Wednesday, January 5, 2011

Bootstrap your startup

Back in 1995 I took my first steps as an entrepreneur and decided to move from the corporate world out on my own.  At the time the concept was fairly novel, to be a consultant working from my home that could successfully develop new integrated circuits for vertical semiconductor companies.  It seems hard to believe but back then 90% of my sales effort was convincing potential customers that their designers didn't need to all be sitting in the same building with the fab!  Anyway that is material for another story...

The point I wanted to make here was that in my current role as a newbie Angel investor, I have already seen many strong entrepreneurs with great ideas that nonetheless are not really appropriate for outside investment, at least not yet.  Most of these ideas are not at all capital-intensive and at the same time while being great ways for the entrepreneur to make a good living, they do not lend themselves to the scalability or quick revenue growth favored by outside investors.  I feel for the entrepreneur facing the 'no' answer.  It makes me think that if I had counted on outside funding back in 1995 my business would never have got off the ground.

So how did I do it?  Bootstrapping is the key.  I needed some cash to buy a computer and some cheap (but still fairly expensive) design software.  But all other costs were minimized.  The office was an old desk in my basement.  I did not pay myself much of a salary.  In my case this was relatively painless because my wife had a full time job.  "That's cheating!", you say, but there were times when my wife was out of work and doing her own thing and I had the old corporate job.  With so many two-income families these days I don't think this situation is all that unique.  The key is having the support of your spouse and both being frugal enough to live off the one salary for a while.

As my business grew soon I had to make a decision to bring on additional designers.  Each designer I brought in required a significant capital outlay for equipment and software.  At the same time I was not comfortable having a group of people working in my basement so I needed to find a cheap facility.  I think even more so today than back then there are many lower-cost options for office space for startups.  Some of these, like incubators subsidized by local economic development departments, are actually quite nice, but in any case a secure, safe workplace should be the primary goal, not a slick, fancy office.  I would much rather spend a little more money on having an impressive web presence rather than an impressive office space (of course this may not apply as well to a retail startup).

Finally, the team you assemble has to be bought into the concept and motivated primarily by the work itself.  Salaries by necessity have to be scaled back, replaced by stock or option ownership in the firm.  Leadership and teamwork are the key here.  Once the business is well-established it is much easier to get outside funding if required but in many cases the original goals will have been achieved without that need. 

Through some creative thinking and shared sacrifice the 'no' from outside investors does not have to be the end of your dream.

My first foray into the blogosphere

Hopefully more interesting content to follow...