The problem with outside investment

I've always been more comfortable working with "bootstrappers" than the highly leveraged, venture-capital-funded companies. There always seemed to be a distinct lack of realistic thinking in the venture-backed companies.

I've always attributed the unrealistic approach of venture-funded businesses to several factors, including:

• Multiple layers of "playing with other people's money" - in the sense that the CEO of the financed company is spending money obtained from VCs, and the VCs obtained that money from investors

   

   

• No connection between "money the company has available to spend" and actually meeting customer needs

   

   

• Having to answer to VCs, rather than to the actual customer

Lately it occurred to me that the last item was the most damaging, and not just because the VC is often out of touch with customers, may be clueless about the business and/or industry he is investing in, or is just on a power trip. The real driving factor - and the main difference between a VC's mentality and the bootstrapper's approach - is that the VC has a "1 out of 100" expectation for the businesses he invests in. If one company goes "astronomical," it more than pays for the 99 other companies that limped along, failed, or were destroyed by inept meddling. The bootstrapper, on the other hand, has one chance to get it right. If he doesn't, he fails.

Using VC money to build your business makes you answerable to someone who puts that 1-out-of-100 mentality between you and your customer. Because you have to please your sugar daddy, you are pressured to make decisions that don't have anything to do with what your customer wants, or what your employees need in order to assist your customer. Those who get an infusion of operating capital from an outside investor can create a company - and all the things that go with that process (people, products, infrastructure) - and run that company, for months or even years, without ever truly meeting customer needs.

How bootstrappers operate

In the case of the bootstrapping company, where the company is financed completely by company revenue and profits, the owner is driven by a different reality. His reality is not "1 out of 100." It's "1 out of 1." No matter what, he has to make his company profitable. No matter what the problem is, he has to find a solution. He is betting his personal savings, his mortgage, the kids' college education, his reputation, his career, his home life, his time, and more, on making the company successful.

He doesn't delay decisions, and the decisions he makes will have to be as right as they can be with the data he has on hand. If he has made the wrong decision, he has to admit he was wrong and make adjustments. He has to listen to others who may have more experience in a given area than he does, carefully weigh what he hears, and then make a good decision.

He is also more intense. He must get things done (while his VC-funded counterpart is content to have meetings, discussing what they ought to do). In the give and take of a normal project, when it comes time to do his part, he does his part. He doesn't demand long, detailed documents, when a one-page document will do.

He also has a closer connection to his customers. He knows there will be no money if he doesn't figure out what they want.

Facing the future reality

We are living in turbulent economic times. The best security blanket in times like these is to behave like a bootstrapper. Keep your costs down, do what you do best, and do it to the best of your ability. Most importantly, keep close to your customer, who holds the key to your success.

It is true that certain types of businesses cannot get started without some form of outside investment. If you must go in that direction, you'll need to counterbalance the 1-out-of-100 mentality of the VCs with some real, ongoing input from customers. You'll want to walk in with that data when it's time to pow-wow with your investors. You'll want to make sure that you bring your customers "into the room" so that the decisions are based on their wishes. You will have to go out of your way to make this happen, to avoid getting sucked into the 1-out-of-100 mentality.

A 1-out-of-100 mentality turns your company into an experiment for an investor. While he is hoping you will succeed, there is also a little voice in his mind that says, "If the experiment fails, it's no big deal. It's not my money, and we have other, more promising prospects." He will make decisions - and encourage you to make decisions - that have nothing to do with real customer needs. You will end up deciding on a course of action because "This is what we did before, in my last company," or, "Here's what I think we should do, because I like the idea," or, "This is what I would want, so that's what the customer will want as well."

When you're a 1-out-of-1 bootstrapper, you know you must do the right thing in the right way at the right time, in every situation. Right in the sense that it works for your customers, so your customers are happy to give you their business. You allow nothing to get in between you and that reality. When you're doing it right, your business will prosper. You can cover your expenses, plus more. You will succeed.