Why bootstrap your business? So when is bootstraping not a good idea?

There is just too much to say about the topic and I have been warned about being too verbose with lengthily postings so this is a 3 posting series. Following is the third and last posting:

So when is bootstraping not a good idea? Almost never!

However … there are times that injection of external funding is crucial to the delivery of value and no revenues can be generated unless significant investments are made. In these cases the bootstrappong duration may be shortened but not eliminated.

When things are not in your control or costs are very high:

1- You are in the pharma or medical devices business and an FDA approval is needed before you can sell – these ventures usually involve significant upfront research and multiple scientists , require expensive lab equipment and need to have trial results from hundreds to thousands of people. In this cases the SBIR and other grants are critical and should not be overlooked – not only they are non-dilutive, they help provide credibility – building university and commercialization partners are also critical.

2- Chip design – regardless of the simplicity of semiconductor chip ventures, the need for working with fabs and uncontrollable time periods between testing cycles is a killer – every time you make a revision in design you have to wait for 4 to 12 weeks for a turn around – the wait is expensive. These ventures almost always need a lot more money – in these cases the market must be very very large and the innovation very very novel for the investors to engage early – SBIR grants are also often feasible.

3- Situations where the time to revenue is a function of “mass traction” – these would include social networking and some internet projects – this group of ventures will benefit significantly in terms of valuation and funding chances if they can show traffic traction – the novelty in these type of projects is slowly wearing off and targeting and niche play is becoming paramount. A word of advice do not worry bou technology scalability – worry about getting traffic first.

And here are a few against the grain comments on the topic!

Although some are believers in the first to market argument – I am not one of them. If your value proposition is solid, you can be the second to market and win - often is the second mice that gets the cheese. We need significant money now or we will lose market share is an argument against the strength of the value proposition!

I am also not a believer in “we are losing customers” argument either – if your value proposition is compelling converting an opportunity into a sales should be the focus. Customers are your best source of cash (surprise) and they are non-dilutive.

And that is one man’s opinion.

Why bootstrap your business? 2- Some Good Reasons

There is just too much to say about the topic and I have been warned about being too verbose with lengthily postings so this is a 3 posting series. Following is the first posting:

Some Good reasons to Bootstrap

1- Bootstrapping ensures that you build your business on legitimate, real world value propositions. You truly focused on customer value from day one.

2- Bootstrapping initiates the critical sales learning process sooner, not later.

3-Bootstrapping does not waste money: the focus here is on the early and closer customer contact.

4- Bootstrapping accelerates time to market and time to profitability – if you can not possibility wait for the next version to get ready, you compromise and try to make money from what you have.

5-Bootstrappers are less likely to make big, fatal financial mistakes. Being alert about survival makes people much more alert about catching fatal mistakes.

6- Bootstrappers are forced into unconventional thinking – necessity is truly the mother of invention.

7-Bootstrappers have more freedom and flexibility – when you take money you become slaved to the business plan.

8- Bootstrappers end up owning much more of what they create – and that is a good thing.

Coming next a few words about when you should not bootstrap & some of the negatives.

Why bootstrap your business? 1- The big picture, 2- some good reasons, and 3- a few negatives

There is just too much to say about the topic and I have been warned about being too verbose with lengthily postings so this is a 3 posting series. Following is the first posting:

The big picture of bootstrapping

Bootstraping, in my opinion, is not about conserving cash or paying out of your credit cards (although those may become ways to achieve it). Bootstrapping is about taking the right action at the right time. It is about making quick and timely decisions. And it is about being focused on cash flow and incremental progress.

There are a few key elements / drivers that make bootstrapping generally lead to better results:

1- When in Bootstrapping mode, the margin of error is much smaller and more importantly the entrepreneur knows it. This causes decisions to be more focused on generating results and on making money, and that is a very good thing.

