Bootstrapping is the process of growing by reinvesting profits back into the business. A business may start with something from the owners, but often not much. In 2003 61 % of the Inc 500 companies had started with $50,000 or less – this normally comes from personal saving rather than outside investors. (This is not to say they all continued this way… ). Costs are kept low, budgets highly monitored, and profits are used to grow. This has advantages and disadvantages. The advantage is that it appeals to many people’s ideas of a good strong work ethic, it keeps companies debt free, and often forces people to find creative ways to get results (ie focusing on selling, rather than investing tens of thousands in a web site). It proves a model will work, rather than just relying on dollars to make it work. The disadvantage is that growth is limited to the amount of profits. A business may just survive, when it had the potential to thrive.

Seth Godin wrote a great book about it. Click here to download it.

Bootstrapping is a mentality. The problem is, it might be a mentality that stops someone from creating a fortune. By getting by on incremental change, and not leveraging an opportunity, the danger is that the business stays small.

Investors will want to see a balance of the good aspects of bootstrapping (keeping costs low, getting by with what you need instead of buying $1000 chairs and a new Porsche) and the slight disposition to risk that shows a business owner can create something bigger.

Often a good fundable business is one which has proven itself through organic growth – building on existing customers and sales activities, and proven that the products and systems work – but that needs capital in order to leverage these assets. A dream investment opportunity is one which is proven, yet constrained by lack of capital.

Some businesses just don’t work with limited resources, so would not be possible to run as a bootstrapped operation. Examples include anything with high fixed costs, longer sales cycles, high R & D, and when the only strategy is to enter a market quickly (some innovative products need to start strong in order to gain first entrant advantage).

As a business owner seeking capital, part of your “packaging” to an investor needs to be a clear demonstration of those things which you have achieved on your own, so that you are seen as capable and resourceful. Companies that seek to raise capital with just an idea, and no results yet, are unlikely to win funding… even if the “results” are not profitable. A company that shows it can win customers, but is losing money (due to its size for example) may still be an attractive investment.

A brilliant example of bootstrapping is Ovid Technologies started by Mark Nelson in the late 80s. He ran the business from an apartment, and as he grew, he rented more apartments in the building… running cables in and out of windows. It grew to 150 employees and in 1994 listed, raising $10m. In 1999 he sold for $200m. This is a great story because it shows both the creativity and persistence that was required to grow the company, together with the final payoff that this gave the owner in being able raise funds, then cash out.

{ 0 comments }