The Bootstrap To Funding Pivot Playbook

Bootstrap To Funding Pivot Playbook

Do you like having multiple potential paths to reach business success? So do I. That’s why you should get to know the Bootstrap To Funding Pivot Playbook.

See, I’ve figured out that bootstrapped entrepreneurs create more funding options to accelerate growth, the further they get while self-funding.

Having more options is good!

The “Bootstrap to Funding Pivot Playbook” contrasts with the typical equity fundraising path. Once you have investors, you usually have taken a fork in the road that leads to more equity, ending in acquisition. Or liquidation.

The key reason: equity investors want very rapid growth. And they want you to burn cash to achieve that growth through more marketing, and sometimes more product development.

This high-burn-rate high-growth-rate-or-bust scenario is the right strategy for companies in winner-take-all markets. (That’s a lot of hyphens in one sentence!!) But there are plenty of businesses who have reached success through a different path.

Founders who initially bootstrap – which includes the vast majority of companies – have discovered or chosen many different options that can ultimately lead to financial success, however they define success.

Of course some companies bootstrap for a very long time and achieve their personal success goals that way. The Mailchimp story is one of many success stories for companies that don’t have outside funding.

The Funding Pivot

Bootstrapping is very often the right strategic funding choice, or the only available funding choice, in the very early days of young companies. This is true whether they have extremely high ambitions from the start or “just” aspire to a six-figure income. Or somewhere in between.

But sometimes the unexpected happens, and bootstrapping no longer makes sense any more.

Or the business reaches critical mass and needs to grow faster in order to remain successful.

Or a funding option appears suddenly and it makes strategic sense.

Or the business achieves enough traction equity funding is finally possible.

Or the founders’ personal balance sheets are strained to the breaking point.

That’s when you should, and often can, do a Funding Pivot.

Unlike a Business Model Pivot, which is by definition a major diversion from the original plan, a Funding Pivot can sometimes be the plan:

Bootstrap First, and Then…

Whether planned or unplanned, it’s useful to know what your options might be, and what kinds of companies have chosen those options.

Here are some of those Funding Pivots that successful entrepreneurs have used.

Bootstrap To Grants or Prizes

We’ve built lists of business plan competitions for college students and other young companies. There are also federal research grants and statewide funding organizations that can help innovative young companies.

But did you realize that bootstrapping first can help you win or qualify for grants and prizes? It can!

Like many funding sources, the judges or grant managers who oversee small business pitch competitions and grants see lots of applications for every one they can fund. Always, a big question is: can this team pull it off?

Companies that start bootstrapping their way towards progress can demonstrate much better that they are capable of turning their ideas into reality.

And founders who put some of their own money into their startups demonstrate commitment to the company’s success, which also makes them stand out in the crowd.

Bootstrap To Rewards Based Crowdfunding

Kickstarter is the best known platform for rewards based crowdfunding. Funders get something in return for their money: often a discounted early version of the product, but sometimes other stuff like t-shirts, or an official “thank-you” in a funded movie or book.

Kickstarter and all similar platforms are highly competitive. Not every campaign reaches the goal. A key aspect of being competitive is demonstrating the product or service in a great video. And how do you pull that off?

Generally you have to bootstrap your way to a successful crowdfunding campaign. Somehow someway your idea needs to get pretty close to reality. And somehow someway you need to make that video.

Bootstrapping is usually the path to that somehow someway.

Bootstrap To Angel Investment

Maybe this seems obvious… but there are lots of companies that start life by bootstrapping. They make progress on their product, their team, their marketing strategy. Sometimes they get early customers.

And then they start looking for angel investors.

I’ve looked at hundreds of prospective angel investment deals over the years. And the companies that have made progress on their own have a significant leg up on the companies that are much earlier stage.

As with other forms of funding you face stiff competition. You need to show you can make things happen, you need to show commitment to your startup. Bootstrapping for a while shows both.

Sometimes the bootstrap leg of the journey is just a year. But it can easily be three to five years before a company “finds its legs” and feels ready for angel investment funding.

The Bootstrap to Angel Investment pivot is extremely common.

Bootstrap To Bank Funding

Conventional banks like to see three years of revenue before they will provide a loan. In part that’s because statistically speaking about 35% to 40% of companies will have failed before they reach 3 years of revenue. The chance of failure after that goes down with every additional year of operations, although it never goes away entirely.

In order for banks to be successful, they need a portfolio of loans with a failure rate (called the default rate in bankerese) of 3%. Really young companies fail far too often.

Successful bootstrapping for three years or more requires that your company is at least cash flow breakeven or cash flow positive, and maybe profitable (at least a bit) from an accounting perspective. Positive cash flow increases the likelihood that you can make regular payments on a loan.

Also, as you’ve bootstrapped your company you have generated lots of customer history banks can analyze to figure out how good you are at collecting customer payments. And typically you’ve also created an extensive business credit payment history with your suppliers, which they can analyze to see how good you are at paying bills.

The Bootstrap to Bank Financing pivot takes patience and discipline, but lots of companies have been able to go this route.

