Several of my recent blog posts have addressed raising private equity (e.g., raising capital from angel investor groups and venture capital firms). It is easy for new business ventures to focus on private equity raises and ignore the art of bootstrapping. Of course, private equity offers seed capital to launch a business into a market quicker (and for certain business plans, time to market is essential), but for many businesses, they can effectively start small, reinvest profits, grow at a strategic and systematic pace, and ultimately gain economies over time. Plus, this allows the business owner to retain their ownership percentage. From my experience as an entrepreneurial law attorney, successful businesses who practice bootstrapping methods often find themselves with efficient business models over the long haul. In Bootstrapping I I listed the first three steps for effective bootstrapping by Guy Kawasaki. Here are the next three:
4. Forget the proven team. Proven teams are overrated—especially when most people define proven teams as people who worked for a billion-dollar company for the past ten years. These folks are accustomed to a certain lifestyle, and it’s not the bootstrapping lifestyle. Hire young, cheap, and hungry people—people with fast chips, but not necessarily a fully functional instruction set. Once you achieve significant cash flow, you can hire adult supervision. Until then, hire what you can afford and make them into great employees.
5. Start as a service business. Let’s say that you ultimately want to be a software company: People download your software or you send them CDs, and they pay you. That’s a nice, clean business with a proven business model. However, until you finish the software, you could provide consulting and services based on your work-in-progress software. This has two advantages: immediate revenue and true customer testing of your software. Once the software is field tested and battle hardened, flip the switch and become a product company.
6. Focus on function, not form. Mea culpa: I love good form. MacBooks, Audis, Graf skates, and Breitling watches. But bootstrappers focus on function, not form, when they are buying things. The function is computing, getting from point A to point B, skating, and knowing the time of day. These functions do not require the more expensive form. All the chair has to do is hold your butt. It doesn’t have to look as though it belongs in the Museum of Modern Art. Design great stuff, but buy cheap stuff.
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Also see:
Bootstrapping I
Private Equity VII - More on Angel Investors
Private Equity VI - Raising Angel Capital
Private Equity V - Raising Capital and Not Telling Lies
Private Equity IV - Angel Investors Get Picky
Private Equity III
Private Equity II
Private Equity I
