S01 EP 02 Bootstrapping Tips, Convertible Notes, Legal Connectors for A Growing Drone Startup

The Funding Coach

Following up on the previous interview with Max Tubman of drone startup BFD Systems, I expand on observations and recommendations. The company used four classic bootstrapping techniques to launch. But it’s quickly at the equity “fork in the road.” Max has the almost universal perception that investors won’t value his company sufficiently today. Convertible notes will help. But a cash cushion would be helpful to seize opportunities in his hot market. A funding pivot requires a change in mindset, not just a change in funding sources.

  • I elaborated on my grandfather’s legendary bootstrapping story, which has remarkable parallels to Max Tubman and BFD Systems.
  • The company used several other classic bootstrapping techniques: services to products; monetizing years of industry experience and connections; using equipment from other business to launch a new business.
  • Equity is a “fork in the road,” which is why I always ask about long term goals. You need to make sure your interests are aligned with investors’ interests.
  • Convertible notes help bridge the gap that is always there between entrepreneurs’ and investors’ perception of company valuation, today and a year from now. They look like a good option for BFD Systems.
  • Reflecting on the initial interview, I realized extra funding is always a good idea if you can raise it. Unexpected good things and bad things can both increase the demand for cash.
  • Funding pivots also require a change in mindset, from needing cash to meet payroll, to needing cash in order to seize opportunities.

Links and Resources

BFD Systems

GSM – my grandfather’s company, now run by my cousins, tells his bootstrapping story.

The Equity Fork In The Road

Are You Ready For Equity Investment

Investment Structure: Convertible Notes vs. Equity

How Much Should I Raise? Include a Cushion If You Can

The Bootstrap To Funding Pivot Playbook


In this episode I’m following up on the interview I did with Max Tubman of BFD Systems. He’s a young entrepreneur in Philadelphia who has had an explosive first year in the industrial drone marketplace. He was able to bootstrap things from the beginning and now he’s got to figure out how to fund his future growth because he really has a tiger by the tail.

In this episode I’m going to first share some observations I made about the bootstrapping story that has brought him so far. So if you’re a bootstrapping entrepreneur or you’re thinking about that as an initial path to going after a very large market hopefully the story will resonate with you.

And then he’s thinking about equity. And so I want to elaborate a little bit on a few points that I brought up in the original interview and finish with just some observations. As often happens in these short initial coaching sessions I reflected on things afterwords and I have some follow on thoughts that I think also would be relevant to everybody who’s in a situation where, my goodness, things are going great!

Let me start with a couple observations about the way Max started his business, which is in fact a classic bootstrapping story. Which is to say: don’t start your company until you have a customer order in hand.

As I think I said in the interview, my grandfather started his industrial roofing business also in Philadelphia. In his case he was right after World War II. He was selling industrial roofing components for another company, and he observed, as lots of good opportunistic entrepreneurs do, a gap in the marketplace. In this case there were lots of parts going out to roofing jobs in Lancaster Pennsylvania, which is probably about an hour and a half west of Philadelphia – maybe longer back then.

And he saw that these were going to roofing service companies in Philadelphia because there were in fact no roofing companies there in Lancaster. And so he said “there’s an opportunity here!”.

But he didn’t have a lot of money, and so he first got a customer contract to go manage a roofing project out in Lancaster. And then he sold his truck for $2,300, and used that cash from selling his truck to actually buy the roofing materials. And then famously he hitchhiked out to Lancaster to manage the project.

Of course that was not sustainable. He looked around and said “what resources do I have?” Well, turns out my brother-in-law has a good truck. So his brother in law came on, and then they needed a sheet metal expert. And that became the third partner of what was Gooding, Simpson and Mackes, now GSM.

So to take it back to Max – he had been selling products. He knew this market. He saw the opportunity, this gap in the market for American made industrial drones that could carry large payloads – large I think he said fifteen to twenty-five pounds is the range that there’s a gap in. And so he didn’t start his business until he actually had the customer in hand.

Now that’s great from a financial standpoint because he got that down payment on the delivery of the drones that then allowed him to buy all the necessary materials and pay both him and his partner enough to put the first thing together. And that led them to more contracts, and amazingly he had $900,00 in revenue in year one and a profit. I think I told him offline that this put him in the top 1 percent probably of all startups that get going here in the U.S.

