What Entrepreneurs Should Know About Bootstrapping A Startup

The current state of the economy encourages entrepreneurs to build and launch their companies in bootstrap mode. Early stage funding is scarce and investors are looking for an example of what the company, product or service can do before they will make an investment. Essentially, investors have become risk adverse and are expecting entrepreneurs to take on the risk associated with early stage companies.

Entrepreneurs are heeding the call and jumping in with their own working capital, small staff sizes and stripped down first launch product objectives.

Many entrepreneurs are taking the bootstrapping route without fully understanding the implications and challenges associated with this approach. The learning curve and true implications of a self-funded venture do shock many entrepreneurs causing them to have to significantly change their original business plans. To avoid the shock or surprise factor that can come along with launching a business in bootstrap mode the following should be considered before going all in.


Time To Market - Inevitably it takes longer to develop and launch a business then originally expected. This can be the case even if a company has a war chest of funding. In a bootstrapped company this phenomena is exacerbated because the lack of funding has many implications including resource constraints, skill set mismatches, slower communications and lack of focus because team members are involved in a number of other non-related activities. The key to hitting target dates is to do some real planning taking into consideration the working capital at hand, the mix of people and skills in the company and the market adoption rate for lean and mean product and service offerings.

Quality - Product quality always seems to suffer in a poorly financed bootstrapped startup. Bootstrapped companies usually ignore the need for test plans, product specifications and QA resources. The responsibility for testing product is usually relegated to a part time technical person or a business partner leading to a suboptimal quality assurance environment. This can lead to continuously dealing with product and technical issues that can impact consumer adoption and the transition from beta to production. Assign someone QA responsibility from the beginning. Just giving someone this label will help to establish focus on delivering a quality product. Bring outside testers into the process and listen to what they have to say. Build, test and iterate in a small sandbox that everyone understands.

Scaled Back Functionality and Feature Set - Most entrepreneurs are excited about their business and have great ideas and want to see them implemented. Unfortunately, the clash between dreams and reality can lead to real frustration. Dreams are great but reality is more important. The key is to scale back expectations early to align with the company's resources. Starting out too ambitiously can lead to a state where nothing gets done on time or very well.

Part Time Workers And Schedules - Most bootstrapped companies use a hodgepodge of part time and temporary workers. Quite often the schedules for these workers are not in sync resulting in missed communication, partial completion of projects and inconsistent product features. Regular group meetings and emergency meetings will need to happen on a regular basis to keep the company moving. Plan ahead for this establishing a communication vehicle(Skype?), a regular time when everyone can collaborate and an emergency process just in case something really challenging occurs and someone needs to get in touch with someone to resolve it. Also, keep a stable of backup resources just in case.

Running Out Of Money Before Launch - The sad truth is that many bootstrapped companies never make it to launch because they run our of money before they are ready to launch. The previously mentioned factors have a big impact on this outcome. However, lack of budgetary planning and establishing realistic goals also has an impact. If you only have x amount of cash in the bank to invest in the venture be smart and assess what you "really" can achieve with this amount of cash. The company may only be able to create a limited web site introduction or a limited functionality product. Even if this is the case it is better to set goals based on the cash at hand and actually do something worthwhile with it. Having a partially completed product or service will cause a company to waste the little bit of capital they have. Avoid having nothing practical to show for your efforts.

Unstable Technical Platform - How many wobbly startup products and services have we seen? This is a common problem with many startups. Sometimes lack of funding is not the cause of the problem(this is a topic for another blog). Using part time and temporary developers can reek havoc on a platform. Try to use as much of the off the shelf development tools and base functionality you can. Avoid getting into a significant development effort to get to your first launch.

The Initial Beta Is Just The Beginning - Many startup's spend all of their money, energy and good will getting to the beta. The beta is really a stepping stone to get consumer feedback and to show off to potential investors. A startup will get piles of suggestions and will have to scramble to keep the pace once real customers arrive. Do not disappoint them. A startup is unlikely to get any significant funding until real numbers start showing-up.

Conclusion - We will be in an early phase startup funding drought for quite some time. It is hard to predict when funding and consumers will be in a position to hand over some significant cash. Make the most of what you have and be realistic about what you do not have. Trim up the plan and the launch expectations and keep a tight hold on those precision resources(money and human capital.

What Is The Value Of An Idea?

