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THE BUSINESS Strategic Bootstrapping Babson College Entrepreneurship

RUTHERFORD
EXPERT PRESS Matthew W. Rutherford Research Conference Collection
DIGITAL LIBRARIES Strategic Bootstrapping is about helping entrepreneurs Andrew “Zach” Zacharakis, Editor
EBOOKS FOR sift through the “noise” regarding bootstrapping a start-
BUSINESS STUDENTS up. The cold-hard facts on bootstrapping are presented.
Curriculum-oriented, born- Practically speaking, most entrepreneurs should avoid
digital books for advanced bootstrapping, realistically, most entrepreneurs will need
business students, written to engage in some form of bootstrapping. The argument
by academic thought then shifts to how should one bootstrap? In this era of
leaders who translate real-
lean start-ups, effectuation, and bricolage, bootstrapping
world business experience
is oft romanticized but seldom analyzed. This book is dif-
into course readings and
reference materials for ferent from other bootstrapping books in two key ways.
students expecting to tackle First, it draws on evidence from scientific study to offer

Strategic
management and leadership best practices. Second, it utilizes this evidence to help en-
challenges during their trepreneurs thrive—not just survive.
professional careers.
Matthew W. Rutherford, PhD, is associate professor and

Bootstrapping

STRATEGIC BOOTSTRAPPING
POLICIES BUILT Johnny D. Pope Chair in Entrepreneurship at Oklahoma
BY LIBRARIANS
State University. He received his PhD from Auburn
• Unlimited simultaneous
University.
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way to deliver practical
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ENTREPRENEURSHIP
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Strategic Bootstrapping
Strategic Bootstrapping

Matthew W. Rutherford, Ph.D.

Strategic Bootstrapping
Copyright © Business Expert Press, LLC, 2015.

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted in any form or by any
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First published in 2015 by

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 Abstract
This book is about helping entrepreneurs sift through the “noise” regard-
ing bootstrapping a start-up. Ultimately, the cold-hard facts on bootstrap-
ping will be presented. Practically speaking, most entrepreneurs should
avoid bootstrapping. However, realistically, most entrepreneurs will need
to engage in some form of bootstrapping. The argument then, impor-
tantly, shifts to how should one bootstrap? In this era of lean start-ups,
effectuation, and bricolage, bootstrapping is oft romanticized but seldom
analyzed. This book is different from other bootstrapping books in two
key ways. First, it draws on evidence from scientific study to offer best
practices. Second, it utilizes this evidence to help entrepreneurs thrive—
not just survive.

Keywords
Bootstrapping, new venture strategy, new venture finance
 Contents
Chapter 1 Bootstrapping Described....................................................1
About This Chapter...........................................................1
What Is It?.........................................................................3
The Cowboy Way—Brief History of Bootstrapping...........4
Bootstrapping Involves Making Choices about
Initial Financing.................................................................7
Bootstrapping Involves Creatively Operating
in Resource-Poor Environments.........................................8
Myths Associated with Bootstrapping................................9
Strategic Bootstrapping versus Reactionary
Bootstrapping..................................................................12
The Structure of the Book................................................13
Chapter 2 Bootstrapping and the Problem of Being New.................15
About This Chapter.........................................................15
Engage in Self-Reflection.................................................16
Newness...........................................................................18
Overcoming Newness Liabilities......................................21
The Importance of Legitimacy in the New Venture..........22
The Importance of Signaling in the New Venture.............24
Summary.........................................................................24
Chapter 3 New Venture Finance Considerations for the
Bootstrapper....................................................................27
About This Chapter.........................................................27
The Funding Gap.............................................................28
Types of External Financing.............................................30
The Bermuda Triangle......................................................35
The Financial Growth Cycle.............................................38
Summary.........................................................................39
viii CONTENTS

Chapter 4 Financial Bootstrapping...................................................41