But importantly, starting a business this way is also getting customer validation for your idea. This is always one of the big challenges when you’ve got a new big idea, you think. And you’re not quite sure: Is this something that the world really wants?

Some entrepreneurs believe that getting funding from smart investors is validation. But I think a lot of investors would tell you, in fact the only true validation is when customers pay you for what you’re delivering, and they’re paying you much more than it actually costs to deliver. By starting this way bootstrapping, Max has gotten terrific validation for his perception that there is an opportunity here.

Let me also make a couple other observations about the initial bootstrapping strategy that he took. One of the very common strategies to bootstrap a business is to go from services to products over time. In his case he was providing consulting services, maintenance on a particular kind of aircraft. And then what is sometimes called systems integration. That is to say, pulling together a lot of different components that are available on the market and putting them together in a way that they suit the very specific needs of specific customers. Although he’s doing manufacturing, a good part of his value is the service of knowing what’s out there, making sure all the components could fit together, and then actually putting it together so that a big company that has a very specific need can fulfill this need.

One of the things he told me – again this wasn’t in the interview – Verizon wanted to have an industrial drone in Puerto Rico after the big hurricane that could basically stay up in the air indefinitely, holding cell phone transmission equipment, because the towers were knocked down by the hurricane. So they put together all the components, including an electricity generator and tether that was going up to the drone in the air. So that’s a very specialized need. And there wasn’t anybody doing that systems integration.

But doing the services for customers who have very specific requirements can often lead you as an entrepreneur to understand some of the more general requirements that are in the marketplace. And that’s exactly the path that BFD systems is on in this first year of operations.

They built a couple of different models on the manufacturing side and refined those over time so that they he’s got the the frame, if you will. And then he plugs in all sorts of other stuff and he can now start to crank out the frame as a manufactured proprietary product. So again services to products is a classic bootstrapping technique.

Another important observation is that Max has been working in the field for 8 years. In fact he went to University of Vermont and his major was Film and Television Studies about ten years ago. So he actually got into the world of drones by their use in film and television, and becoming a pilot for the video side, and learning a bunch of other things over time. And lo and behold he’s now doing industrial drones as a business.

So it’s important to remember that part of bootstrapping is taking your own assets and figuring out how to monetize them. So those assets could be all sorts of resources. He did mention on the show that they had some infrastructure in place from the previous service work that they had done, but he also had connections to this South Korean composite manufacturing company, and knowledge in general about what’s going on in the drone space.

And I’ll just make the observation as well that he’s now 30/31/32, which I’ve always thought was a great age to become an entrepreneur for the first time, because you’ve had some time to build up that knowledge, those connections, and observe where there are opportunities.

So if there are any college age potential entrepreneurs out there, don’t feel like you have to rush. In fact if you build up all of these personal assets knowledge and connections on somebody else’s nickel, that’s something eventually you’ll be able to monetize.

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Back To The Discussion

Next, let’s talk about equity as a potential funding option for Max and BFD Systems. I asked him about what his goals are personally because equity investment is a fork in the road for your company. In fact I’ll post the link in the show notes to a post I wrote about that fork in the road.

You may have heard there’s a Yogi Berra classic quote that says something like “If you come to a fork in the road, take it.” And Max is kind of at that fork in the road very quickly in his company, because he sees this large opportunity and he does realize that he’s going to need to raise a significant amount of money in order to be able to fully take advantage of that.

I wanted to make sure that his own personal goals were going to be aligned with what the investors’ goals are. That is the fork in the road.

I’ve talked to lots of entrepreneurs over the years, some of whom want to be running their company for a very long time, even to the point, in some cases, entrepreneurs want to have the option to pass on the business that they’re building to their kids. That is a great option for some people – it’s important – but that’s not compatible, at least the way equity works today, with equity investors who typically are trying to get a return on their investment in the five-ish year timeframe – five plus or minus five. And they’re looking for extremely high returns generally, and so that typically is earned by selling the company, just because it’s very difficult to take your company public these days.

So you have to make sure before you go down this equity fork in the road that your interests are aligned with the equity investors. That’s the the first thing.

Another issue which I raised in the interview, and I raised it in the video I did “Are You Ready for Equity Investment.” I think in that video it was point number five, which is: “Are equity investors ready for you?”.

