Bootstrapping vs. Fundraising
Josh Steimle wrote an interesting blog entry last week about his personal debate on getting loans or bootstrapping his company. This is a very difficult decision for most entrepreneurs because a lot of people believe that more money is the solution to everything. It’s an interesting topic for me to write about since I am in the business of helping entrepreneurs raise money for their company — so you would think that I am 100% for fundraising — but that’s not the case.
We see a lot of deals every week — and thousands every month. If I were to guess, I would say that only 5-10% of the companies that sign up to FundingUniverse are great candidates to acquire capital. The rest of the companies may need capital down the road, but it probably isn’t the underlying issue to success right now. (By the way… I put myself into this same boat most of the time — I often think that we need to get more money to solve a particular problem, when there are other solutions that would be more beneficial to our company.)
Let’s just say this — the worst time to raise money is when you need it. If you and your company is in a difficult cash situation, there is probably another solution (bootstrapping) that can help reduce the stress. Those actions might require you to downsize on employees, work from home, reduce high expenses, and/or work harder to drive sales.
Yesterday, we (FundingUniverse) just released a new product that I call the Entrepreneur’s Roadmap. The Roadmap is a 13 lesson course on every aspect of raising capital — including bootstrapping — because we believe that every entrepreneur should first focus on bootstrapping your company before trying to raise capital.
The more and more I think about fundraising, I am starting to formulate the opinion that entrepreneurs should first focus (on a small scale) on how to build a profitable business model. If you can bootstrap your company to prove your business model, then fundraising will be much easier.
I think the hardest part is to find people actually willing to sit down with you and really consider your product or service. Trying to do a pitch over the phone, or even list it on a site trying to attract interest is almost a waste of time.
The best thing that could happen for any company is to show that they have been successful acquiring their first customers and that they can show some revenue. I think that with this market, the only way to attract real investor interest is to have a fully operating prototype or show that people are already buying.
We originally bootstraped our company and invested well over $125,000. We found our first investors through close contacts and family friends. I don’t think there are a lot of people that have that kind of cash to invest in their idea to get it off the ground.
Forget going to a bank or the SBA unless you are already profitable. They have no idea what they are doing unless you say you are opening up a Subway or Pizza Hut. Technology investments at a retail bank are completely non-existant.
I am a firm believer in bootstrapping. I have seen too much money kill too many companies - the green backs prevented them from every really getting a good buisness model figured out. There are a few rare companies that do require major outside cash infusions. However, most companies in America did not begin with a big capital infusion from VCs or Angels. Most began, grew, and survived by filling a need that people were willing to pay for, often in advance. If the problem is important enough, the customer will pay for it, and often pay for a portion in advance of the solution. It is my belief that for many businesses the customer is willing to pay for a significant portion of the cost up front. The entrepreneur needs to have some money to put in, primarily in the form of savings to live on until the cash begins to flow.
Like Brock said, the worst time to raise money is when you need it. Traditional banks are not going to fund you great new idea, they only fund what is simple and proven - like a franchise. If you need money, it is not the time to raise it. If you don’t need money, you probably won’t be needing it as you should be able to grow pretty fast by reinvesting the profits.
By the way, Seth Godin’s “Bootstrapper’s Bible” is a wonderful resource. Read it with a pencil and scribble in the margins!
I have a website in development that would be very easy to bootstrap, but I’m considering funding in order to take a dominant competitive position before our stealth-mode competitors get off the starting line, and in order to build a strong team with experience guiding large revenue companies — all of my past ventures have been small.
The market for this particular project (I have a few other projects waiting in the wings) is very broad, while the scope of the project is very narrow, which means that we can go a long way with few expenses.
One of the things I learned at the December speed pitching event though, is that preparing a company for capital investment can also make the company more robust and capable of handling fast growth. I’m confident that I can make this site successful on my own, but I’m not confident that I can grow it to my target of $50m in revenues on my own.
Do you think these are good reasons to seek out a venture capital investment, or am I barking up the wrong tree?
- Eric