I have recently been approached by a few young startups who are looking to raise money for their concept or very early stage product. I found myself beginning to write and talk about the pros and cons of raising investment, angel and VC. Therefore I thought it maybe useful to get my thoughts down as a blog for anyone in the future to take a look at.
The chances of an entrepreneur finding a venture capitalist with plenty of money to throw around, is close to zero, in fact some people have stated that its easier to get struck by lightning, in a cinema than it is to get funding. I maybe wouldn’t go as far as stating the cinema piece, but it is exceptionally difficult. In fact, even less venture capitalists will back an entrepreneur that hasn’t even tried before (failed and/or succeeded).
The general investment policy of a venture capitalist, with regards to choosing an entrepreneur, is that they would rather back an “A” class team with a “B” class product over a “B” class team with an “A” class product. The main characteristics of an “A” class team are its entrepreneurial experience. So this raises the question, how do you get the experience without financial backing?
In “Bootstrap Finance: The Art of Startups”, Amar Bhide says it best:
“For the great majority of would-be founders, the biggest challenge is not raising money but having the wits and hustle to do without it.”
The art of bootstrapping is all about minimising your commitment of resources to the necessities at any particular stage during the multi-stage process of starting up. Their persistence is critical in this regard, an entrepreneur will ask the question about how they can achieve a little more with a little less and continue with the opportunity.
The circumstances are different for every entrepreneur; a newly graduated student has a different tolerance to risk than a middle aged single parent with a mortgage and a car loan. These circumstances will dictate the methods used in minimising the resource commitments.
To address the risk, some people will maintain their day job while establishing a brand in the market place, thereby reducing risk. Others may value the time lost more and have a small savings set aside to replace their lack of salary. Others may have accepted another job with a future starting date, this is their failsafe should they believe the start-up isn’t moving quickly enough.
The art of bootstrapping is not necessarily about owning resources, but controlling them. The advantages of this comes not only in the reduced capital requirement, but in other factors such as flexibility, if you don’t the resource it’s a lot easier to commit it at the right time and more importantly, de-commit from it quickly. Fixed costs are generally lower, albeit probably at the price of higher variable costs. Risk is also reduced when an entrepreneur, aims to control rather than own e.g. resource obsolescence.
It’s something that I am applying to some of my more established businesses, and bootstrapping is something that could help your business more than you think during an economy such as the one we are experiencing. I’d love to hear your thoughts.