Business

As a private equity attorney I have never known a time when bootstrapping was more important for start-up businesses than now.  The current economic climate has created several opportunities for business owners (see my blog entry entitled Economy = Opportunities), but venture capital and angel investor groups are proving less willing to invest in pre-revenue and early revenue businesses than in recent years - meaning, owners of start-up businesses are forced to take care of themselves more than before.

Readers of this blog know that I am a fan of Guy Kawasaki (author of The Art of the Start).  I recently ran accross one of his posts on the Open Forum Blog called The Art of Bootstrapping where he lists his ten steps for effective bootstrapping.  Here are numbers one through three.

1. Focus on cash flow, not profitability. The theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small upfront capital requirement, short sales cycles, short receivables terms, long payables terms, and recurring revenue. It means passing up the big sale that takes twelve months to close, deliver, and collect. Cash is not only king, it’s queen and prince too for a bootstrapper.

2. Forecast from the bottom up. Most entrepreneurs do a top-down forecast: There are 150 million cars in America. It sure seems reasonable that we can get a mere 1 percent of car owners to install our satellite radio systems. That’s 1.5 million systems in the first year. The bottom-up forecast goes like this: We can open up ten installation facilities in the first year. On an average day, each can install ten systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems. That’s a long way from the conservative 1.5 million systems in the top-down approach. Guess which number is more likely to happen.
 
3. Ship, then test. Perfect is the enemy of good enough. When your product or service is good enough, get it out, because cash flows when you start shipping. Besides, unwanted features, not perfection, come with more time. By shipping, youll also learn what your customers truly want you to fix. It’s definitely a trade-off your reputation versus cash flow so you can’t ship pure crap. But you can’t wait for perfection either. (Nota bene: life-science companies should ignore this recommendation.)