Entrepreneurs must decide early on how they will fund their new business ideas. It’s a critical decision that echoes throughout the life of the business in very profound ways. Whether you turn to investors, or go it alone, the decision will determine not only what capital you have to build your business, but the control, constraints, and the type of returns you need to generate.
As a web entrepreneur, my field is filled with stories about venture capital, private equity and angel investments. In fact, if you read the tech press, you could think that this is the only way to build a successful online company. But it’s not. I advocate that more entrepreneurs should take a different approach. One that involves not venture capital, but what I call boot capital, a nod to the well known term, “bootstrapping.”
The benefits can be big. You have total flexibility in your decision-making, strategic path, and goals. A typical investor is interested in a return, usually of a significant multiple, within a set timeframe. This is great for an investor, but isn’t always aligned with the goals of the entrepreneur. In particular, the alignment is way off if your goals as an entrepreneur are not primarily financial.
Wait, nonfinancial goals for an entrepreneur? It sounds like an oxymoron. But it’s not. The entrepreneurial spirit is about opportunity, creation, ownership and leadership. Financial return is a byproduct of success, not always an end in and of itself.
Boot capital provides the ultimate control. When you self-fund your business, control stays in the hands of the founders. This gives you the power to make choices about staying small, sticking out a business idea that isn’t succeeding on paper, following a path no one yet understands, or simply making decisions your way.
When you don’t have much, you learn to be careful. You are forced to prioritize. You pay a lot of attention to cash flow. And perhaps most importantly you engage in creative problem solving.
Using boot capital also teaches you some very important disciplines. In their book ‘Getting Real’, the famously bootstrapped web company 37Signal write, “Instead of freaking out about these constraints, embrace them. Let them guide you. Constraints drive innovation and force focus. Instead of trying to remove them, use them to your advantage.”
When I started my business we had zero money for marketing and were working out of my in-laws’ basement. This forced us to use guerilla tactics to engage with users to build a grassroots community that is now the core of the company, and reaches millions globally. Now that the company is profitable we can always start buying advertising and market share, but our early constraints developed a competency in a type of grassroots marketing that takes ingenuity. It is nice to be out of that basement, but we still need to be smart!
A friend of mine struck up a conversation with the owner of his favorite restaurant. He asked the proprietor of this small but bustling business why he didn’t start a delivery portion, or maybe franchise it out, or expand. The owner considered for a moment and then replied, “How much business do I really want? Things are good. I’m happy.”
When you build a business on boot capital, it’s your choice how big you make it. It’s your choice if you pursue growth, or a business that fits your lifestyle. Not every business needs to multiply in size and complexity, but if you take venture capital, you are committing to exactly that.
The overwhelming number of businesses are small businesses. According to 2008 statistics about business size from the U.S. Census Bureau over 95 percent of all businesses in the U.S. have less than ten employees. And there is nothing wrong with that. A small team can still do great work and generate healthy income.
That’s not to say that boot capital isn’t also capable of going much further. My own company has a staff of over a hundred, and to date has not needed to take investment. We’ve simply grown at the pace that matched our business, using revenues to reinvest in growth.
Not every business suits a self-funded approach. In fact, some types of business are more or less impossible without external investment. But as a bootstrap veteran, I couldn’t be happier for having “bootcapped” it. For any new entrepreneur starting out, I’d encourage a long, hard look at whether taking funding is the right decision for their business.