2- The risk is personal and decisions are reduced to absolute “value” delivery. Being the one who would hold the bag if things don’t work and being conscious about the responsibility to our family makes the risks to be taken very personal. Naturally the game becomes much more dangerous but the danger brings with it a wonderful force of reason that makes us focus on doing the things activities and products that delivers value to the customer – the only way to make money is if we sell & collect and the only way to do that is if the customers see a compelling value in what we do – personal risk forces us to focus on the essentials, and that is a very good thing.

3- Time is a commodity in bootstrapping mode - this makes agility the norm. Being pressed by time makes us move faster, make quicker decisions and deal with our errors faster – being conscious of time, makes the entrepreneur place more focus on the process, the strategy and people – the three elements of execution - time limitation makes us more creative in finding solutions to issues and more agile in dealing with correcting our errors – and that is huge thing!

Coming up some next posting: good reasons to bootstrap.

Real Entrepreneur Story #2: It is about making money NOT raising money

The entrepreneurs were clearly fatigued when they waked into my office. They had raised close to a $1,000,000 at a whopping valuation of close to $10,000,000. The friends and family investors were joined by a couple of angels who were fortunately (as the entrepreneurs claimed) very hands off. Unfortunately, the bank balance was almost $2000. The product is almost there they claimed and the patent was almost approved. The product a video / picture tool was indeed slick, but I had to scratch my head as how to make money from it. The exit was rather unclear and the deal was over shopped; as almost every VC had looked at it and passed – the problem; the valuation was too high for the progress made, the exit was not clear, and the had no idea as to how to making money.

Nice tool! How have you tried to monetize? the answer was “we are trying to build a community” also, “we can offer the tool as an ASP model to enterprise customers”, “we have a customer that uses the tool on his website” , “we feel that when we develop the next version with mobile capabilities it will really pick up” were some of the answers provided in a span of a 30 minute conversation. I guess the best answer was the last answer they gave me “we really don’t know”. The answer to how you tried to sell it was telling also: “we hired some sales people to go out and sell the enterprise version at a price point of $300 to $500” - the sales people never produced any results.

A very cool tool, about a million bucks, and a lot of sweat and tears was about to go to waste and you could clearly see the entrepreneurs frustrated and in distress.

1- So here is the quick diagnosis and feedback:
2- So what if you have the coolest tool, can it make money?
3- Do not spend all your money on product development, build something that can sell and then improve the hell out of it.
If you over value the company, the chances of getting additional funding when you really need it will significantly diminish.
4- Building a sales model is entirely different that hiring some sales people. If the sales people can not make money, the efforts will fail every time. How could sales people make any money in a direct sales model going door to door - paying for over $3.0 per gallon for gas to drive to the customers and close sale that will produce a couple of hundred dollars of commissions at most - the math must work out for the sales force or they are not a force!
5- It is not only about money, the fact that angels are hands off is not always a good thing.
6- And at the end, it is not about making money NOT raising money.

Real Entrepreneur Story #1 – What to do next?

Over the weekend, I met with a very hardworking and smart entrepreneur. He operates a business in the medical devices space. He is the founder, has over 20 patents to his name and yes, they are making money! The dogs are in fact eating the dog food. He has successfully raised over $5 million and has managed to put the company on the path to make close to $10 million in revenues this year. The company was in a terrible shape a year ago as he had hired a very ineffective CEO and was dealing with a weak Board of Directors (a story for another time!) – no questions asked the man can execute and deliver!

We spent a few hours together and he and his partner outlined their strategy of raising about $20 million from VC’s at a valuation of over $40 Million (because they thought it was worth that much!) – after discussions it became apparent that that they really did not need that much money to further increase revenues by over 5 fold and they just wanted to be safe! Not considering that this being safe is costing them valuable equity; besides because they were looking for so much money they had to increase the valuation so that they don’t give up the whole company.

Digging deeper, it became apparent that they can increase the revenues by close to 3 fold in a couple of three years without any more money !!! and can get the revenues to five fold and develop a few more innovative products with $5.0 million.

