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Bootstrapping Basics Entrepreneurs Need To Know
By Ellisa Brenneman (c) 2009
Over the last five years approximately 600,000 entrepreneurs pitched
first tier venture capital firms in North America and about 15,000
received funding. Your chances of getting funded are 2.5%. This is a
fact. Many of those that were funded became quite wealthy and many
more failed. Venture capital firms are looking for home runs not base
hits.
To begin, let's say you're having difficulties raising capital for one
of a multitude of reasons. You lack an experienced management team
with a track record of prior success, your product is still in
development, the service you've created hasn't been market tested and
you still haven't refined the sales process. Or, your company may
simply not be a "VC deal" or a "home run", that is, something that
will go public or be acquired for a bazillion dollars. Finally, your
organization may be a non-profit with a cause like the environment or
autism. Does this mean you should give up? Not at all.
I could build a case that too much money is worse than too little for
most organizations, not that I wouldn't want to buy a NBA franchise
one day to emulate Mark Cuban. Until that day comes, the key to
success is bootstrapping. Bootstrapping refers to a group of metaphors
that share a common meaning, a self-sustaining process that proceeds
without external help.
The term is often attributed to Rudolf Erich Raspe's story The
Surprising Adventures of Baron Munchausen, where the main character
pulls himself out of a swamp, though it's disputed whether it was done
by his hair or by his bootstraps. Regardless bootstrapping sounds a
lot more businesslike and appealing than hairstrapping. What follows
is some practical advice for bootstrapping a start-up or small
business.
First, focus on cash flow, not profitability. Generating revenue and
profíts is 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 up-front capital requirement,
short sales cycles, short payment terms, and recurring revenue.
Service oriented businesses or new products in hot market segments
come to mind immediately.
Next, 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% 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, they can
install ten systems. So our first year sales will be 10 facilities x
10 systems x 240 days = 24,000 satellite radio systems." 24,000 is a
long way from the conservative 1.5 million systems in the top-down
approach. Guess which number is more likely to happen. This is one of
the most common mistakes I see entrepreneurs make. Stop dreaming and
let's get real.
Hire an affordable mentor or small business coach to provide guidance
based upon relevant experience. Most likely they've bootstrapped their
own businesses in the past. They can provide you with valuable
objective advice steering you around potential pitfalls and hopefully
save you dollars, along with time, by keeping you from making the same
mistakes as they did in the past. They also aren't going to want
equity in your business just by having their name attached to it or
request a seat on your board of directors.
Most start-up small business entrepreneurs don't have a "proven team"
and you can't create experience out of thin air. Proven teams are
often over-rated anyways. Especially when most people define proven
teams as people who worked for a multibillion 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. Employees with passion and desire along with low overheads are
going to be much more likely to stick beside you during the inevitable
ups and downs your business will face. Once you achieve significant
cash flow, you can hire experienced supervision. Until then, hire what
you can afford and make them into great employees.
What type of business is best for bootstrapping you ask? One path to
take is to 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-process
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. You'll
also have obtained a líst of satisfied clients and developed important
industry connections which can be priceless.
During the start-up stage be prudent and focus on value. You don't
need the fanciest office furniture, phone system or computers. Look
for the best value, haggle and shop around for the best deals. There
is no shame is negotiating pricing and terms on almost anything
related to your business. Sometimes the best isn't always the best
either; it's just the most expensive.
When it comes to employees make sure new hires have multiple skill
sets and can handle stress because if they can't they're going to
crack or go crazy lowering overall morale in the process. You are the
visionary and leader of the company. Your employees need to believe
and put their faith in you. Take your time; hire carefully. At times
you'll be asking your employees to do three jobs at once, while
learning a fourth, and eating lunch that day at their desk because
there's so much work to be done. Your employees look to you for
leadership so make sure to lead by example. YOU are the first one
there and the last one to leave. Every day.
Go direct and sell, sell, sell. The optimal number of mouths (or
hands) between a bootstrapper and customer should be zero. Sure,
stores provide great customer reach, and wholesalers provide
distribution. But ecommerce was invented so that you could sell direct
and reap greater margins. By taking this route you'll also learn more
about your customer's needs. Stores and wholesalers fill demand, they
don't create it. If you create enough demand, you can always get other
organizations to fill it later. Why would a store or a wholesaler put
time, money and effort into selling your product or service if you
can't? If you don't create demand, all the distribution in the world
will get you nowhere fast. Sell, sell, sell and if you're not good at
selling one of your first hires better be a superstar in that
department.
In summary, focus on creating revenue, retain a qualified affordable
mentor/business coach, forecast from the bottom up, pick the right
business model for bootstrapping, focus on value when purchasing goods
and services for your business, take your time to hire the right
people and sell, sell, sell. For a small business or a start-up
nothing happens until someone sells something to someone. Period.
About The Author
The author, Ellisa Brenneman, is the owner of Ethos Mentor. Ethos
Mentor provides entrepreneurs with affordable one on one mentoring,
business coaching and capital raising services so they can launch and
grow their businesses. Visit www.ethosmentor.com for additional
information or email info@ethosmentor.com to schedule a free
consultatíon with a Mentor.
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