does, indeed, seem to revert to that physics example of impossibility, but clearly we all know its not. In the investment world, bootstrapping is meant to self-finance, which is to say, fund the growth of the company from its own cash flow. And finally, bootstrapping has become a statistical term that means a statistical procedure that resamples a single dataset to create many simulated samples to aide in developing confidence intervals. Phew! That’s pretty complicated, right?
And then there’s the Bootstrap Paradox, which is a SciFi concept that most often relates to time travel, something I simply don’t like. I must have a mind that cannot bend itself into a pretzel, or better yet, a Möbius strip to accommodate the concept of time travel. The Paradox is an obviously self-contradicting concept (hence the Mobius quality). In time travel, this most often has to do with something (an item or piece of information) that goes back in time and therefore must have created itself since there were no precedents from which it was derived. Hence the Bootstrap (Impossible) Paradox. What the hell is so great about time travel that people are drawn to imagining how they might do the impossible?
What got me going in this direction was a dinner I had tonight with a student in my Advanced Corporate Finance course. We have just covered Special Purpose Acquisition Companies (SPACs), the latest financial concept to adopt bootstrapping as its primary technique for generating capital and going public. It’s actually a perfect example since some might suggest that SPAC financing is making something from nothing. But this story is not a finance story. This is a people story and its about the student who asked for the dinner. He was blown away by the four professional practitioners I pulled in over two weeks (6 hours of class) to discuss the topic from different perspectives. There was a lawyer, a consultant/advisor, an investment banker and an operator (management member, specifically an ex-CEO). They were collectively an impressive team of world-class practitioners that really gave the students an excellent understanding of the SPAC landscape. He wanted to talk to me as a mentor to help guide him in his career planning.
He had grown up locally, the son of a surfing father who worked in restaurants to earn a living. He didn’t say it, but I suspect he wanted to be more motivated and successful than his father cared to be. He explained that he is thirty-two and had taken a while to find his direction. After two years of studying history at Chico State, a school he described as a party school, he took a pause to work in a restaurant. That’s when he met his wife and the two of them decided to go back to school at Cal State San Marcos to both study business. At the same time, they both decided to stop drinking. I took that to mean that they decided to get serious. He excelled in the business program and when he had finished he took a corporate job in FP&A (financial planning and analysis) where he has worked for a year. He has developed serious programming skills as well and has worked on the side developing financial models for real estate valuation and assessment.
He explained to me that he wants to get into what he called “high finance”. I think that’s his way of saying that middle-office FP&A was not his long term goal and that being a deal-doer in the front office was where he wanted to head. After a relatively short stint at his company, he has LinkedIn his way into a job offer at a young real estate private equity firm as their acquisition analyst. He would be working with a small team responsible for generating all of the company’s assets in the multi-family real estate space. In addition, he wants to ideally keep his side gig modeling real estate valuations since it should not be conflictive but add a quantum to his income while continuing to expand his skill base.
I asked him one important question; whether he planned to disclose his side gig to his new employer. He immediately answered that he felt he had to do that. It was the right answer and it comforted me that this young man who was suddenly in a hurry to drive himself into the wild and wooly world of finance had a good ethical foundation. That was important to me in advising him since He was moving pretty fast and into the fast lane, which is how I would describe real estate private equity. I couldn’t help but tell him that this was a perfect move for his objectives and that I was impressed that he had managed to position himself, by himself, so well from what might be described as an otherwise humble beginning.
He had bootstrapped himself into high finance and I was happy for him and willingly told him I would be happy to mentor him as he stepped into this new world. My guess is that his trepidation today will quickly become comfort and self-confidence, but that remains to be seen based on whether what he describes as strong financial modeling skills are as strong as he thinks and as his new team expects. I give him good odds of making it work as he has proven to be good at bootstrapping.