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To Bootstrap or Not? That is the Question

Financial EfficiencyYou are an entrepreneur faced with a troubling question: How do I get venture capital? Before you answer that question, consider another one that should be more important – should you bootstrap?

In my new book Bootstrap to Billions: Proven Rules from Entrepreneurs who Built Great Businesses from Scratch, I have profiled 28 entrepreneurs who built great companies from scratch, including the world’s largest medical device company (Earl Bakken of Medtronic), the world’s largest consumer electronics retailer (Dick Schulze of Best Buy), and the world’s largest private healthcare management company (Richard Burke of UnitedHealth Group). The 522 lessons in the book answer five key questions that each entrepreneur should consider. These include how to find the right opportunity with your unique competitive advantage, how to implement a capital-efficient sales and operations strategy in order to do more with less, how to finance to create wealth and keep it, how to build a dedicated and effective organization even without the resources, and how to be a better leader than your competitors. This column is a partial answer to the finance question.

One of the key lessons from the book is that most entrepreneurs can bootstrap to success, i.e. you don’t have to obtain venture capital (VC) to build a giant corporation if you are willing to improve your leadership skills as your company grows, and if you are willing to run your business intelligently with capital-efficient business, financial and financing strategies. Early-stage VC, money was not a key requirement for success for most of the entrepreneurs in Bootstrap to Billions. None of the 28 entrepreneurs got VC at the start of their first venture. And 22 of the 28 never got VC. Two got it later in their growth cycle and were able to maintain control even though they got VC. The entrepreneurs who bootstrapped did not obtain early-stage VC, did not share control with the investors, and kept the wealth they created. And they did not have to sell their company prematurely to satisfy the interests of professional investors.

If you have to get it, the timing of when you obtain VC is key. Get it too early, and you may have given away too much of your company and given up control, which can come back to haunt you later. Get it too late and competitors may pass you by so this is a key judgment call that each entrepreneur must make. You may want to bootstrap to build value, and get VC after proving your competitive advantage when you have more VCs interested in your business. You may then be able to negotiate a much stronger agreement and obtain a higher valuation. When Steve Shank obtained VC to build Capella, he had already built his company to the growth stage. He had added value and demonstrated his competitive advantage. He had his choice of VC firms – and he could pick the right one to satisfy his goals.

Can you always bootstrap to success? I don’t think so. VC may be essential in certain situations. If you are a potential home-run, i.e. the next Google, in a hot, emerging industry (semiconductors in the 70s, PCs and biotech in the 80s, Internet and telecom in the 90s), you may not be able to reach your potential without VC. Or others may raise more and use the additional resources to become dominant. But understand the odds and the negatives if you raise VC. Best estimates are that VCs have home-runs (like a Google) on approximately 2% of their investments. If you are not in this rarified 2% group, the odds of you as an entrepreneur profiting hugely can be low. Why? First of all, you may not be running the business because VCs like to bring an experienced management team. Secondly, they like to earn their returns before you get yours.

So should you seek VC or become capital-efficient? If your strategy is capital-intensive, or you are seeking high growth in a high-potential industry, or you don’t want to live the frugal life bootstrapping calls for, you may have to consider VC, especially if money is a key requirement for dominance. If you can beat your competitors and dominate your industry without VC, do so to maintain control and keep the wealth you create.

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