Many entrepreneurs are excited about their ideas and the potential for those ideas to turn into great businesses. This excitement translates into a perceived valuation of the idea. An entrepreneur may assume that the idea is extremely valuable and an investment in a business based on the idea is obvious. In many cases the entrepreneur's valuation is not consistent with the publicly perceived value of the idea.

There are cases when a pure idea does have immediate monetary value. If the idea represents a break through mathematical formula, insight into a physical law, or a new chemical process the idea may have immediate monetary value.

However, in most cases an entrepreneur has to show an investor more than an idea to entice them into investing.

This does not mean that the idea has no value. In fact, the idea stage of a company is very important and "valuable".

1. Starting Point - Everything starts somewhere and the creation of the idea that will one day power a company is usually the symbolic starting point for a business.
2. Brainstorming - The idea phase of a company is a blue sky anything possible stage. It is exhilarating and stimulates thinking around the technology, company structure, staffing, marketing and product development that will be forthcoming.
3. Intellectual Property - Although the idea itself may have no monetary value a patent does have value. If the idea is truly unique a patent process should be initiated. If a patent is granted the idea will add value to the future business.
4. Rallying - Presenting an idea to another individual or group is a great way to start a dialogue about an idea's potential. The idea discussion will help bring like minded people into a discussion about the idea and its potential merit. The idea itself may form a common bond amongst like minded individuals that will eventually take interest in the tangible manifestation of the idea.
5. Validating - Getting the idea out into a public forum will help determine the validity of the idea as it relates to its commercial potential. Be careful about confidentiality when soliciting public feedback. Isolate your public contacts to individuals you trust to keep your information confidential. Having them sign an NDA is a good idea.
   
6. Investor Introduction - At the idea stage it is very unlikely that an investor is going to invest. However, sharing the idea with investors is a good way to prime the pump for a future investment and to determine if a business built around the idea is of interest to the investor. The investor may know other people that would be interested in the business. The one caveat is confidentiality. Be careful about sharing your idea with investors that may take the idea elsewhere.

The inclination to focus on an idea as having monetary value prior to having an actual business associated with the idea is not the correct way approach to idea valuation. Vet and develop the idea from a theoretical notion into something tangible such as a product, service, etc. before you considering the idea as having monetary value. Use the idea to motivate a team around you to create the product and service that will eventually represent the real value of the idea.

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Should The US Federal Government Become A Venture Capitalist?

To a large degree the government has already set this precedent. The recent bailout of the banking industry resulted in the government taking an equity stake in a number of banking institutions. GMAC is now part owned by the US government. During the Savings and Loan crisis in the 90's the government took equity positions in a number of financial institutions and actually received a very good return on investment. In the vernacular of the VC industry these investments can best be described as "down rounds".

Given the current economic crisis and the need to stimulate growth and innovation in the US economy the prospect of having the government proactively invest in America, with an expected return on investments, seems to be a a policy worth entertaining. This is certainly a much better way to stimulate growth and innovation then bailing out troubled businesses such as the automotive industry.

The recent economic crisis has also brought to light certain deficiencies in the US's ability to innovate, create new and forward thinking industries and to provide jobs for its citizens that have a prospect for future growth and expansion. Just imagine what would happen if the US government provided a trillion dollars of investment capitol for new and emerging companies in the areas of technology, education, health care, transportation, etc?

This may seem far fetched and Utopian or is it? Other governments have taken the lead in setting an example on how effective this approach can be. The Singapore government has several VC initiatives chartered with investing in businesses that will lead to innovation, business formation and job creation in areas that will help Singapore remain a technology leader in Southeast Asia. These programs have helped to make Singapore a net exporter of consulting services, software development and infrastructure. The economy remains robust even in this time of global downsizing.

If the US decided to go down this road they could leverage the established VC model, with some modification, to get going rather quickly.

1.) Invest in existing VC Funds - This is really no different that the way large state pension funds work today. They invest significant portions of their assets in VC funds. They have very specific ROI expectations for these investments and have a long history of investing in these funds.

2.) Investment Categories - Make strategic investments in certain areas that would have direct benefit to significant segments of the US population. Green and Clean, Health Care, Transportation and Education come to mind. The assumption being that the shear number of customers the business would impact should help to make them successful.

3.) Advisory Board - Create an advisory board of VC's, technologists, entrepreneurs, business leaders and consumers to determine how best to manage and invest the funds. There is a wealth of knowledge and experience in the US that could be brought to bare to help make the program a success.

