Bootstrapping Your Company
Christopher Kenton writes in BusinessWeek Online about the benefits of bootstrapping your business [via TechDirt]. As we've said before, the VC route isn't for every company. But it's easy to disagree with Kenton's reasoning in the article, which is more along the line of "VCs bad":
Once a businesses becomes part of a venture portfolio, it's less accountable to its customers than to a string of powerful investors and banks -- and it lives or dies according to their formulas. Each business represents one small part of the VC portfolio, selected to ensure that if most of the portfolio crashes, one or more fabulous successes will generate a net return that outperforms the SP500. That mindset guides the operations of each company as the VC firm safeguards its investment. Often, decisions are driven not by the market, but by the VC's market. I can't tell you how many companies we've seen yanked from one market focus to another in order to attract another round of investment and dilute a bad risk, or to rebalance the VC's portfolio.
Naval wrote enough about the real reasons not to take venture investment, so I won't rehash them here. But suffice to say a VC who changes a company's strategy as part of his own portfolio rebalancing should have his wallet privileges revoked.
There is no question that some companies have done very well through the last few years while avoiding venture investment. But I think once the cycle gets further in, we'll find that bootstrapping was just a convenient tactic when there wasn't any money anyway. Already, I've seen the angel community starting to step in to a number of successfully bootstrapped companies and I'm hard pressed to imagine the venture guys aren't right behind. The level of VC-to-VC "tell me about this company in your portfolio" traffic is way up of late and it's only a matter of time before interest turns to the earlier stage companies as well.
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The Venture Blog had something to say about Bootstrapping Your Company. Joel on Software Talked about that very thing some time ago. I've some small amount of experience in starting a business, although being in the very begining stages I can't speak m... Read More
Andrew Anker considers Bootstrapping your Company. "a VC who changes a company's strategy as part of his own portfolio rebalancing should have his wallet privileges revoked." There are two good points in this short post, first, not all good... Read More
Christopher Kenton obviously has a skewed view about the stability of bootstrapped companies versus venture funded ones. Bootstrapped companies can and do turn on a dime (or even a penny if budgets are tight), and one new customer can move the entire company in a new direction.
One big difference? Bootstrapped companies with a bad idea, bad execution, or a bad market usually don't last a year. During the dot craze a good number of ideas without substance were funded, allowing them to live much longer than they should have. Some of the "yanking around from one market to another" that Chris refers to was probably the mutual pruning of a bad idea; with the attempt to salvage knowledge gained, the existing team, and the money remaining; and apply it to a hopefully more successful endeavor. Starting a new business (no matter how its funded), is a risky business.
Another difference is that the customers and markets that bootstrapped and venture backed companies can target do not often overlap. I wouldn't attempt to launch a nationwide ISP as a bootstrapped company, nor would I try to raise venture funding to sell commercial laundry inventory tracking software.
There are lots of different ways of raising money to start a business, from your own pockets to venture capital (and a whole bunch of other pockets in between). There were over 900,000 new businesses started back in 1999, and I seriously doubt that even 1% of them received venture funding. The Dot boom wildly over-inflated the public's perception of VC funding and so now there's a wave of press about how venture funding is not the be-all end-all.
For those of us trying to start new revolutionary new businesses in $1B markets, venture funding is appropriate. For all those others servicing market niches, regional customer bases, or wishing to stay small; there are plenty of alternatives. I wish everyone success at their venture, no matter what size it is.
Derek Woolverton
I'll give an example that validates Kenton's point. It's common knowledge that some of the VC's with large positions in companies like Yahoo, would fund dot-com's with the 'understanding' that a good portion of that investment be placed into banner ads running on ... Yahoo. Given the relationship of stock value to revenue at the time ... a very good investment strategy.
You can 'bank' on it.
By the way, I founded a 'Bootstrapped' company (www.zipproof.com) ... it's achieved "positive cash flow" (not draing a salary helps) .... but growing the company with a tiny marketing budget is a challenge.
We didn't start out to be this way. In June '00 I actually won a VC competition (iBreakfast, as YouWorkIt.com) that was even covered on NPR.
It just that by then the term sheets were basically 2nd mortgages ... as it is, I eventually liquidated my assets to get this off the ground ...
So we 'decided' to go the bootsrap route.
We sure have outlasted most of the ASP's that were funded in '99/'00.
You guys should check out www.antiventurecapital.com , the anti-venture capital site.
A really good article on this topic is A. Bhide (1992), Bootstrap Finance: The Art of Start-Ups, Harvard Business Review, Vol. 72, pp. 109-118.
It's definitely worth a read.
Right on point!