punctuative! by Matt Winn

To some, bootstrapping and venture capital are diametrically opposed.  Where’s the self-sufficience in a pile of outside money, after all?  In fact, the two startup approaches are eminently compatible, even complementary.  Naysayers, follow along.

I recently finished Greg Gianforte and Marcus Gibson’s Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money.  It’s a no-nonsense guide to guerilla startup techniques that work in a low funding environment and is packed with examples of folks who have ”made it” on a small pile of dimes and no outside capital.  The advice is nicely tiered, flushed out with details (e.g., bring at least 200 business cards to trade shows), and reinforced by calls to action (e.g., following a particularly brazen tidbit, ”Yes, really do it!”).  All in, a strong, practical read for corporate trailblazers, and duly celebratory of the bootstrapper (”We believe Bootstrappers are America’s true unidentified entrepreneurial heroes”).  It’s no accident that “herculean” finds its way into the text. 

Unfortunately, however, the focus on entrepreneurial classification leaves an incomplete story with its bootstrap or bust message.  Pieces of Greg and Marcus’ book address perceived pitfalls of venture capital funding, and lend credence to the axiomatic view portrayed therein.  I hope the following, offered in the book’s myth buster format, dispels misconceptions associated with the compatibility, philosophical or otherwise, of venture capital and bootstrapping:

• Myth#1: Bootstrappers don’t take outside financing.  In fact, I’ve seen many entrepreneurs bootstrap a business to $1 or $2, or even $8 million in revenue and then seek venture capital to build a much larger business.  This happens all the time.  There is no either/or.  Entrepreneurs’ needs and desires are mutable over the lifecycle of a business. 
• Myth#2: A bootstrapper’s frugality is incompatible with the demands of a VC.  Actually, a CEO’s stewardship of capital is an important factor in an investment decision.  Demonstrated capital efficiency within a high growth enterprise is a real boon.  The nuanced view, of course, is that large venture funds have to ”put to work” a certain amount of money to make an investment worthwhile.  This does not mean a bootstrapper should avoid financing.  It means she should match her expected capital demands with an appropriately sized venture fund.
• Myth#3: A bootstrapper’s ownership expectations are incompatible with the demands of a VC.  Perhaps.  It’s true that entrepreneurs often expect a higher valuation (hence, more retained equity) than a VC is willing to proffer.  The “bootstrapped cap table” as I’ll call it, which really means concentrated CEO ownership prior to funding, can lend an interesting dynamic to the venture funding discussion.  On the one hand, such a CEO is in a particularly good spot.  Post-funding, he will often own a very large piece of the company relative to many venture-backed CEOs (if a new one is brought in to a venture-backed company, an option grant might be in the low to mid single digits as a percentage of the total company and vest over time).  On the other hand, a venture investor will likely be concerned about mismatched incentives - in the event of what a VC might consider a small sale, the entrepreneur may do quite well.  There are ways of getting around this dynamic.  For example, sometimes the venture firm will allow the entrepreneur to take money out at investment, thereby freeing him up to focus on a much bigger exit (but also eliminating some “hunger,” a notable downside).  Irrespective of process, a bootstrapper may often end up with a large, even majority, stake in the business.
• Myth#4: The bootstrapper shouldn’t waste her time with, cede control to, or otherwise “fuss with” venture capital.  Despite Greg and Marcus’ well-founded notion that an investment process will take resources away from core business operations, the effort should be evaluated just like any other business decision.  This topic has been well addressed by the blogosphere, but I thought I’d address a few of the authors’ points, namely the following: “Venture capital firms might take up to a year or more to decide on whether to invest.  They might want a 200-page business plan; their activities might force you to spend up to $50,000 in professional fees.”  In a book filled with sage advice, these notes deserve attention.  1) Yes, investment decisions may take a year, though it’s rare and would never in my experience be a full blown, year-long diligence.  It would be an initial intro followed by a monitoring period, and later investment.  From the standpoint of both parties, a lengthy interval offers a true “getting to know” period pre-partnership and may behoove both the VC, who is mitigating risk, and entrepreneur, who is building value.  As a subset of entrepreneurs, the bootstrapper who can afford not take capital today, benefits from a long due diligence period. 2) No, it would be extremely unusual (and I’ve never heard it happen) for a VC to demand a 200 page business plan.  In fact, it’s much more likely that the VC wants to see a 1-5 page executive summary and well articulated pitch with an understanding of the business’ unit economics. 3) Regarding professional fees, it is standard practice for diligence and legal fees to be paid back by the company out of funding proceeds and the $50,000 figure cited in Bootstrapping Your Business is not unreasonable as an all-in number.  On all of the above, there are good firms and bad.  Be careful with whom you deal.  If third-party engagement in your business, however limited, gives you hives, venture capital is not for you.  Otherwise, it can be a valuable tool for company building and wealth generation.

So go bootstrap a company.  And then, if it makes sense, raise venture capital.  Yes, really do it!

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As a free download, Seth Godin’s The Bootstrapper’s Bible offers additional fodder.

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Photo credit: fill your boots, originally uploaded by **spaceMonkey**