Quick calculation considering an exit in 3 years revealed that they would make more money as founders if they take the lesser amount and that they would not have to value the company at a point where a deal is difficult to make.

The moral of the story is that more money is not always better and a higher valuation is not always to the benefit of the founders. If you make bad assumptions you end up with bad deals; if you can consummate the deal in the first place!

What kind of an entrepreneur are you?

In my days, I have met with many many entrepreneurs. We have agreed and disagreed on things, learned from each other, and experienced disappointments and successes together.

Here is “one” way to slice and dice the group.

1. The Pure Dreamer
   The pure dreamer is filled with new and novel ideas -- innovations and schemes that will make a lot of money -- for some, every once in a while they see their pictures on the front page of the Time magazine . Despite their potential, majority of these folks never cross the bridge and get to the “doing side.” They are always waiting for the right time and almost always regretful (if only, I had that idea a long time ago, ..). My advice to this group is to either admit that you are a dreamer (get it over with) and then enjoy the dreams and the innovations without regret, frustration and the feeling of failure OR “just do it” as the saying goes; the short cut to results may be finding a partner with a different character profile!
2. The “not so Pure” Dreamer
   These are the self proclaimed entrepreneurs that generate ideas faster than bunny’s produce offsprings. They have a shotgun approach - the more bullets in the air the higher the chance of a hit. The not so pure dreamers have yet to see an idea they do don’t like and a risk level that is too high! My advice to them is that entrepreneurship is more of a laser guided sport and the more is not always the merrier. Aim carefully and focus. Fast talking is not the same as salesmanship and focusing on a quick buck is not entrepreneurship.
3. The Always Stealth Creator
   As the name suggests these guys have discovered the next big thing but are afraid that others may find out and copy it - on the basic assumption that the rest of the universe are “non-thinkers” and will not figure it out on their own. These folks skill fully conceal the innovation, often to the point of obsolescence. My advice to this group is there a lot of smart people out there and that it is “doing” that makes money and not “hiding” – To capitalize on a good idea you must first share it.
4. The Enforcer
   Well, these folks are skillful, mechanical and hard workers. They are intelligent and astute. They particularly shine in large corporate settings. They are not necessarily “first idea” people or original tinkers, but they can find a 1001 ways to expand an idea, open up markets for it and lead an organization to results. However, they often fail in start-up situations – naturally they would disagree. My advice to this group is that being a great corporate entrepreneur does not necessarily qualify you to be a start-up executive / founder. Be very careful; make sure you fully understand the differences between the two before you jump in.
5. The 100% Genuine thing
   The genuine thing, although a risk taker can walk away easily if the opportunity does not make sense at a gut level. Is constantly planning the next step and most often has a passion that transcends “dollars.” A genuine entrepreneur prefers smaller organizations that can be turned on a dime. They like to be in the middle of things and can motivate people with their vision and passion to accomplish unordinary things. They are always looking for new ideas but are fairly grounded with respect to execution – can it be done? Is it worth doing? My advice to this group is “don’t” fight it!
   
   Which one are you??? Should I develop an “Are you an entrepreneur test” ?

My Education

I am quickly learning that writing a blog requires a lot of discipline. You need to be thoughtful and quick - My apologies for being a slow learner - I’ll get there. It would be great, however, if you could help me with topics – what interests you? Here are some topics I am looking at:

1. Weekly tips on effective execution, this is not a how to work harder guide! but a how to be more effective series of thoughts.
2. A session with and entrepreneur -- documenting a conversation or two every week with some of the entrepreneurs I meet and discuss funding with (naturally, the name of the company & founders, as well as, the business details will remain confidential) – the good, the bad and the ugly. The idea here is to take real life interactions and turn them in to a learning experience – this is NOT an interview, but rather a one sided (my) perspective.
3. Random Tips on valuation, term sheet, trends, concerns, etc.
   
   ALL from the Investor’s perspective.
   
   Any thoughts?