How can we bootstrap the launch our new business?
Discussions About Bootstrapping The Launch
Traction to move the venture forward comes from capturing one specific slice of a market. This focus-first approach needs to lead to other follow-on markets. But committing to a focus is difficult because of the unknowns. Nothing gets an entrepreneur more focused than uncertainty and fear. And at no other time in the entrepreneurial life cycle is there more uncertainty and fear than in Stage 3, Commitment of Resources, when the entrepreneur and venture has to commit to one direction. The only way to get to the top is by climbing. It is now time to “concentrate your powers” and focus your “organizational intelligence”—which is your venture’s capacity to mobilize all of its brainpower—and to commit to the mission at hand. Commitment means it is now time to “bet the company” and “go for the summit.”
Innovative products and technology are good things but not enough to build a sustainable business. However, in the aftermath of the Perfect Storm, entrepreneurs need to flush out of their systems the beliefs that technology alone will drive a business to the top. One leading venture capitalist succinctly told us, “If you build it, no one’s going to come.”
There was too much enthusiasm for entrepreneurship, now new business venturing gets down to going for the summit and surviving. Today’s entrepreneurs need to figure out the pathway to successfully launching the venture, and then bootstrap themselves to the summit and plant a first prover flag. Or as Michael Dell says, “The ultimate test of an idea is whether the customers actually buy.”
German philosopher Friedrich Nietzsche once said, “That which does not kill me, makes me stronger.” Sir Edmund Hillary proved that Mt. Everest can be climbed, just like the Wright brothers’ sixty-second flight proved that man can fly, and Edison’s first light bulb burning for forty hours straight proved that electricity can safely light a home.
Psychologically, making it up the Hillary Step is vitally important. It gives you the assurance that you can fight and be successful, that you can believe in yourself as an entrepreneur, and that your team is a winner. The Nepalese saying goes, “The summit of Everest can deliver you from the prison of ambition.”
Richard Shuttleworth of Silicon Valley Bank told us that it is very important for entrepreneurs to break through this “transition stage” from entrepreneurial risk to a more traditional business risk. More often than not, new business ventures fail because the business and revenue models were not clearly defined and tested in the real-world environment. We heard of venture capitalists who lost their confidence and ability to quickly pick out winners based on concepts. Only exposure in the bitter cold at the summit is a true test of a workable model.
In addition to validating your product, you need to validate your price point to help you determine how much money your product can generate. And only after a race to the summit can you determine whether you need to change the technology, the core components of the product, or your pricing structure in order to get traction in the market. After the climb, down at base camp, you will need to determine the headroom for this market, meaning how many customers there will be, how many will continue to rely on your new products or additional services, and how many will remain as a part of your customer base over the long term. It is also important to uncover pitfalls about industry risks and competitor threats. Only a focused, limited experiment can reveal hidden problems and force the venture to solve them. Taking care of them early on increases the chances of success, and likewise increases the value to potential investors.
Successful entrepreneurs know that new business venturing cannot be taught, even at the best business schools, and it cannot be learned from working at the biggest and best-run organizations in the business world. It can only come from experiencing and surviving a climb to the top of the world at Mt. Everest.
Bootstrapping: Unlocking the Door to Self-Financing
Serial entrepreneurs understand that all resources are scarce to a start-up, and that cash must be as cherished as the oxygen that is required to reach the summit of Mt. Everest. Weight on a climb to the summit is like overhead to a start-up. David Breashears, the first American to scale Everest twice, says that climbers cut their toothbrushes in half to save weight.
Tom Siebel founded Siebel Systems in 1993 with $50,000 in East Palo Alto, California. Ten years later his company had nearly $2 billion in revenues, with 8,000 employees working out of some 136 offices in twenty-four countries. Said Siebel, “We didn’t spend much money. We had the crummiest space in Silicon Valley. All of our furniture was the crummiest furniture that we could buy at auction.”
Start-up financing is very dependent on paid-in equity capital by the founders, their credit histories, and heavily collateralized banking financing. This “bootstrapping” is self-financing by employing highly creative ways of gathering and allocating critical capital resources without raising equity from outside investors, or borrowing money from traditional banking sources. Bootstrapping requires a different mindset and approach, because the principles and practices imported from the corporate world will not serve well. Entrepreneurs need to become a “cash management fanatic.”
One report on successful bootstrappers found that 73 percent tapped into their personal savings, 27 percent used credit cards, 14 percent had repayable loans from friends or family, 7 percent had a loan against personal property, 5 percent had a bank loan, 2 percent found equity investors in friends or family, and 14 percent found other sources of cash. Almost two-thirds, 63 percent, started their business in their homes; 49 percent did not start paying themselves until a year later; and 33 percent waited more than a year to pay themselves.
Additional research on bootstrappers found that 87 percent of the CEOs leading high-growth ventures had on the average 43 percent of all their personal assets at risk in their start-ups. About 28 percent of them raised their seed money from co-founders, 24 percent from friends and family, and about 7 percent raised seed money from strategic partners and customers. Two-thirds of them launched using $50,000 or less, and 22 percent needed more than $100,000. It takes, on the average, twenty-eight months for successful ventures to grow from the seed stage to sales ranging between $1 million to $50 million. Another recent study found that ventures with seed capital of $100,000 or more grew, on average, some 2,074 percent over five years, employed about 150 people, and had nearly $21 million in annual sales.
Strategies for Covering Gaps in Financing Needs
There are two bootstrapping strategies you can employ.
Focus on Cash. Get operational quickly and generate cash creatively. What you do at this early stage is not struck in stone for the life of the venture. Be sure to start with premium-priced products and services in niches. Be advised that start-ups will not survive pricing wars with established competitors. Focus on cash flow and remember that each stage of new growth will require additional cash.
Cultivate Business Relationships. Strategic partnerships, business partnerships, and outsourcing partnerships, formed before you need them, are critical to the successful execution of your business plan. Surround yourself with the right mix of people, capital, and business partners. Such “relationship capital” is an increasingly important resource for entrepreneurs. Your venture’s success depends less and less on the resources within your “corporate walls” and more and more on the strategic alliances your venture is able to establish within your sector. Strategic partnering, corporate partnering, and strategic alliances all refer to “the establishment of long-term collaborative agreements” between smaller entrepreneurial ventures and larger corporations.
We found that two-thirds of the fastest-growing ventures in the United States participate in multiple strategic alliances. Service companies typically have five to six alliances, and product companies have four alliances. About 70 percent of all these firms are in a joint marketing or promotional alliance, 58 percent are in a joint selling or distribution alliance, 32 percent license technology, 29 percent have R&D contracts, 26 percent have e-business partnerships, 24 percent conduct design collaborations, 23 percent have product development arrangements, 15 percent are going global together, 13 percent are outsourcing partners, and 5 percent are involved in some other alliance. Be sure to look to your board of advisors and directors for guidance on finding strategic alliances that can fill out your critical capital resources.
Today’s entrepreneurs need to figure out the pathway to successfully launching the venture, and then bootstrap themselves to the summit and plant a first prover flag.