About This Chapter.........................................................41
How Common Is Bootstrapping?.....................................42
Why Do Entrepreneurs Bootstrap?...................................42
Types of Bootstrappers.....................................................46
Types of Bootstrapping....................................................47
Summary.........................................................................49
Chapter 5 Bootstrap Strategically......................................................51
About This Chapter.........................................................51
A General Model of New Venture
Survival and Growth........................................................52
Sending Legitimizing Signals............................................53
Summary.........................................................................61
Chapter 6 Typologies for Strategic Bootstrapping Success.................63
About This Chapter.........................................................63
Strategic Bootstrapping—Behavioral Typologies..............64
Strategic Bootstrapping—Business Model Typologies.......68
Points of Caution and Tactics to Avoid.............................71
Summary.........................................................................72
References..............................................................................................75
Index....................................................................................................85
 CHAPTER 1

Bootstrapping Described

About This Chapter

New firms are different. Firms that are still in developmental infancy rep-
resent a distinct subsection of the universe of all firms. Indeed, experts
have noted that new ventures differ fundamentally from more mature
firms and these differences mean that new strategies and tactics must
be developed, because strategies for survival and growth cannot simply
be shipped wholesale from the realm of mature firms (McDougall &
­Robinson, 1990).
Consider, for example, Under Armour in 1995. Now a household
name and wildly successful apparel firm, Kevin Plank started this com-
pany from his grandmother’s garage and sold product out of his car. Since
it took him over a year to land his first major account—a team sale to
Georgia Tech—he had to live very frugally because initially no customers
were willing to buy a fledgling product from a novice entrepreneur with a
company that had no history or legitimacy. Because of this lack of legiti-
macy, he built his business on hustle and thrifty living.
New ventures like 1995 Under Armour lack financial, human, and
social capital. They have no legitimacy, reputation, or status, and as a re-
sult face long odds competing with more established competitors who do
not have this set of liabilities. As organizations mature, they gain unique
resources and cultures that allow them to differentiate themselves from
the competition (Barney, 1991). As a result of these issues, new ventures
fail at a much higher rate than more mature ventures. While estimates
vary, most would put the chances of surviving 3 years at about 60 percent,
and closer to 50 percent at 5 years (Knaup, 2005).
2 STRATEGIC BOOTSTRAPPING

The rate of success is likely lower for those entrepreneurs who decide
to launch their firm with no outside financial assistance (Ranger-Moore,
1997). These so called bootstrappers are exacerbating their inherent dis-
advantages by limiting their access to financial capital. However, most
entrepreneurs do bootstrap and some prosper. Kevin Plank founded his
company’s launch with credit cards, taking no equity finance or bank debt
in the founding years.
Plank’s success aside, after taking all the risk factors into account, it
is a wonder that the failure rate for new firms is not much higher. How
could any firm be expected to survive in such a harsh environment, with
such substantial disadvantages? But many new firms, like Under Armour,
do survive and some even grow, create jobs, and generate tremendous
wealth for entrepreneurs.
It is the goal of this work to investigate ways that entrepreneurs can
increase these survival rates and have a much greater chance to create
wealth for themselves and others, even if they decide to eschew external
financing. But, it is also the goal here to encourage entrepreneurs to think
through the decision to bootstrap very carefully.
There has been an explosion of articles, books, blogs, etc. that all at-
tempt to help entrepreneurs navigate this precarious stage of existence.
Much of this writing is based on anecdotal evidence from the entrepreneur/
author. This book takes a different approach to assist new venture
­entrepreneurs—it takes an evidence-based approach. That is, the research
on the topic is reviewed and applied to the practice of starting the new
venture. In addition to the wealth of knowledge available from practicing
entrepreneurs, academics and other experts have collected and analyzed a
large amount of data. The results of this analysis can add new and objec-
tive information that can assist the practitioner in decision making.
This is certainly not to suggest that the evidence-based approach is
better than the anecdotal approach, but it is to suggest that one approach
is not complete without the other. This book should be seen as a com-
panion piece to the more anecdotal, personal experience-based books
currently on the market (e.g., The Art of the Start by Guy Kawasaki).
It is meant to provide objective facts to the entrepreneur, where those
facts are available. In this book, we will drill down into the theory and
 Bootstrapping Described 3

evidence on one specific facet of the start-up—the process and content

of bootstrapping.

