Bootstrap your way to riches
Article Date: Jul 19 2006Internet companies in early 2000 could raise capital in just two meetings and the deal would be closed in six weeks. Their track record was appalling.
Bootstrapping would have led to sounder businesses as failures were not caused so much by the state of market but because basic good business practices were thrown out of the window in a desperate search for growth. This search was often based on a completely unproven business model and for markets that in some cases were non-existent!
Working on a tiny budget
Validating one’s business model and one’s market can often be done on a shoestring. This has the benefit that you analyse every bit of the market and sales expenditure – and then draw breath.
This often means changing your ideas, your marketing approach, or your pricing policy. Trial and error is the order of the day and so much less costly and less confusing than trying for a ‘big bang’ approach.
There are other benefits too. Keeping things tight means you don’t hire expensive people on big salaries with long notice periods. You use friends, consultants, and people who believe in your concept and your business. Such an approach binds people to you and often brings great loyalty.
Bootstrapping means that you try not to enter into onerous contracts, for example, on property. You try and sublet from people you know or even borrow office space paying weekly or monthly. FTSE-100 behemoth Sage did this in the early days with NEI – yes, even major companies have humble beginnings.
Loving your customers
Bootstrapping brings another benefit. You realise the value of your few customers. It’s important to smother them with attention at all times of the night and day. This is what I did with Kleinwort Benson, one of my major customers, who subsequently bought my business, Elderstreet Investments. But this is also a tip that you should never forget: treating your clients with care and respect will always stand you in good stead going forward.
When it comes to finance you don’t need a costly firm of accountants to tell you what your bank balance looks like – as an ambitious entrepreneur you should know it off the top of your head. You also learn to collect monies owed to you quietly and firmly but with a friendly manner – at least at the beginning.
Learn to prioritise your time. Time is money so you don’t want to spend your efforts with timewasters and people who haggle on everything and then refuse to pay. No – you toughen up and learn that judging people is a key ingredient in the business, no matter how big you become. But when you’re small you do it because you have to!
You also work out original and innovative ways of finding money for your business from other people. I have an investment in a company that grew an estate of vending machines, the bulk of which was financed by credit from the machine manufacturers themselves.
If you are in a cash business then dragging out your supplier payments has the same effect, although you tend to lose out on the best discount terms (unless you are Philip Green) if you can’t pay cash with each order.
The other key advantage of bootstrapping is that if you don’t raise lots of money too early, you preserve your equity. So many entrepreneurs give away too big a percentage of their shares too early and, when success comes, realise to their chagrin they are left with too small a stake for all their time and effort. This was particularly noticeable with a number of dotcom survivors.
When bootstrapping should come to an end
There can come a point when raising largish amounts of money for your business is the best way forward – it is just a question of timing and raising the finance for the right reasons.
Just such an opportunity could be because you have already established sales momentum with products that the market really wants but you simply don’t have enough ‘feet on the street’. It may be that you are selling via third parties because you saved costs at the beginning by going down this route. Now you might have reached the point at which you are just giving away margin, now your products are proven, or that by selling direct you can give a much better service to your customers.
You may also be capacity constrained by lack of equipment, warehousing space, telephone systems and the like – all good things to raise money for, but requiring different types of finance such as bank loans and leasing finance.
Much more difficult and risky but often a more rewarding decision is to invest in intangibles such as R&D and marketing and advertising. This is often the area that software companies find most difficult to judge.
In some respects though, the discipline of fundraising itself, while time-consuming, can help. Approaching VCs with people who really understand your business can be a good way to gauge the validity of your plan. After all, they don’t have to invest and can therefore bring a much more independent view to bear.
It might seem that, of all people, VCs never give away anything for nothing, but their views and initial due diligence can be a great source of free consulting, even if you don’t agree with them!
Michael Jackson is chairman of Elderstreet Investments, the leading technology venture capitalist which he founded in 1990. He was formerly chairman of Sage, the FTSE-100 accounting software group which he was closely involved for more than 20 years, since its unquoted days. He has recently been appointed as chairman of PartyGaming, the largest online poker business in the world.
