Friday, January 13, 2012

Why Bootstrapping Is As Over-Rated As Raising Money

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Ashkan Karbasfrooshan 
Photo credit: Leonard John Matthews
Entrepreneurship requires balancing unbridled optimism with delusional foolishness.  Most entrepreneurs are mocked and misunderstood until they are wildly successful, at which point the chorus changes from “good luck with that ‘business’, pal” to “I always believed in ya, buddy!”

Master of your Domain
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There is an undeniable appeal to the notion of bootsrapping your company to success without venture capital. While bootstrapping has many advantages aside from control and ownership—…—the reality is that the disadvantages may be greater. …

Yes, Mo Money = Mo Problems, but Money = Lifeline
Throwing money at problems is usually a short term fix.  …
But with no safety net (let alone a warchest) on your balance sheet, you can’t really pivot if your business is hitting a wall.  Even if you’re doing well, money is your lifeline, so lacking it may starve even the most promising of bootstrapped companies, preventing you from investing in growth or supporting your clients.  So in a best case scenario, you’re operating with one foot on the pedal with another in the grave.  You’re basically in a perpetual state of fund-seeking, which is far more distracting than being in fundraising mode.…

Give equity to grow equity
Fundraising is an art, and in Silicon Valley, conventional wisdom suggests that you “raise as much money as you can”.  …

Except raising as much money—or diluting—as much as one can is good for investors but bad for entrepreneurs. …

But this shines a light on another reality of value creation: you have to ensure that others want to see you succeed and prosper, and the only way to do that is to hand out equity; as John Doerr says “no conflict, no interest”.

Meet the Board: Your More Objective Bad Cop
Once you have investors on board, the board they assemble will come in handy when you need to make tough decisions.  Knowing that you have a regular evaluation and review of the business’ operational and financial metrics helps you succeed, plain and simple.

It’s also helpful for the CEO to be able to play good cop to the board’s bad cop.  Indeed, many CEOs lack an objective sounding board and have an emotional attachment to an idea which not only wastes money but more importantly, the best years of your life.

So while too many companies chase the flavor of the month at the behest of their investors, the board will push you until your business takes off or you need to pivot.

Psychological Price Floor
While businesses should be valued on their financials, the historical valuation that investors place on your company may play a role in at least determining a floor price in a worst case scenario or a framework, at least.  …

Conversely, I have been told at least a dozen times that not having raised any venture capital values my company at a discount.

The Perception Problem: Red flag?
Moreover, not raising money from professional investors is—in all honesty—a potential red flag.  It’s rare for an entrepreneur to run a business and spend millions of dollars without having any outside help.  When that is the case, it’s a normal reaction to wonder: why?  Why hasn’t outside money been raised?  It’s unfair, but saying that it’s never come up would be a lie.

No Sympathy Points
Ultimately, while you may score extra points for building a large business despite being bootstrapped, you don’t actually score many points for running a small business if you have avoided venture capital, even though 99.9% of VC-funded companies wouldn’t exist or last as long as yours if they didn’t have VC funding to rely on.

The cliché is that it’s not the destination that matters, but the journey.  …  In the sports and business world, it’s all about the outcome.  No one remembers the score, let alone how the teams played the game, they remember who won, even if it means giving in to greed and resorting to bad behavior.

When it’s said and done, you can own 100% of a lemonade stand or 1% of Coca-Cola. While these are extreme polar opposites and a middle ground does exist, you have to understand that neither approach to building a business comes without its share of problems and drawbacks. In some ways, you build a business despite bootstrapping or raising VC, and not because of it.
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Editor’s note: Contributor Ashkan Karbasfrooshan is the founder and CEO of WatchMojo.  Follow him @ashkan.
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