What Is It?
Briefly, bootstrapping is understood as the condition whereby start-up
entrepreneurs operate (often in creative ways) their firms with no outside
financial assistance. This is certainly a condition in which many entrepre-
neurs find themselves, and there is little argument about that (Aldrich &
Martinez, 2001; Shepherd & Zacharakis, 2003), but there are differing
opinions regarding whether one should choose to bootstrap if given the
choice. These opinions are often conflicting and therefore confusing.
In carrying out the goals of the book, this advice will be organized and
examined.
The practice of bootstrapping captures at least the following activi-
ties that arise from the entrepreneur’s unwillingness or inability to attract
external financing:

• Keeping one’s day job to invest salary

• Utilizing home-equity
• Using credit cards
• Operating from home
• Sweat equity—working long hours
• Loans from family and friends

Avoiding outside investment makes it a virtual necessity that an entre-

preneur will have to rely on these activities to stay afloat.
As noted there has been copious writing in the popular press on the
topic of bootstrapping, but there has been a bit less in the realm of aca-
demia. Infamously deliberate with regard to publishing results, academics
who research entrepreneurship are just now reaching a critical mass of
research and writing on the topic.
Historically, the academic research on financing focused on the larger,
older firm. Yet, as noted, new ventures have a significantly different set of
opportunities and constraints than established businesses. For this reason,
4 STRATEGIC BOOTSTRAPPING

traditional theories and models of the firm sometimes have had difficulty
translating to the new venture. Entrepreneurs are finding this research and
teaching from business schools difficult to implement in their situations.
Moreover, much of the academic writing on bootstrapping specifically
has focused on small—not new—firms. As will be asserted throughout
this book, the new firm is a different beast, not only different from large
firms, but different from smaller, older firms as well.
Consider the apparel company, Gerbing’s, when compared to a start-
up like Under Armour. Headquartered in Stoneville, NC, Gerbing’s
manufactures heated clothing for hunters and other outdoor enthusiasts.
The firm is almost 40 years old with 50 employees and $15 million in
­revenue—certainly small, but not new (Privco, n.d.). Practical advice
given to a firm such as this would likely not have been overly helpful to
Kevin Plank in his bootstrapped start-up—and vice versa. Frankly, the
fundamentals of Gerbing’s are far closer to a Fortune 500 firm than a
start-up. For example, the managers of Gerbing’s likely spend far more
time making decisions about managing resources—that is, which employ-
ees to hire, which financing to accept, or which new plant to open—
than about attracting initial customers and financing. These two types of
firms are so different that they hardly resemble one another. As renowned
economist, Edith Penrose states, “The differences in the administrative
structure of the . . . [two] are so great that in many ways it is hard to see
that the two species are of the same genus” (Penrose, 1959).
Building on this relatively new and growing base of research on the
topic, this chapter introduces the notion and nuances of bootstrapping.
It also introduces key concepts and relationships that will be referred to
throughout this book.

The Cowboy Way—Brief History of Bootstrapping

To this writer’s knowledge, the term bootstrapping originated in the cow-
boy lexicon as way of describing how cowboys would arise from a seated
position to standing. They would reach down, grab the straps of their
boots and rock to an upright position. In this way, the self-sufficient
cowboy or cowgirl accomplished goals using only what was immediately
available on their person—receiving no assistance from the outside. This
 Bootstrapping Described 5

