Category Archives: Bootstrapping

How to Make Money on Your Brilliant Business Idea

A Pile of CashSo you have a brilliant business idea that will be very successful. My congratulations to you. Now read all ideas are brilliant and nobody is going to pay you for your ideas. Are you still sure? All right then, let’s continue.  And – this is important – do not even think about getting investors yet. Do a lean business plan.

1. Gather a team

Can you execute on the brilliant business idea yourself? That does happen. For example, take your browser to KiddoLogic.com. That’s a venture built by one very smart woman, on her own. She used her own money and paid the providers she needed, to get going. If you can do that yourself, without help, then I applaud you. Go for it. Forget investors; just do it. You don’t need them.

For the rest of us, your next step is to gather a team of people who have the skills and experience you need to get going. Look for people different from you who can do what you can’t and who know what you don’t.  If you don’t know anybody, or don’t know the right people, that’s a damn shame; but it’s your problem to solve. If you can’t solve it, then keep your day job. Other people have solved that problem millions of time.

If you can afford to pay them…

If you can find suitable people, then  you have to convince them to join you. If you can afford to pay for their services with your own money, then maybe you don’t have to convince them of the idea. Just pay them. This puts you in the category of the smart person on your own. Just do it. You’re special, the sole entrepreneur with a great idea and the means to execute. Skip to the next section.

However, if you can’t afford to pay people, then you need to convince them to join you as co-founders and work on this idea for free. Don’t feel bad about that; that’s what most successful entrepreneurs had to do. And if you can’t convince the right people to join you, then get a clue. Your idea was one of the many ideas that seem brilliant but won’t work. Keep your day job. Revise your plan. Focus on a subset you can do yourself. Or give up.

Get your people together and revise that early plan. Bring it up to date with what you’ve learned while gathering the team, and what your team members were able to contribute to the plan. Remember that plans are made to be reviewed and revised and kept live and up to date.

2. Execute. Get traction. Prove it.

You have a team and you have a plan. Execute on it. Follow your plan. Go as far as your team can take you towards early website, product prototype, discussions with potential buyers or distributors, so-called minimum viable product. Maybe you go on Kickstarter or one of the other sites for pre-launch selling. Get traction. Prove to yourself and future investors that you idea will work. You’ll have to know what that means in your specific case. It’s different for every business.

3. Seek investment if and only if…

Don’t go for investment unless you really need it.  Never bring in investors unless you need them to address an huge opportunity that makes sharing your business ownership with outside investors good for you and them. Read the startup sweet spot.

Furthermore, don’t go for investment if you’re not going to get it. Only a few businesses are good investments. Read this self assessment will you get angel investment, 10 things angel investors ask about your plan. And be aware that the advice in those two posts applies to the U.S. market only. The realities of angel investment are vastly different in other markets.

(Note: I have no association with Kiddologic. I saw her pitch for local angel investors and was very impressed.)

Why Bootstrapping is Better

The normal startup process doesn’t go from idea to plan to funding by outside investors. Funding is the exception, not the rule. Most startups are bootstrapped. That means we start a business with what resources we have. We fund it from early sales, promises, savings, and maybe friends and family; not outside investors.

We all undervalue bootstrapping

Cash MousetrapIn business schools, in popular blogs, in business publications, and in general discussion of starting a business, we undervalue bootstrapping. We teach starting a business as if every new business requires sophisticated venture capital. I understand how this can be educational. It means teaching business planning, which is the ultimate business teaching tool, and investment analysis, ROI, IRR etc. Still, of the five or six million new businesses launched in this country every year, only about 5,000 had VC (venture capital) money, and maybe 75,000 had angel investment. The rest were bootstrapped.

I think the investment option is overrated. It’s better to own your own than to land investment, at least if you can pull it off. As the old song says, “God bless the child that’s got its own.” The opportunity itself should determine whether investment is required. lf it takes more resources than the founders can muster, then it needs investment.

The cliché asks which is better, a piece of a watermelon or a whole grape. But what if that comparison is skewed wrong? Which would you rather have, a slice of an orange or a whole tangerine?