4.) Regulation - Yes, the government will have to create a regulatory group to make sure that the money is being invested properly and abuses are minimized. The recent Wall Street, banking and mortgage fiasco proves that regulation and oversight is important whenever significant dollars are involved. The regulatory body should be comprised of government, financial, industry, consumer and entrepreneurial representatives.

5.) Set Expectations - Like any investment a rate of return and cash out term should be set for the investment.

Overall, the concept of investing in new and innovative products and services seems to be a much better idea then pulling out FDR's 1930's infrastructure New Deal initiative. That may have have been fine in the 30's but this is a new millennium and things have changed. We need to iterate and innovate quickly. Let entrepreneurs do what they do best and help lead the charge in the 21st century.

Venture Capital Outlook For 09

Last week I had the opportunity to sit in on an open forum with a combination of VC's, entrepreneurs and various business people interested in learning more about expected VC behavior and investment strategies for 09. I thought it would be a good idea to share some of the commentary with you.

BlueRun, Norwest, Hummer Winblad and VantagePoint were openly represented. Other VC's were also there but not officially.

1.) Are you currently investing? They unanimously indicated that they are investing and mentioned some deals they had recently done. It has slowed down a bit but will most likely pick up in the first quarter of 09.

2.) What are you advising your portfolio companies to do during this period? Batten down the hatches and preserve cash. Venture funded firms do not want to be in the market looking for another round of capital in 09. Unless of course they are phenomenally successful and warrant a strong valuation.

3.) What is going on with valuations? They are getting a haircut. The valuation you had in 08 no longer applies. Everyone is getting another look.

4.) Are you investing seed round funding? Sort of not really. Some said yes some said no. The no category do not usually provide seed funding no matter what the economic conditions. There was a VC in the audience that specialized in seed rounds and they were active. However, the big guys generally were not interested in this stage of investing.

5.) Does the climate impact how you select companies to invest in? Not really. The formula for each VC partner is different. It is a personal thing based on prior experience as an entrepreneur and VC.

6.) What are you looking to invest in? It depends on the VC's specialty. Categories mentioned were enterprise software and consumer Internet. Hardware oriented companies were not favorites due to the large capital outlay and long gestation period.

7.) Are you investing in the team, idea, individual, upside of valuation, market size or market category. They are looking for a game changing idea, enthusiastic individuals that will pursue their idea despite the funding outcome. The VC's are looking for home runs that are on the scale of Amazon, Cisco, Facebook, Google, etc. Others need not apply.

8.) What about VC funding sources? This question spawned a mixed response. Some said no problem. Other said that there is a risk that some large government oriented institutions may not be able to cover their obligations.

9.) How should an entrepreneur approach a VC in 09? Don't be scared they want to hear ideas no matter how off base the may be. Perhaps the more far out the better. Me too ideas are not generally interesting.

10.) How should an entrepreneur gauge a VC's interest in their proposal? No response is the new "not interested" vocabulary. The first meeting either gets them hooked or turns them off. The first meeting "es muy importante". If they do not love you right away not likely you will get a second look.

11.) Show me the money? This is even more important in the current economic environment. The VC's want to know right away how you are going to make money. You better have an answer with big numbers in it. And you better know what you are talking about.

12.) The advertising revenue model? The VC's were actually mixed on this. Some say no way others have no problem. The formula is pretty clear for this model. Lot's of unique visitors. Sure the value of each impression is less. That means even more impressions are required to make an ad revenue model viable.

13.) What categories will you invest in? Categories do not matter. In fact, forcing a business into a category could hurt an entrepreneurs prospects. Having the idea and business stand on its own is refreshing and more likely to get funded. However be aware that VC's only invest in certain categories. Pick your VC wisely. Check out their portfolio before you approach them.

14.) If a company does get the node how long will it take to close? Well, longer then you would like. The VC usually has to vet the company with the partners even though they may be super enthusiastic. Then you have the hand wringing, lawyers and valuation issues. Build-in a couple of months from first blush to closing the deal.

The big take away is investment will continue. Companies that are running on venture funds should hold on in 09 and preserve cash even at the expense of growing top line revenue. Good ideas, that have a potential to change the world will get funded. Watch out for the health of the VC investors. This could be a curve ball for 09.