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Bootstrapping is One Answer

Posted on Tuesday, Oct 2nd 2007

The VC-Entrepreneur Compensation Disbalance post has generated great discussion. In it, a theme that emerges over and again, is Bootstrapping.

You have read a few of my prior writings on Bootstrapping [Is Bootstrapping Becoming Sexy and Again? and Protect Your Dilution]. There is no doubt at all anymore that bootstrapping is, indeed, becoming sexy again.

Unlike the mid-late nineties, when Powerpoint Financing was in vogue, and VCs fell all over each other financing half-baked ideas, today, entrepreneurs are no longer really seeking financing for the ideation / experimentation phase. In contrast, in 1999, all of us raised funding on Powerpoints. Experienced entrepreneurs included.

Today, many entrepreneurs are not seeking financing at all, choosing to go straight to exit (eg. Joe Kraus sold JotSpot to Google with no VC money).

An even more interesting model is what Sridhar Vembu has done with Zoho. He has built the company to $10M+ in revenues, and has no plan of selling it ever. His sweet sauce is using a smaller “cash cow” network tools business to get into something much bigger and potentially more ambitious and disruptive, ie. On-Demand Office and CRM.

In my opinion, VCs trying to play the seed-stage venture business would have some difficulty for the moment. Entrepreneurs are sincerely trying not to take venture money too soon.

Friday’s announcement from Salesforce.com of a new fund with Bay Partners and Bessemer, focused on startups developing applications on its Force.com platform, may be a good idea, but the best entrepreneurs will not seek this funding.

The program will target investments of at least $500,000 each, totaling approximately $25M over the next 3 years to assist startups and young companies embracing Platform-as-a-Service. However, in my conversation with Kirk Krappe of Apptus, Kirk clearly indicated that he had no desire for venture capital.
Apptus is one of the first Force.com applications and already has serious enterprise customers.

It would thus be interesting to see what kinds of companies get funded by the The Force.com venture program.

Note, Bay Partners had earlier announced a fund for Facebook widgets as well. Not sure what has come of that, since Facebook itself has also announced a similar fund, and has kind of hijacked the idea, just as Google has hijacked many deals from under the VC’s nose.

Anyway, the seed stage venture investment game is going through an interesting process right now in Silicon Valley. Experienced entrepreneurs are most definitely bootstrapping, and not raising money until they have created substantial valuation already. That leaves the less experienced, naiver ones.

The best of those “naive” first-time entrepreneurs include whiz kid Mark Zuckerberg, who has bootstrapped his way up to a controlling stake in Facebook, and even though VCs are now involved, Mark still calls the shot. This is a GOOD situation that all these first-time entrepreneurs should dissect, understand and emulate.

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I would argue that the Zoho route is not the way to build big businesses like Google and Yahoo.

Zoho might be more of an exception rather than a norm. I personally know a couple of Indian startups who first try to create ‘cash cows’ through the services route and then bridge on to products.
In most of the cases this does not really work out very well. A time of reckoning comes when they have to choose between the cash cow and the product and most almost invariably dont want to let the cash cow go. Others spin of a separate company just for the product.

Also competing in a super competitive market like online software requires a 100% focus. Building sustainable cash cows takes years – and then the organisation DNA is pretty much set.

VC funding also comes with its own cost – but I would bet anyday on a brand new software startup with a 100% focus on a single product competing with a big firm coming in with a baggage of unrelated product lines.

nishant Tuesday, October 2, 2007 at 3:36 PM PT

I agree, that if you have a home run project such as Google or Yahoo in your hands, VC financing may be a very good route.

I disagree with you that using services to leverage into a high growth product business is NOT a good way to build a large business.

Read the Jerry Rawls interview on Finisar.

Sramana

Sramana Mitra Tuesday, October 2, 2007 at 3:44 PM PT

[…] Mitra says bootstrapping is becoming sexy again. Certainly, second and third-time entrepreneurs are bootstrapping more; in many cases they can […]

An Introductory Guide to Startup Funding : Instigator Blog Wednesday, October 17, 2007 at 7:03 AM PT

JotSpot took $5.2M from Mayfield and Redpoint. JotSpot was not a “bootstrap” prior to their acquisition by Google.
See http://www.mayfield.com/newsarticles/jotspot10062004.pdf

Sean Murphy Wednesday, October 17, 2007 at 11:07 PM PT