I have good associations with bootstrapping. I was on the board as Philippe Kahn took $20K from his father, plus one $90k bundling deal from a PC manufacturer, and levered up Borland International without outside investment until he didn’t need it. He did it with a great product, strong demand, smart management, and cash-only sales instead of the mainstream, working-capital-hungry channels. Borland went public less than three years after it started. Palo Alto Software grew slowly without outside capital. We had to slipstream a larger vendor whose advertising budget was 10x ours. We ended up with 70% share in our niche and owning the company outright.

The value of owning your own

Bootstrapping isn’t just about owning the whole pie. It’s also about the luxury of being able to experiment and, at times, making mistakes. Philippe was unconventional. Could he have had that freedom if he’d had conventional VC financing?

I spend a lot of time these days answering questions I get through email, often with posts on this blog. Way too often people asking me those questions assume that the normal startup process requires getting funding from outside investors. That’s not the real case. Develop your idea, do your plan, and don’t wait for funding. Get going.

The important exception

Some businesses require serious deficit spending to make an opportunity work. For example, the so-called critical mass businesses that need to acquire a large number of users before the product is viable, such as review sites and social sites. In these cases, the opportunity is big enough to offer a return to investors as well as founders. Even for these businesses, however, the founders are better off getting going and doing some of the work before they seek investors.

For more on this: 10 good reasons not to seek investors for your startup.

Angel Investment vs. Bootstrap: Startup Sweet Spot

Successful angel investment is a win-win for both sides, the startup founders and the investors. And I mean win-win right at the beginning, at the time of the investment, not the obvious win-win later when years have gone by and the business succeeds and investors exit. The win-win sweet spot exists from the beginning, when both sides agree that there’s an opportunity for deficit spending to produce dramatically accelerated growth. Simply put, it’s when the startup has an exciting use for other people’s money; it’s going to grow much faster with that money than without it. So much faster, in fact, that it’s a great way for investors to spend their money, and a great way for startup founders to spend (share) their ownership. Otherwise, bootstrap (build your startup with your own resources, not outside investors) is better.

Understanding the sweet spot for angel investment vs. bootstrap

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At the sweet spot, years before failure or exit, investors have spent their money on a good risk-return ratio, and founders have given up ownership for good prospects of much better growth and much better end value than they’d get if they kept their ownership and didn’t spend the extra money.

It’s about milestones and inflection points. Inflection points are when a business is suddenly worth more than it was, in a short time, because of factors like risks reduced, milestones met, assumptions validated, and so forth. In my simple chart here, the sweet spot shows up after startup founders have met some initial milestones to make their valuation better before they talk to investors. Those milestones are things like recruiting the team, testing the concept, developing the website, gaining traction, gaining users, registering the intellectual property. Then they turn to investors to get money they will use to meet new milestones which will produce another inflection point, when valuation pops up even more. Milestones depend on the specifics, but it might be getting the key people on board, developing the prototype, getting the first critical mass of users, going through some critical regulatory step, and so forth. In my chart here, we can see the first inflection point when the founders get going, the second inflection point when the investment money is put to good use, and the sweet spot, for both sides, in the middle.

In my illustration, valuation is that theoretical agreed-upon value that determines how much equity is exchanged for how much money. That’s a critical concept I explained in setting an initial valuation, an articles here on bplans.com.

There’s plenty of information about angel investors here on my blog, and elsewhere here at bplans.com,  about what investors want, how to approach them, and so forth. But I think we miss the essential, fundamental concept of what makes a startup investment a win-win situation for startup founders and investors. It’s about both sides wanting the same thing, seeing the same opportunity, and betting, together, on the outcome. Win-win is easy to say afterwards, years later, when and if the business was successful. This sweet spot win-win is for beforehand, when the investment is made.

If you’re not in the sweet spot, don’t seek angel investment. Bootstrap.

What’s also important about the investment sweet spot is what to do if it doesn’t apply. For startup founders, if you don’t need the outsiders’ money to generate more growth than otherwise, then don’t seek investment. Never seek investment money unless you really need it. Other people’s money comes at a high cost in ownership, so you should only even consider it when it’s going to give you a much bigger value.

If you can do it yourself, and get there alone, do. Then you own the whole thing.

There’s a classic analogy that’s often used wrong. People will ask, “which is better, a piece of a watermelon, or a grape?” The rhetorical question is supposed to lead to a rhetorical answer in favor of the watermelon. That’s because it comes up in the context of startup founders sharing ownership with investors.  But what if the better analogy is you have grapevine (your own business, entirely yours) vs. a piece of a watermelon?

