Bootstrapping…

April 1, 2007

So it’s been about 9 months so far and things are moving well. We started raising money in February after sending our materials out beginning in December. After three months of raising money (not really pounding the pavement but loosely following up with individuals), we have raised $120,000. The good news is that we did not need the much greater sum of $500,000 we thought we would need to build out a working technology. We initially thought we would have to outsource our technology to India, which would have cost anywhere from $100,000 to $250,000. Instead, we lucked-out by getting an introduction to a team of incredible technology developers out in Bethlehem PA from one of our business contacts. This team is interested and willing to build the technology for us for much much less. We have arranged to compensate them with a combination of cash and equity in our budding venture. Plus, they are local and the communication between us is 150% better than it ever would have been trying to communicate with Mumbai at 3am.

Our major costs so far have been designing and building our website for our first rewards program, which we are calling iBakeSale (more on that later). Legal costs have been a huge chunk of change as well. The drafting of employment agreements for new hires etc. have been very expensive (and a waste of money in hind-sight). We have done a good job conserving cash on this front by hiring a great firm (Perkins Coie shout-out) in CA that is willing to defer most of our legal costs until we raise more money (more on picking a law firm and that process later). The difficulty that Seth and I face is that neither of us are technologists. Had this been the case, we would have saved even more money by doing it ourselves. But I guess that’s just the nature of the beast.

Bootstrapping is a commonly used phrase to explain how start-ups manage to accomplish a great deal with very little money. Some people think this is a myth. Others swear by it. Seth and I fit in the latter category. Entrepreneurs bootstrap for two main reasons. The first is that they can’t raise the necessary amount of money to hire key employees and pay a ton to get it done immediately (that’s us), and the second reason is that they don’t want to lose ownership of their company, even if they can raise the necessary funds, to investors who will want a majority of their business (us as well). Many times, it’s the second reason that overshadows the first. However, there are some businesses that simply cannot bootstrap. Those that require large capital investments for equipment and the like cannot afford to start a business on $100k. Other businesses that can bootstrap decide not to because they are worried about getting to market quickly and end up selling >50% of their business. However, for the tech start-up with founders working from home and hiring good part-time employees on equity compensation, bootstrapping can be a viable reality.

The good news is we still have 80% of our capital in our bank account. The bad news is that it will start going quickly as we start hiring more part-time tech developers to build more functionality for us (we’ll pay them by the hour). We also just hired a PR firm that will help us get our new program out there to our target market (more on marketing and PR in another post). In the end, we will be able to build and launch our first product to the market with what we have and use the snowballing success (god willing) to raise more money from existing and new investors as we move into the next phase of our business.

Bottom Line: We believe that bootstrapping, when possible, greatly increases the chances of success for a start-up, especially given the fact that 98% of all start-ups fail. Save cash whenever possible. When you have the choice of spending money or not, make sure that if the answer is yes, you understand exactly where the money is going and how that will allow you to increase the value of your business (building technology, a corporate website, marketing, sales, etc.). When the trade-off is unclear, save your cash. You’re going to need it when you least expect it. Bootstrapping can’t last forever. The goal of bootstrapping is to allow a business to build traction on a “shoe-string” (with little money) so that (1) investors are more willing to roll the dice on your business and (2) you won’t need to give up nearly as much of your business as you would if you went out to raise money day 1.

JT

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2 Responses to “Bootstrapping…”

  1. mehnaz Says:

    Yours was an interesting read….Sramana Mitra in her piece, Is Bootstrapping Becoming Sexy Again? has explored the phenomenon that today, companies can be built quickly bootstrapping and bring success. Entrepreneurs are perfectly happy bootstrapping their companies.

  2. jtreiber Says:

    That’s a great article Mehnaz! Thanks for your suggestion. Please feel free to share any other articles on the topic for our readers. All the best!


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