Bootstrap To Revenue Based Financing

Halfway between bank loans and venture capital is a type of funding called many different things, including Revenue Based Financing. It’s a higher interest rate than bank loans, but you keep all of your stock. In the US this option is mostly open to Software as a Service (SaaS) companies, but other high margin businesses may also find this option available when they need funding for growth.

Bootstrap To Venture Capital

Lots of venture capital firms like to invest in growth. In other words, they like writing big checks – tens of $millions – to companies that already have products, customers, distribution channels, marketing strategies, and a team that knows how to scale.

If you bootstrap your way onto the INC 5000 list of the fastest growing companies in the US, these venture capital firms will start calling you. Really! And you will be in a much stronger negotiating position over investment terms and valuation.

There are many stories about companies that have made the Bootstrap To Venture Capital pivot. Among them:

  • GoPro started with about $265,000 of founder and family money. Launched in 2004, the company almost raised equity on terrible terms but the 2008 crash forced them out of equity fundraising mode. Finally in 2011 they raised an $88 million Series A venture capital round.
  • Wayfair, an e-commerce company, was founded in 2002 after the dot-com crash. They became immediately profitable, and didn’t take in their first round of $165 million until 2011.
  • Quizlet was started in 2007 when the founder was still in high school – no equity available! It was 8 years before the first $12 million funding in 2015.
  • Apple, Dell, and Microsoft are among the many examples of name-brand companies that bootstrapped for a while before they raised venture capital.

So don’t let anyone tell you that bootstrapping is incompatible with raising venture capital. Investors would much prefer that you de-risk your company before you take their money!

Bootstrap Funding Pivot To Private Equity

Private equity is a type of professional investment beyond venture capital firms. While VCs will often fund young companies with high business model risk, private equity investors like more established companies that can take on financial risk, and maybe new management to spur growth.

Sometimes, but not always, private equity investors will put in a combination of equity and debt.

The line between venture capital and private equity is pretty fuzzy. But private equity is an option if you bootstrap your way to $10 million of annual revenue or more, and want tens of millions or even hundreds of millions of dollars for growth.

And sometimes private equity firms are more like an acquisition than an investment. They may buy close to all of your founder stock and bring in new management. So they are an exit option for you.

Bootstrap To Strategic Mentor-Investor

Basecamp is one of the most famous tech advocates for bootstrapping. They celebrate bootstrapping and profitable companies on this page. But, in 2006 they took a small investment from Jeff Bezos of Amazon. Even though they didn’t need the cash.

And wouldn’t you? If there’s a wise, successful entrepreneur who can help you grow as a founder, sometimes the only way to get their time and attention is by bringing them on as an investor. And unlike professional investors, successful entrepreneur investors are under no pressure to get an exit.

Basecamp now distributes its annual profits to shareholders. Bezos has already recouped his investment and then some through these distributions. So, no company sale is needed to provide him a return on his investment.

Not that he really needs it!

Inspired by the Basecamp model, Groove did a similar thing with David Houser, co-founder of Grasshopper, after that company had been acquired by Citrix.

As a totally different model, Shark Tank promises Strategic Mentor-Investors for the companies that have bootstrapped their way onto the show. Although it’s hard to tell if those investors are patient!

Who would you like as a Strategic Mentor-Investor in your company?

Bootstrap To Corporate Partner

Sometimes the path to growth includes bringing on a major company in your industry as a strategic partner.

The big company wants your product, your technology, your agility, your customer credibility.

You want their customers, their customer credibility, integration with their products, their sales force, and sometimes funding to customize or internationalize your product.

And sometimes these corporate partnerships can include venture capital investment. Corporate VC is quite extensive. Sometimes the corporates will only co-invest with financial VCs, but many like to do their own deals.

Bootstrap To Acquisition

The most common exit for equity investors is acquisition of the company in which they’ve invested. But, bootstrapped entrepreneurs can exit this way too, without any help from investors!

There are plenty of examples. Here are just two.

  • Plenty of Fish was a dating site that somehow managed to create extensive word of mouth marketing. Without the need for equity to fund growth, the company bootstrapped for 12 years until it was acquired for $575 million.
  • Kepware built a software company in an obscure niche, after a major pivot, with only personal funding. The company was acquired for $118 million, all going to the management team.

Bootstrap To IPO

Occasionally a venture capital funded company becomes so successful it is able to go public in an Initial Public Offering (IPO). More rarely, but sometimes, a private bootstrapped company can follow a similar exit path.

In November 2017 Altair went public, more than 30 years after its founding in 1985. The Troy Michigan company sits in the middle of automobile computer aided design, having acquired many smaller companies along the way.

The Bootstrap To Funding Pivot Playbook

So there you go – lots of options! You can bootstrap to:

  • Grants or Prizes
  • Rewards Based Crowdfunding
  • Angel Investment
  • Bank Funding
  • Revenue Based Financing
  • Venture Capital
  • Private Equity
  • Strategic Mentor-Investor
  • Acquisition
  • IPO

Bootstrapping can be forever, but it doesn’t have to be.

Will you be using the Bootstrap To Funding Pivot Playbook?

 

Don Gooding

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