Good angel investors don’t want to invest in a business that doesn’t need the money. And startup founders should not seek angel investment unless they need the money.

 

Video: Startup Funding. Bootstrap. Then “Be So Good They Can’t Ignore You.”

I stumbled on this brilliant video of an after-hours startup funding event at the Stanford business school, a panel discussion putting two of the best-known, most influential, and most successful investors (Marc Andreessen and Ron Conway) together with another successful entrepreneur (Parker Conrad, founder of Zenefits), a moderator, and a group of interested entrepreneurs. The video format is perhaps less than optimal, unless you like the rapid-access panel on the left (I do, actually) … but the content is outstanding.

Make sure, please, that you hear Ron Conway suggesting “bootstrap as long as you can.” You can find that with the navigation on the left.

And also, what both investors say about how they choose investments, what makes them successful, and valuation. And Marc Andreeson quoting Steve Martin on “be so good they can’t ignore you, and then, adding:

“Focus on making your business better, not making your pitch better.”

The original for this is on Sam Altman’s online course. Click here for that.

Some excellent quotes:

Marc Andreessen on startup funding as hit or miss:

The venture capital business is one hundred percent a game of outliers, it is extreme outliers. So the conventional statistics are in the order of four thousand venture fundable companies a year that want to raise venture capital. About two hundred of those will get funded by what is considered a top tier VC. About fifteen of those will, someday, get to a hundred million dollars in revenue. And those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year. So venture capital is such an extreme feast or famine business. You are either in one of the fifteen or you’re not. Or you are in one of the two hundred, or you are not. And so the big thing that we’re looking for, no matter which sort of particular criteria we talked about, they all have the characteristics that you are looking for the extreme outlier.

Ron Conway on bootstrapping before startup funding:

Bootstrap for as long as you can. I met with one of the best founders in tech who’s starting a new company and I said to her “Well, when are you going to raise money?” “I might not,” and I go, “That is awesome.” Never forget the bootstrap.

Restaurants, Bootstrapping, Good Stories, and Divine Intervention

This is a great look at one example of a successful restaurant business. Jonathan Fields calls it “bootstrapping with a bit of divine intervention.” That story is about four minutes in. The whole interview is interesting, and a good background look for anybody curious about the restaurant business, particularly one successful restaurant business, not stylized for cable TV.

If for any reason you don’t see the video, click here to get to the original on YouTube.

This is a really good interview, with a lot of good stories, about real life in the restaurant business.

And while I’m on the subject, this is part of a series Jonathan is doing called the “Good Life Project.” It’s a great collection. You can find that here on YouTube, on Jonathan’s Career Renegade channel.

Quick Funny Disruptive Game Changing Paradigm Shift Video

In my post here yesterday I questioned the value of the phrases “game changing” and “disruptive” for what every startup promises investors and few really offer. Right after posting I caught Sramana Mitra’s fun video cartoon here, a quick riff on the similar phrase “paradigm shift.”

Aside from the fun video, I’ve mentioned Sramana before on this blog and I’m happy to mention her again in this post because the world of startups and entrepreneurship needs to be more aware of her 1M/1M program to help people succeed with startups. Sramana’s program, unlike so much of the teaching available for startups, acknowledges the fact that the vast majority of startups make it on their own, bootstrapping, without outside investment. And she tries to deal in that real world, not in the theoretical or academic or high end world in which every startup requires funding by outside investors. The program is named for its goal of helping a million startups get to a million dollars in revenue each.

If you’re curious about that, here’s a link to the program website, and here’s a link to a 30-minute summary on YouTube.

Can’t Get Funded? Maybe There Are Better Ways

Today I joined Ian Sigalow, Jim Estill, and Mike Edelhart on a free webinar titled “Revolution in Venture Funding.” If you’re interested, here is the link to the permanent archive: http://myventurepad.com/93875/audio-archive-revolution-venture-funding.venture-funding-revolution

The sizzle in this one is the idea of crowd funding: specifically, there’s a bill in congress that would loosen up restrictions on small-time investments in startups, relaxing the constraint related to “accredited investors.” A lot of people are excited about that. Me too, but I’m also worried about opening up a floodgate of spams and scams. I have mixed feelings.

