Bootstrapping Our Way Back From the Collapse
Since the collapse of Lehman Brothers last year (along with broader financial markets) the question at the top of my mind has been, “What next?” or maybe, “Where to from here?”
From my perspective it is clear that small business must be a top priority in the coming months and years. There are approximately five million small businesses in the United States with fewer than 20 employees. Another 20 million moms and pops endeavor day in and day out without employees. Let us hope that in the coming decade those numbers will double, then triple and quadruple. Here is the most powerful engine of economic growth and sustenance. Here is our way back.
I’m a serial entrepreneur who founded three companies after earning my master’s degree from MIT. I continue to work as a technology entrepreneur and strategy consultant in Silicon Valley. I’ve seen how entrepreneurs like RightNow founder Greg Gianforte found ways to get started without capital and how they have been able to create a great many options for their businesses. I believe entrepreneurship is the only sustainable path forward to a healthy economic world order.
So if the next Google is to emerge–and bring with it thousands of new jobs–it must get started where there is not only hope, but available opportunities. So it’s important to create and sustain a startup culture, to cultivate a supportive community and the kind of economic conditions where entrepreneurs can not only start businesses, but also survive and thrive at a higher rate.
To achieve this we must answer a couple of questions: Why don’t more businesses get off the ground? And, once up, why do so many fail?
I’m in an unusual position to give this some thought, as I also write a weekly column for Forbes and the business blog, Sramana Mitra on Strategy. Through much discussion, writing, and brainstorming on each topic, I have arrived at a core thesis: Not just entrepreneurship, but bootstrapped entrepreneurship is the true weapon of mass reconstruction.
So it was with great interest that I read Bruce’s post on bootstrapping from a San Diego Venture Group’s panel discussion in May. In that article he shared lessons from “business leaders and Baron Munchausen.” Likewise, I explore the ways a dozen entrepreneurs define bootstrapping and how they have mastered the art of doing more with less in my book Bootstrapping: Weapon of Mass Reconstruction.
The conventional wisdom is that businesses often fail to take flight because they cannot raise funding. I contend that it makes more sense—especially these days—to start with the assumption that funding will not be available until the business is substantially further along, if ever.
I don’t think most small businesses should even look to raise money, because they do not really fit the framework of professional venture capital. (In the eyes of venture capitalists, even a $25 million business is considered a small.) That does not mean that any business generating less than $25 million in annual revenue is not worth building. To the contrary, the entrepreneur who fully owns a $12-million-a-year company is in a wonderful situation: Total control. Loads of cash. And true independence. Heck, even a $300,000-a-year business has many of these attributes—and can be a deeply rewarding and worthwhile endeavor.
There is currently a lot of discussion about whether or not the venture capital model is working. Except in a few cases where the entrepreneurs have really large ideas, venture capital is a bad deal altogether. Bootstrapping, on the other hand, preserves ownership for the entrepreneur, and there is none of the pressure to build an artificially large business. You can build a $20 million business, you are happy, your team is happy, and you can call it a success. With venture capital, you will have some VCs bugging you to grow at 100 percent year-over-year until you can reach $500 million. Building a $500 million business is a lot harder than building a $5 million business. Most importantly, your idea—your business model—needs to support a $500 million business. That’s rare. A $5 million idea is much more common. I don’t see anything wrong with building your own $5 million business and enjoying the fruits of your labor with a small team.
Once you’ve freed your mind from the tyranny of needing something you can’t have, i.e. capital, you’re ready to consider some useful tips for successful bootstrapping. Many of the successful entrepreneurs I’ve studied shared some common characteristics: They’re extremely frugal; They don’t go off like Don Quixote to chase the proverbial windmill; They focus on practical priorities and execute; And they are tremendously creative and resourceful about solving problems.
So I remain resolute that if entrepreneurs around the world learn to build sustainable small businesses without requiring large amounts of outside financing, the global economy will run without a hitch. No doubt, many of these ventures will go on to seek large-scale expansion capital, and build larger enterprises. But even the companies that don’t grow exponentially still embody something fundamental that I strongly believe in, and that is creating a business with sustainable value. We can and should feel the pride and privilege of accomplishing that—especially if we did it by bootstrapping.