metaphor has great appeal to the entrepreneurial community, as many en-

trepreneurs view themselves as renegades, mavericks, and/or lone-wolves,
and so it persists.
Bootstrapping is often discussed, but rarely defined. Noted to be
an, “essential entrepreneurial phenomenon” (Grichnik & Singh, 2010),
bootstrapping is a term that has been discussed in the academic literature
for at least 20 years, but has only recently received rigorous examination
by scholars.
A review of the academic and popular press reveals multiple defi-
nitions of bootstrapping. Most incorporate the idea that bootstrap-
ping is a process whereby entrepreneurs assemble resources and at least
­persevere—if not grow—without utilizing debt or equity financing from
outside banks and/or investors. This process is generally termed financial
bootstrapping (Freear, Sohl, & Wetzel, 1995). But, in actuality bootstrap-
ping comprises two related, but distinct activities. To be complete, a defi-
nition should also address the fact that entrepreneurs must be imaginative
to discover ways to compete and survive without access to this financing.
As such bootstrapping is not only the absence of outside debt or equity,
it is also the ongoing process of acquiring other resources (e.g., supplies,
employees, equipment) at minimal cost (Freear, Wetzel, & Sohl, 1990).
Bootstrapping also presupposes that the entrepreneur brings a rela-
tively limited amount of resources to the table. Present day Warren
Buffet, for example, would likely do very well as the entrepreneur of a
bootstrapped firm because, for all intents, his venture would not be boot-
strapped. Mr. Buffet could bring his enormous personal wealth to in-
ternally finance his business. He, personally, has more wealth than most
venture capital (VC) firms. Therefore, there would be little need for him
to engage in creative tactics to operate in a frugal manner, even if he
chooses to avoid external finance.
Bootstrapping is often discussed as inevitability in start-ups, as the
refrain goes: “there is simply no money for aspiring entrepreneurs.” And,
on average, it is true that new businesses do not receive external funding
and that new ventures have fewer financing options than more mature
ventures. However, it is also the case that, as we stand in the afterglow of
the Jumpstart Our Start-Ups (JOBS) Act, that there has never been a time
when there were more options for external financing.
6 STRATEGIC BOOTSTRAPPING

So, importantly, the primary cause of lack of external financing is not

the so called “funding gap”—the reluctance on the part of financiers to
lend to new ventures—it is because entrepreneurs do not ask for external
funding (Shane, 2008). To be clear, even if they asked, many new venture
entrepreneurs would likely still not receive financing, but far more would.
This fact is the key and will be referred to throughout.
Because many entrepreneurs identify with the “cowboy way,” there is
a tendency, particularly in the popular press to glorify the bootstrapped
entrepreneur, and with good reason. Any individual or team that can
survive—or grow—without external money should be celebrated. Firms
like Ben and Jerry’s, Google, and Pandora were all bootstrapped and are
very much celebrated.
But readers should understand that it is extremely difficult to simply
survive without external funding and nearly impossible to grow. The role
of the popular press is to celebrate the outliers—not to accurately describe
the average, or most likely condition. Virtually all of the advice provided
by expert entrepreneurs is correct, in that it reflects what worked for them
in their specific context or contexts—war stories, if you will. The prob-
lem, though, is that one expert’s advice often conflicts with another’s and
novice entrepreneurs get buried under an avalanche of conflicting advice.
Throughout this book, I will attempt to provide clarity to this advice.
The reality is that bootstrapped entrepreneurs are likely to struggle
to overcome the inherent burdens associated with being new (Neeley &
Van Auken, 2010), and as a result, will fail. The only way to overcome
these burdens is to be “old”, or at least appear that way, and this usually
requires resources.
Bootstrapping is an ironic concept. In one way, bootstrapping can
be a very freeing experience. Free from external financiers, cowboy
entrepreneurs are able to operate their businesses in the way that they
choose—they have the much sought after autonomy. In another way,
though, bootstrapping represents, by definition, constraint. Entrepre-
neurs are free to act however they wish within some fairly tight resource
boundaries.
Therefore, this book encourages the entrepreneur to think through
carefully what starting as a bootstrapper means. Specifically, the entrepre-
neur should think through ways that a start-up might achieve a large degree
 Bootstrapping Described 7

of autonomy, while simultaneously shedding some of the debilitating capi-

tal constraints. There are more ways to do this than one might think.