So the issue with BFD Systems is they are a manufacturer and they are a systems integrator. Some equity investors really like to focus on software, because it has extremely high gross profit margins – you know 80 to 90 percent. And some investors may perceive that doing systems integration – the kind of thing that BFD Systems is doing, pulling together all these electronics and software components along with their own manufacturing to deliver a final end solution – they may perceive that the systems integration business is not “scalable.”.

As you may find as you talk to different equity investors, scalable is truly in the eye of the beholder. So you won’t find any particular agreement on that.

The point for Max Tubman is going to be: he needs to quickly find equity investors for whom his type of business is an attractive option.

He obviously has terrific financials coming out of the box, which is really rather astonishing, and there will be some investors who will just look at the financials and say: yeah, there’s definitely a pony in there. But because equity investment fundraising can be so time consuming, it will be important for Max to weed out all the folks who are really just focused on software and those particularly who like manufacturing. Those will be the ones to be concentrating on.

And finally I want to say a couple words about the issue of valuation and the availability of convertible notes for very early stage companies.

It’s always the case that entrepreneurs see that their company is more valuable than investors will see it. So that’s the first thing.

It’s also almost always true that entrepreneurs see that their company valuation will be increasing significantly in the next year.

That divide in the perception of valuation both today and a year from now is one of the reasons why convertible notes were developed. It is, as I said in the interview, it’s a loan with the expectation that it will turn into an equity investment in the future, at a price to be determined in the future, in the process of raising a much larger round at a later date when presumably the company has made operational progress and therefore the valuation would be higher than what it is today.

It [convertible note financing] is extremely common even though there are some equity investors who don’t really like them. I will include a link to a video training video I did on structuring your investment and looking at the issues behind convertible notes versus price rounds. I will go into all the gory details here, but if a convertible note is not executed well it can be highly problematic for later stage equity investors. So you just need to make sure you don’t screw it up. And if you get a good lawyer and you follow a few rules, that will be fine.

So it does look like for Max Tubman the path towards a convertible round of equity, or pre-equity if you will, is definitely a good path for him. He already has people knocking on his door, and if he can connect with the right attorneys who understand equity investment he should be in pretty good shape between that, as well as the potential big down payment from a customer that wants to do a large project.

One final thought though. When I was doing the interview I was trying to find out how much he needed to raise. And I came to the number of $200,000 based on needing about $150,000 for manufacturing increase and $50,000 for marketing.

And as I reflected on that, it occurred to me: it’s always better to raise more money, and that’s for two reasons. Sometimes things go worse than you expect, and sometimes things go better than you expect. So both of those can impact fairly dramatically how much cash you need.

Obviously if things don’t go exactly as you expect in terms of things like customers delaying big payments – happens all the time when you have big customers – or various kind of sna fus in terms of the supply chain – you know, things don’t arrive when they’re supposed to. So delays, which happen all the time in trying to do a startup, those can lead to an increased need for cash.

But also sometimes if you’re in a very hot market, like BFD Systems is in in this industrial drone market that’s really going crazy… And as he said, it’s just beginning to scratch the surface of this huge opportunity. It’s highly likely that in the next year or two he’s going to come across some opportunities that he had not anticipated that he can only take advantage of if he has cash in the bank to take advantage of them. This could be anything from hiring an incredible person that isn’t in the current budget but they are available for a job right now, to buying in mass quantities building up inventory. There are all sorts of reasons why you might need cash and if you’re again in a hot market these opportunities may arise unexpectedly and it’s awesome if you have cash in the bank to be able to take advantage of them.

And so my advice to Max would be although $200,000 is kind of the minimum – you know exactly what you would spend it on – getting, frankly, another $100,000 just to have your “mad money” in case things go bad, or things go really great, is highly advisable. Just because he’s in a highly dynamic marketplace and things are going to be moving fast and a little extra cash will be helpful.

I should note, though, that the instinct to raise more cash is hard when you’re doing what I call the “funding pivot” going from bootstrapping to raising some significant amount of funding from either equity or debt or some other source.

If you managed to bootstrap your way into a market that is suddenly exploding with opportunities all around, you just be aware that you not only need extra funding, but you’re also going to need a change in your mindset to realize that cash is going to help you to seize the opportunity, not just survive until the next payroll.

Don Gooding

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