I’ll be adding in some suggestions for alternative funding and bootstrapping, including my own experience of funding a new product by giving a professional programming shop a percent of future revenue rather than percentage ownership in the company, and of getting a big company promising to purchase a product to fund the development. And, in the end, my experience of bootstrapping Palo Alto Software so that as it stands now, we own it outright, with no outside investors.

In that vein, I was searching the web and came up with this Smoothspan: Directory of Bootstrapped Companies listing some very well-known companies (37 Signals, WordPress, Zoho, and several others) that were bootstrapped. And you can add Palo Alto Software to that list.

And I want to add that Ian and Jim are world-renown pros in venture capital investment, and Mike is a smooth moderator, so the discussion will also get into a lot of other angles on the main theme, revolution in funding. I hope you join us.

Blaming Angels and VCs for Choosing is Like Blaming Up for Down

I was happily reading Sramana Mitra’s The Other 99% of Entrepreneurs on Read/Write Web, agreeing with every detail, when I ran into a snag. It’s in italics in this quote from Sramana’s post.

Sramana_RWW_Bootstrapping.jpg

Over 99% of entrepreneurs who seek funding get rejected. Yet, the entire world is focused on the 1% that is “fundable.”
The media, when pitched a startup story, is interested in who funded the venture. They seldom ask how much revenue the company has or if it is profitable. Incubators take pride in how exclusive they are and how many “deals” they “reject.” Angels and VCs, of course, discard most of their “deal flow.”And entrepreneurs? They seem to have confused the definition of entrepreneurship altogether. Entrepreneurship, they mistakenly believe, equals financing!

This is wrong.

I agree with her: It is wrong — except for that one extra detail. On the core of it, well, I posted something similar more than three years ago, in a respectful hats off to bootstrapping, on this same subject:

For years now, I’ve complained every so often about how we (in blogs, business plan contests, academia and entrepreneurship in general) tend to idealize the venture capital-financed startup, the SBA loan and the more formalized and carefully planned financial strategy. This is especially true in venture competitions.

This is the real world. Bootstrapping is often the only way to start, build and grow your business.

But don’t blame the investors. That’s like blaming up for down. Angel investors spent about $18 billion last year to fund more than 50,000 startups; of course they have to pick and choose. That’s the nature of investing in startups. And venture capitalists are investing other people’s money. They’re being paid to generate a return on investment. Their job is picking the best deals they can find. It’s for the rest of us to understand and respect bootstrapping.

Sramana Mitra is way too smart for that. I like her work and read her often, and included her in posts on this blog. I think she just got on a roll and added one detail too many. Because everything else in that post makes a lot of sense. And she’s one of the best writers/bloggers/thinkers you can find on startups and investment in general. I love her reengineering capitalism idea. So consider this a small correction for a really good post. On an important subject.

Reflection: 10 Lessons Learned in 22 Years of Successful Bootstrapping

(I posted this about two years ago on Small Business Trends. I’m reposting it here today because this is a good time of year for this kind of reflection. And maybe also for not writing a new post. Tim )

Last week a group of students interviewed me, as part of a class project, looking for secrets and keys to success. They were asking me because after 22 years of bootstrapping, my wife Vange and I own a business that has 45 employees now, multimillion dollar sales, market leadership in its segment, no outside investors, and no debt. And a second generation is running it now.

Frankly, during that interview I felt bad for not having better answers. Like the classic cobbler’s children example, I analyze lots of other businesses, but not so much my own. As I stumbled through my answers, most of what I was saying sounded trite and self serving, like “giving value to customers” and “treating employees fairly,” things that everybody always says.

I wasn’t happy with platitudes and generalizations, so I went home that day and talked to Vange about it. Together, we came up with these 10 lessons.

And it’s important to us that we’re not saying our way is the right way to do anything in business; all businesses are unique, and what we did might not apply to anybody else. But it worked for us.

1. We made lots of mistakes.

Not that we liked it. At one point, about midway through this journey, Vange looked at me and said: “I’m sick of learning by experience. Let’s just do things right.” And we tried, but we still made lots of mistakes. We’d fuss about them, analyze them, label them and categorize them and save them somewhere to be referred to as necessary. You put them away where you can find them in your mind when you need them again.