Bootstrapping Involves Making Choices

about Initial Financing
So, entrepreneurs bootstrap for one, or both, of the following reasons:
(1) the decision is made to eschew external financing, or (2) external
­financiers deny to provide such funding. The majority of entrepreneurs
bootstrap (Kim et al., 2006), but their motivation for bootstrapping mat-
ters immensely. The end result is largely the same (i.e., financial constraint),
but the process is important because some processes are much more likely
to end in failure than others. If entrepreneurs are bootstrapping simply
because they are driven by a desire for autonomy, control, or risk aversion;
the prognosis is likely a bit better than if the entrepreneur is bootstrap-
ping because he or she must. When an entrepreneur is denied funding by
debt providers or financiers, this is a clear market signal that the firm is
primed for failure (Carpentier & Suret, 2006). This is an important point:
being denied financing is a feedback windfall for the entrepreneur. Stated
differently, the decisions that financiers make about the viability of a new
venture should be taken very seriously by entrepreneurs.
The popular press is full of examples of entrepreneurs who persisted
through rejection after rejection from money handlers to eventually suc-
ceed, ostensibly because the financiers were dim. To be clear, this happens
and financiers miss opportunities often. Moreover, many new ventures are
simply not appropriate for funding. However, if funding is denied, it is
also likely that the entrepreneur has either misidentified the opportunity
or done a poor job of communicating its viability. Entrepreneurs must
be very careful and honest with themselves if they decide to launch after
being denied funding. The confidence (or overconfidence) that many en-
trepreneurs possess is likely critical for success, but this bias comes with a
number of negatives that must be addressed (Cooper, 1988).
In general, firms with more resources on average increase their chances
of survival and growth (Singh, Ang, & Leong, 2003). Acquiring resources
is, virtually by definition, a method of shedding newness burdens. Build-
ing on this, simply by going through the process of requesting external
8 STRATEGIC BOOTSTRAPPING

funds, the entrepreneur builds social and human capital by receiving

valuable information from knowledgeable stakeholders. There is value
being added to the firm and the entrepreneur during the capital raising
process, and it is far better to request funding early than to wait until a
time when the entrepreneur is truly desperate. Financiers—particularly
lenders—like to grant funding when entrepreneurs do not need it.

Bootstrapping Involves Creatively Operating

in Resource-Poor Environments
Not only does an entrepreneur’s motivation for bootstrapping matter,
so too does the entrepreneur’s strategy when bootstrapping. This second
component of bootstrapping is even more involved than the first; for it
involves the day-to-day tasks the entrepreneur must perform to survive
with limited resources. As will be explored in this book, some of these are
more fruitful than others.
The activities undertaken to survive in this resource-scarce environ-
ment are numerous and range from the obvious to the subtle. Delay-
ing payments to suppliers is one obvious and quintessential example of
bootstrapping. It is quintessential because it allows the entrepreneur to
make use of some good or service for “free” until the entrepreneur pays
the provider. Anyone who has paid their phone bill late is familiar with
this technique. Another very common method is working part-time in
the new business while working full-time in a different job. This allows
entrepreneurs to subsidize the new business with income from their “day
job,” thereby allowing them to avoid external finance.
While most would agree that these techniques represent bootstrap-
ping, few would agree that they are creative. There are, in fact, some
relatively creative bootstrapping techniques and these tend to be more
fruitful than those listed above. For example, sharing employees with a
similar new firm has substantial advantages for the bootstrapper. It offers
access to valuable human capital, it offers networking opportunities with
the other business (i.e., social capital), and of course it is cheaper than
employing the person with no assistance (i.e., financial capital).
Methods for sharing employees are numerous, but one general way
to do this is to apply for space in an incubator or accelerator. Many lo-
cales now boast at least one of these entities that allow tenants to—not
 Bootstrapping Described 9

only share employees (e.g., secretarial and informational technology

­workers)—but also equipment and other resources. Another relatively
novel way to share employees is by contracting with a “fractional chief
financial officer.” Fahrenheit Group in Richmond, Virginia, for example,
is a firm that supplies talented CFO’s to start-ups who cannot afford (and
likely do not require) a full time CFO. These fractional officers will likely
provide financial services for a number of start-ups.
In this way, sharing employees and employing fractional officers
embraces the paradox of containing costs while growing the resource
base. Clearly, these types of techniques are the most desirable and it is
these techniques that strategic bootstrapping comprise. It is these tech-
niques that this book will highlight.

