When most people think about startups, glamorous images of millions of dollars in venture capital, hip relaxed offices with cutting-edge interior design and hobnobbing with the likes of startup superstars Larry Page or Elon Musk often come to mind. People in the know, however, will often advise an entrepreneur that “bootstrapping” is really the way to go until you make significant progress. As an entrepreneur starting a new business, understanding the benefits of bootstrapping and its inherently unglamorous nature can often be overshadowed by starry-eyed dreams of the venture capital path. In fact, sometimes people get so focused on obtaining venture capital that it becomes the major goal rather than positive cash flow from the sales of your product or service!
I have to admit that I am not immune to such distraction and at the beginning of this project I went straight to the VC community. I made a number of mistakes when I did this. The first may have been approaching the VC’s at all, but I managed to get into the doors of some of the most storied firms on Sandhill Road. Another mistake was the amount of money I was looking for – $2 million. This money was supposed to get us through designing, building and testing our first prototype. This is an amount of capital you really should never ask anyone for because it will either be too much or too little for anyone to be interested. You’ll get more interest if you ask for less than $1 million (in the angel community) or more than $5 million (In the VC community). Secondly, while many VC firms like to talk about themselves as “early stage” or even “seed” investors, very few of them have any stomach for real technology risk. Being an early investor in a social networking event has very little real technology risk. They know they can make websites that can technically accomplish whatever they want. The risk is if they are smart enough to create a community or experience that will attract enough people? They all believe they are smart enough. Will this engine that promises a major jump in efficiency and power density really work when it moves from a computer simulation to aluminum, iron, steel and fire? Man, that is scary! Even if the ROI promises to be 500% if it is successful, technology risk is something that investors have a hard time accepting.
This is the wall I ran into. I had to step back and say, what can I do with what I have? If I pay myself subsistence wages and get a team together that can crank out a lot of work for very little money, what can we accomplish with our resources, which has started out (and remains today) as total invested capital from friends and family of $400k? When you consider that the first quote made to build and test a prototype of our engine came from a major engine design firm at $30 million, our plight looks hopeless. But as we sat down and looked at what we really need to do to reduce risk, and what it might cost us, we started to have hope. Can a small committed team achieve the most important milestones of the project for 1% or 2% of the big company quote? We pretty quickly began to believe the answer was yes. So began our bootstrapping journey.
We have no offices – everyone works from home. We have minimum compensation. The inventor of the engine has refused to accept payment of any kind while he continues to work on the project. It is far from glamorous. But we are achieving a great deal on a budget that is practically non-existent. This has several advantages:
1: We’ve had little or no dilution of our equity.
2: We are accomplishing the same risk reduction with the risk of minimum cash (though the cash has special significance because it comes from family, not third party investors).
3: When we have run our prototype and have real-world results, we will have proven that we have an exemplary ability to manage cash and execute on our plan.
Bootstrapping has it’s own increases to risk, though. We can only afford to do this once. If our first engine completely blows up, we probably do not have the resources to make the engineering changes and build another. This is a big risk – and we probably will have a really hard time raising money to build that second prototype.