2. We built it around ourselves.

Our business was and is a reflection of us, what we like to do, what we do well. It didn’t come off of a list of hot businesses.

3. We offered something other people wanted …

… and in many cases needed, even more than wanted. You don’t just follow your passion unless your passion produces something other people will pay for. In our case it was business planning software.

4. We planned.

We kept a business plan alive and at our fingertips, never finishing it, often changing it, never forgetting it.

5. We spent our own money. We never spent money we didn’t have.

We hate debt. We never got into debt on purpose, and we didn’t go looking for other people’s money until we didn’t need it (in 2000 we took in a minority investment from Silicon Valley venture capitalists; we bought them out again in 2002). We never purposely spent money we didn’t have to make money. (And in this one I have to admit: that was the theory, at least, but not always the practice. We did have three mortgages at one point, and $65,000 in credit card debt at another. Do as we say, not as we did.)

6. We used service revenues to invest in products.

In the formative years, we lived on about half of what I collected as fees for business plan consulting, and invested the other half on the product business.

7. We minded cash flow first, before growth.

This was critical, and we always understood it, and we were always on the same page. See lesson number 5, above. We rejected ways we might have spurred growth by spending first to generate sales later.

8. We put growth ahead of profits.

Profitability wasn’t really the goal. We traded profits for growth, investing in product quality and branding and marketing, when possible, although always as long as the cash flow came first.

9. We hired people slowly and carefully.

We did everything ourselves in the beginning, then hired people to take tasks off of our plate. We hired a bookkeeper who gave us back the time we spent bookkeeping. A technical support person gave us back the time we spent on the phone explaining software products to customers. And so on.

10. We did for employees’ families as we did for ourselves.

Family members — not just our own family, but employee family members too — have always been welcome as long as they’re qualified and they do the work. At different times, aside from our own family members, we’ve had two brother-sister combinations, an aunt and her niece, father and daughter, and husband and wife.

And in conclusion…

Bootstrapping is underrated. It took us longer than it might have, but after having reached critical mass, it’s really good to own our own business outright. It might have taken longer, and maybe it was harder — although who knows if we could have done it with investors as partners — but it seems like a good ending.

Family business is underrated. There are some special problems, but there are also special advantages too.

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Is All Good Business Inherently Social Enterprise?

I liked the phrase social entrepreneurship instantly when I first heard it. It’s doing well by doing good, I assumed, building businesses that help people. A business doesn’t have to not make a profit to do good, so the idea of social entrepreneurship makes sense. Teach kids to read, help people stay healthy, clean the environment, fight discrimination, and make a fair profit doing it. The world will be better for it.

But wait: Don’t all businesses have to make the world better, and solve problems, just to survive over a long term?  A business can poison people or the Earth, or cheat people, for a while, maybe … but eventually that business will die.  Won’t it?

So doesn’t all new business have to be social enterprise? Or is it not so much doing good as just simply not doing harm? That’s a tough question.

Confused, I asked  Google to define: social entrepreneurship. The illustration here shows some of what comes back. It talks of making social change, solving social problems, and creating innovative solutions to society’s most pressing social problems.

What’s hard, though, is working some of this into real life. If social enterprises solve “society’s most pressing problems,” then damn, that rules out a lot of very good and very well intentioned business that I would have called social enterprise.  Does a restaurant serving healthy, local, organic  food qualify? How about a business selling all-natural no-animal-testing cosmetics? What about a business selling electric cars? Chevrolet and Nissan (the Bolt and the Leaf) are social enterprises now?  And if you start to expand, then what about AT&T (communication) and Exxon (energy)? Are they social enterprises? Maybe they trip up on the “innovative” qualifier, as in “innovative solutions to society’s most pressing problems.”

I’m still confused. I will say, though, that in my lifetime I’ve seen a gradual but steady increase in the general consumers’ concern for social and environmental considerations. Frustratingly slow, perhaps, but it’s there. And it also seems like we’re in a new age of transparency, whether the big behemoth companies like it or not; bad businesses have trouble keeping their badness secret for very long.

The underlying story of a business, the people behind it, and its values, these all matter more now than they used to.

Or am I just being too optimistic?