Myths Associated with Bootstrapping

• Myth: There is no money available for start-ups.
Reality: It is certainly challenging to attract funding at the
start-up stage, but good ideas will attract funding—if the
entrepreneur can communicate them effectively. A few
examples of less celebrated sources are private investors, angel
groups, crowdfunding, and micro-lending institutions. All of
these sources provide much more capital to new ventures than
one might think. While estimates vary, most experts believe
that at least $30 billion per year is invested by these entities.
This represents investments in approximately 30,000 ventures
by 300,000 individuals (Sohl, 2003; Butler et al., 2013).
Moreover, it is expected that these numbers will escalate
quickly with the full passage of the JOBS Act.
Entrepreneur Lidia Calzado faced a common new venture
problem. She did not have enough funds to buy supplies in
bulk; therefore her cost-per-unit was very high. This left her
fledgling jewelry and perfume business with a very low profit
margin. She applied for, and received, a $10,000 loan from
micro-lending outfit ACCION, San Diego. This allowed
her to substantially boost her profit margin by purchasing
supplies at a lower per-unit rate (http://www.accion.org/page
.aspx?pid=4326).
10 STRATEGIC BOOTSTRAPPING

• Myth: Equity players will lock an entrepreneur into a course

of action by not allowing that entrepreneur to change
strategic direction when necessary or desired.
Reality: The notion that an individual or entity would invest a
large sum of money into a start-up and then resist important
changes is difficult to support with logic. In the management
literature, the notion of escalation of commitment is often used
to describe a scenario whereby an individual continues to devote
time and money to a course of action long after it is clear that
this course of action is doomed. Rational players are less likely
to succumb to this cognitive bias. A VC or angel with “skin in
the game” is likely to support any change of direction that will
increase viability of the new firm.
Consider, for example, Marbles: The Brain Store. This
venture launched as a kiosk-based retailer of puzzles, games,
and software in 2008. After receiving funding from a
Chicago-based VC firm, the business was floundering. The
entrepreneur decided, with no apparent pushback from the
VC, to rebrand the store so as to be more “hands on” and
experimental so that customers could play the games. She
also moved to a much more expensive and high traffic area.
She now has 27 U.S. locations and employs 185 people, with
annual revenue of approximately $20 million (http://www.
entrepreneur.com/article/229372).
Research on the topic in entrepreneurship actually
supports the opposite condition—an entrepreneur without
knowledgeable partners will be less likely to “pivot.” This
is based on the simple fact that entrepreneurs, probably
more than any potential investor, are filled with biases and
possibly the most pronounced is overconfidence (Cooper,
1988) that often manifests itself as stubbornness. This bias for
entrepreneurs, albeit a necessary one, needs to be tempered
with objective guidance from knowledgeable outsiders.
• Myth: Bootstrapping is less risky than using external finance.
Reality: This is dependent on one’s definition of “risk.” It
could certainly be argued that financing a start-up with
100 percent of the founder’s money is more risky than, say
 Bootstrapping Described 11

50 percent. Particularly if that money is being supplied in

the form of equity—the investor shares the risk. Almost
by definition, raising equity reduces the risk level of the
entrepreneur. Moreover, as noted, it is generally true that
firms started with less capital face higher failure rates. Here
again, bootstrapping may result in elevated risk.
• Myth: Bootstrapping allows the entrepreneur to be autonomous.
Reality: There is autonomy for entrepreneurs in that they will
not have to consult other owners when making decisions.
However, because bootstrapped entrepreneurs are likely
resource constrained, they are more dependent on customers,
suppliers, and other stakeholders, and must often go to great
lengths to appease them. So, bootstrapped entrepreneurs do
gain power in the ownership dimension, but likely lose in
many other dimensions. A well-resourced start-up can dictate
terms with stakeholders far more effectively.
Eco-me is a company that resembles this. Founded in 2009,
the company manufactures and sells all natural cleaning
products. The company was bootstrapped by the founders
(Robin Levine and Jennifer Mihajlov) and was achieving
excellent top-line growth, but was not profitable. The duo
had difficulty negotiating good terms with retailers and
suppliers. On the supplier side, specifically, they needed new
machinery to be able to grow the business. However, the
machinery was too expensive and the cash-poor firm could
not negotiate a favorable deal. In 2013, Eco-me received a
substantial cash infusion by an angel investor. This allowed
the company to purchase the machinery, rebrand the product,
and professionalize the sales team. All of this resulted in
tremendous sales growth (http://www.greencleaningmagazine
.com/people-we-love-eco-me/).

Strategic Bootstrapping versus

Reactionary Bootstrapping
As noted, bootstrapping is the most commonly used form of start-up fi-
nancing, that is, using only insider finance. It is also known that most new
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