Matt Barrie: The art and science of bootstrapping

So you’ve got your killer idea, the one with the potential to disrupt a market the size of Texas. You’ve assembled an A-grade team, attracted to the board grey hairs with operating experience in the industry you’re going to disrupt.

You’ve done the financials and have a strong feeling for the fundamentals of the business. You’ve worked together a plan and have an idea of where the capability gaps are and who you need to hire. You’ve talked to customers and they like your idea and have given feedback on how to get it to the sweet spot where they’d make a purchase decision.

You need to raise some money to get going – how do you go about it?

Capital raising is as much an art as a science. Firstly – I can’t stress this enough – the best place to raise money is your customers, by selling them something!

If you can bootstrap your company, it’s by far the best option. You don’t dilute your shareholding, and you retain absolute control. Bootstrapping introduces strong discipline around management of costs and cash flow. Cash is king! I always consider this my Plan A before trying to raise funds.

An innovative way to raise money quickly from your customers is by crowd funding using kickstarter.com. This website, and others like it, are going to completely disrupt early-stage venture capital by allowing companies to take pre-sales quickly.

Recently, a start-up called Pebble listed its project – customisable, internet-connected watches – after not being able to raise funds from Silicon Valley VCs. If you committed $115, they’d ship you a watch when it was ready; for $235 two watches and early access to their software development kit, and so on. They were aiming to raise $100,000 and ended up closing $10,266,846!

What’s so great about this is that it’s revenue, not a dilutive equity raising. Kickstarter today funds more projects than the National Endowment for the Arts in the US (our government should pass legislation to allow innovation on the crowd-funding model).

Ship early, ship often. Get customers using the product as soon as possible and providing feedback. Solve pain points and don’t be afraid to ask customers to pay. Keep your operating costs low and get to what Paul Graham calls being “ramen profitable” (enough to cover you eating noodles while developing the product) quickly. If you can do that, you’ve massively de-risked the business.

Be careful here that you’re selling your core offering. I see a lot of start-ups trying to get going by consulting on the side. This ends up more often than not being an unhelpful distraction.

If you can’t figure out how to bootstrap, figure out how much to raise. As a start-up CEO you have one job and one job only – to keep the company funded. Run out of cash, and you’re dead in the water. The oldest trick in the book for a potential investor is to simply wait until you run out of cash. The less in the bank, the more desperate you’ll be and the worse terms you’ll be given.

Run out of cash completely and all bets are off – at best, everyone’s equity position is renegotiable, including yours. At worst, if you can’t pay your debts, that’s insolvent trading, and you can get into a huge amount of trouble.

For an illiquid, cash-flow negative business, you need to think about raising money in terms of how much operating runway it’s going to give. At minimum, you need to raise enough to get you a milestone that will deliver you the next increment in value for the company. Ideally, you’d like enough to be cash-flow positive, but that’s not always possible.

You want to ensure that you have enough time to hit enough goals so that the next investors that come along are prepared to pay a higher price than the old ones (an “up round”). If you fail to do this, or deliver flat results, you’ll most likely have a “down round”, and that’s if you can get anyone interested at all. Down rounds are toxic to companies, they destroy morale and pretty much signal the end. So make sure you raise enough to get you to the next level.

Bear in mind it usually takes three to six months to raise a round of financing for a private, early-stage company. But it can take 12 to 18 months in a bad market (ironically, the best time to raise money, because if you pull it off, it’s unlikely you’ll have many competitors!).

Most early-stage companies aim to raise enough to operate for about 18 months. Raise more rather than less, and raise money when things are looking good and you don’t need it!

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