bootstrapping

Posted From: Joylent Blog

One of the things we are most proud of at Joyent is our history of helping fledging start-ups bootstrap themselves into a successful business.

A critical component of this is giving you the flexibility to “fail fast”. This means you can try a business plan, see if it catches on, adjust and react to market changes, and most importantly, gain traction and revenues before you ever need to seek funding. With a deal like the free Joyent Facebook Accelerators, we take care of the hosting infrastructure, Facebook provides you with a distribution channel and all you need to bring is the code.

Fred Wilson over at Union Square Ventures has an interesting post entitled Why Early Stage enture Investments Fail which proves the value of this flexibility.

Fred puts it this way:

So it’s pretty clear to me that most venture backed investments don’t fail because the business plan was flawed. In my experience at least 2/3 of all business plans we back are flawed. Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.

And to prove it, he gives some nice statistics on companies that he has funded. He compares the performance of companies that were nimble enough to transform their business (aka the ones that failed fast) with the businesses that stuck to one plan and did not or could not ever adjust.

The lessons for this are simple:

• Keep all your costs variable
• Get traction before raising capital.

Using cloud computing as part of your infrastructure is one way to accomplish both of these goals.

Additional reading about failing fast and failing often at Early Stage VC

Summary: When lawyers defer their legal fees, they
expect equityi for the risk of not getting paid. If their risk is low or

Elance is an online workplace where businesses find and hire people "on demand" to get work done quickly and cost effectively.

Web development, Design, Writing, Admin support, sales and marketing, finance, legal, engineering and manufacturing.

Collection of online web office tools. A competitor to Google Docs, Zoho offers more capable and a better mix of applications. Looks great for collaboration. Most apps are free for up to 3 users.

6. Don’t bootstrap and then raise VC. The VC will stress how much he admires your guts and determination (while secretly thinking “phew, glad I don’t have to do that”) but the current revenues won’t impact the valuation nearly as much as you think. You either get valued on your revenues or your plan, but the mix is hard. Bootstrap and then sell. With your own capital and that track record you are in the game.

7. Don’t trade equity for services. It's really just a VC round in disguise and the better vendors won’t do it (they don’t need to), so you get weak vendors who drop you when they get a cash deal. With some smaller, entrepreneurial services vendors, it's good to do cash plus an equity “kicker” as motivation - to get the best people. Whether this is onshore or offshore does not make any difference.

This seems really enticing at first, but you can give away lots of equity in little chunks. It also makes a huge mess and investors will balk at all of the random equity participants.

10. Learn how to juggle credit card offers. As long as you really do have revenue and just a working capital cash flow gap (between getting paid and payments you have to make) this is quite viable. You can keep getting those 0% intro offers and then swap around. It takes a bit of organization and effort, but it's the best free money out there. Then a few years later you can get a bank line of credit.

We should have a case study of this soon, Joe and Judy Roetheli of S&M NuTec bootstrapped of of the back of rotating credit cards for a long time, but it paid off with $150MM in revenues and a very healthy sales to MARS foods. Disclaimer: They do not recommend the credit card game out of hand, and it certainly seems like a way to max out your blood pressure.

StartPath has been up for a couple months and is very much a BETA. We are taking our own medicine and following through with Guy Kawasaki's 3rd point in the Art of Bootstrapping, Ship it, then Test it.

This is a prefunding stab to test the basic concept and some of the technology options. We have done this with NO investment or serious cash outlays, previous web design or web app experience. It's been a learning experience, but has prepped us to take on this hefty challenge.

The upside is that there are tons of improvements being made over the next few months and you can help hone the output. Sign up and select the "Beta" group if you're interested in helping shape the next steps.