Have You Considered Bootstrapping Your Business for Success

What if I told you that some of the leading public companies got there without taking early venture capital funding?

Microsoft, Dell, CISCO, Oracle, and eBay all “bootstrapped.” It’s a well kept secret, and for good reason. These founders took a different path to profitability and ultimately IPO, and because of that also made a lot more money than they might have otherwise. Not only are they THE leaders in their respective fields, but they attained that leadership by bootstrapping until they were between $4 and $60 million in revenues. Many other industry leaders have followed suit, including Siebel Systems, Checkpoint Software, and Broadcom. In fact, dozens of companies have bootstrapped through the early years – forgoing paychecks for a higher stake in the company, focusing on customers and real revenues rather than market sizing and early valuations. For an early-stage business seeking venture capital, there are compelling reasons to also consider bootstrapping. It’s a smart way to build a great business.

How It Works

Bootstrapping happens when a company develops with little or no outside funding. The company opts to fund its primary development and growth through internal cash flow using real customer revenues. The founders and a restricted set of early employees often forgo paychecks for equity in the company. Eventually these companies operate at a breakeven or profitable performance level by necessity. Some companies formed from breakeven or cash-positive corporate divestitures share these same qualities.

Bootstrapped companies find ways to generate revenue and sustain growth through consulting engagements, non-recurring engineering (NRE) engagements, value-added reseller (VAR) agreements, customer retainer fees, divestitures or protected supplier contracts with a parent company for a defined period of time, the classic “moonlighting,” and even waived compensation. They learn to generate revenue that funds growth and expansion until reaching a level of growth where it no longer makes sense to go it alone.

Building Great Companies

While not conventional for every business, bootstrapping does build great companies. There are numerous justifications for bootstrapping, namely establishing a solid foundation for future growth, product development, expansion, and market leadership. When a company becomes self-sufficient, early customer focus becomes baked into the company’s DNA. Bootstrapped companies must listen to their customers and react to what they are saying. They must develop products the marketplace will purchase, so often market-test their products and involve their customers. Executives who aren’t fundraising and appealing to investors are able to focus more time on customers, managing growth and building the company at a time when customer acquisition is necessary for sustainability.

A second salient point is that capital allocation is more rational and less speculative among bootstrapped companies. Investments are more gradual, burn rates are more sustainable, time as a resource can be spread more evenly across the company and not impeded by external forces.

Finally, because there are fewer distractions, managers tend to be more focused and goals more closely aligned when a company bootstraps. Typically teams are smaller and have fewer projects in the hopper. And because bootstrapped companies cannot afford to simply throw money at a problem, they must focus on solving the real issue – from internal matters with employees, to external customer issues, to developmental product concerns.

Angel Capital Is Patient

Angel capital can play an important role in a company’s future, and companies often bootstrap with a little help from their “friends and family.” Typically this early capital represents a more patient investment in individuals who the investors know and trust rather than venture capital, which is third-party investment and carries a different level of accountability. Angel capital offers bootstrapped companies a financial resource without having to seek venture capital too early.

How Much Bootstrapping Is Enough

Raising money at the right time can transform a company’s growth rate, so it is important to know when to raise capital. Companies should watch for signals that they’ve outgrown bootstrapping:

Market growth rate is accelerating. If the market is growing faster than internal funding, you risk losing market share (and equity) by not sustaining growth.

Customers are buying products and sales are predictable. You can scale your sales team and/or channel effectively with the money you raise. As a rule of thumb, you should feel confident that you can predictably generate at least $2 in gross profit for every $1 in incurred sales and marketing expense. We recommend a $3:$1 ratio as an even safer barometer.

Complementary products or businesses become available. Is it time to expand your offerings through acquisition? Can you economically acquire new customers through a merger? If you are considering M&A activity and need money to finance your growth, it’s time to raise capital.

The current economic cycle favors growth. The current economic cycle appears favorable to increased technology investment and you see new growth areas on the horizon.

Your balance sheets need strengthening or you want to diversify risk. Co-mingled balance sheets can be a major challenge for bootstrapped businesses. A prudent decision for the company may be imprudent for the founder (for example, scaling sales at the expense of cash-flow). Selling some shares offers founders a way to diversify their own risk.

Where Do You Go From Here

If you’ve bootstrapped long enough for any of these events to occur, you’ve done a pretty good job steering your ship on a steady path, have maintained an equitable stake in your company, and can begin to look for the right partners to help you grow. The question you now may ask is, “What do I look for in an investor?”

Don’t simply look for an investor – look for a partner with vested equity interest to help you grow. If you have ambitions of rapid growth, what are the steps to getting there? The right partner will have experience walking the same path as you, and can help to secure your success. The reality is that many parts of your business and how you manage it will need to change internally and externally. The right partner should help you achieve this by offering substantive contributions – not just capital. Bottom line after coming this far is to find a partner – not just an investor.

Take Note: Bootstrapping Is Not For Everyone

Some startup businesses don't have the luxury of bootstrapping. Their market may be immediate and, therefore, they don't have three or four years to patiently grow the business. As well, their business may be capital-intensive, requiring funding from inception. In some cases, the founders simply can’t invest “sweat equity” in their business by forgoing pay for months and even years. Nevertheless, while bootstrapping doesn’t work for everyone, for the entrepreneur who has the time and wherewithal to grow their business through diligence and hard work, it can lead to a great business and even greater financial rewards. Bootstrapping for many is a sure path to success.