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To Bootstrap or not to Bootstrap: That Remains the Toughest Question

To Bootstrap or not to Bootstrap: That Remains the Toughest Question
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

We live in a world of artificially low interest rates. In such an environment of easy money (well, relatively easy), entrepreneurs are lured into playing the valuation game rather than the “building a business” game.

It’s not that raising external money is bad. The greatest companies in the world — AliBaba, Nike, Dell, and even Apple have raised money. But they have done so after bootstrapping their way into understanding and building a sustainable business in action. Unlike a lot of popular startups (and unicorns) they first proved their business fundamentals before seeking external funding.

When you are a start-up, intoxicated on heady dreams of seed capital, VC funding and unicorn land, nothing kills your buzz faster than the idea of “bootstrapping”. Not for the faint of heart, the concept of bootstrapping is more antique than vintage and yet has never been more relevant than it is today.

Bootstrapping promotes business & product innovation

Some of the best entrepreneurs we know today —Jack Ma of Alibaba, Phil Knight of Nike, Bill Gates of Microsoft — were great money managers. Having founded their respective businesses with a bootstrapped ethos, they were pushed to stretch every dollar, choosing the harder path of stronger organic growth. Their focus was on making money and not spending money as is the case with most funded startups.

A business colleague recently gifted me Shoe Dog, a memoir by Phil Knight, founder of Nike. Knight bootstrapped his business (starting off with US$50 borrowed from his father) for years by funding his imports through bank guarantees. Nike (earlier Blue Ribbon Sports) came close to running out of funds multiple times but it’s these testing times that pushed him to innovate from the low margin business of importing shoes (Tiger Shoes from Japan) to manufacturing superior sports shoes that the world today knows as Nike.

 

I am the master of my fate, I am the captain of my soul

In 2001, in the midst of the dot com bubble, when most software companies were forced into bankruptcy, one Indian entrepreneur rose as the star of Silicon Valley. Very few may have heard of Sridhar Vembu, founder of Zoho.com. Sridhar is often called the Smartest Unknown Indian Entrepreneur who turned down Venture Capital money.

Having lost 147 of his 150 clients as a result of the bubble, Sridhar had a lot of idle staff. He quickly pivoted his company from a pure play service business to a service and product play and thus was born Zoho. Would Sridhar have been able to pivot his business so swiftly with a board full of VCs waiting to exit? I highly doubt it.

Bootstrapping ensures that the trajectory of your company stays solely in your hands. And because your company’s growth is completely organic it isn’t as susceptible to external disruptors.

Focus on building the business and not just a topline

Most Angels / Venture Capitals invest in a business with a vision of exiting in 5-7 years. As an entrepreneur, your vision is to build a company that outlasts you. Raising capital from the get-go changes the focus of your entrepreneurial journey. With funding in the mix and investors to answer to, more often than not aggressive growth is the only path that is left open to you. And that’s where focus shifts from building a business to chasing senseless top line growth, often at the cost of profits.

A very close friend of mine runs a successful sporting goods e-commerce business. All the VCs he met wanted him to chase topline and market share. He was smart enough to be adamant about chasing the bottom line. He raised a minimal round from friends and family and even launched a private label in lieu of chasing the bottom line (a move most of the VCs disapproved of in his business plan). Today, he is amongst the very few profitable e-commerce players. His eyes have been on the business and not on fulfilling investor demands.

 

No greater cost than the cost of equity

Diluting equity (and control) is one of the most important decisions in an entrepreneur’s life cycle. Whether privately or publicly through an IPO – dilution is more or less inevitable to reach scale. The question is “when?”

Most entrepreneur’s make the mistake of diluting too early just because the money is there. This leaves them with lesser control and lesser equity for future fundraising needs.

Most Indian e-commerce entrepreneurs have single digit equity stake in their companies (Snapdeal’s CEO Kunal Bahl has diluted his stake to 3.9%) and eight digit salaries that add up to their company’s losses. No doubt, cynics wonder if they are motivated enough to make their businesses profitable.

The recent AskMe fiasco is another example of an underinvested entrepreneur. But that’s another conversation altogether.

Bootstrap as far as you can (or at least till you prove your business)

Tom Werner, the Founder of Github, puts it best when he says, “Bootstrapping is a way to do something about the problems you have without letting someone else give you the permission to do them.”

Bootstrap as long as you can, so that when you are ready to take the next big leap, your business model has already been perfected and your operational efficiencies are already in place. When you have a clear vision of profitability, you are in a great place to leverage what VCs can offer you and can take that quantum leap sustainably and successfully.

 
Edition: July 2017

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