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Stuart Garfield
Friday, March 6, 2009
Bootstrapping strategy to start a company requires care and frugality
By Jim Schakenbach, Special to Mass High Tech
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“Bootstrapping,” the strategy of starting a company by, as the age-old adage goes, “pulling yourself up by your bootstraps” — using your own money, or cash from someone you know — is one of a number of ways to get started as an entrepreneur. But is it the right way for you? We asked several entrepreneurs and investors for their thoughts and experiences with bootstrapping.
“A lot depends on the type of business you’re starting and what your goals are,” says Roger Greene, CEO of Ipswitch Inc., a Lexington-based developer of network monitoring and file transfer software. “The cost for entry into the software market is pretty low, especially if you’re not in a rush, and software is cheap to manufacture so you don’t really need a lot of capital to get started. If, however, you’re a hardware company with a small window of opportunity to get into a market, you need a lot of capital right away, and that means finding investors.”
To Greene, who founded Ipswitch in 1991, there’s danger in having too much money to start. “When you have money, you tend to waste it,” he says. “I didn’t have a particularly good product idea when I started. I just wanted to get established first and get ideas from being in the marketplace. I believe you can better recognize opportunities when you’re out in the thick of things.”
Stephen Pearse, a partner in investment group Common Angels and co-founder of several startups, including MobiWatch Inc. of Waltham, an emergency communication device developer, says bootstrapping “might be the only way to get a startup going in these days of tight credit. Now is a very tough time to raise outside money, so it could be a good time to bootstrap while the economy recovers. By the time your product or service is ready, the market may be ready as well.” Pearse cautions, however, that “it is important to know how much you are willing to put into a startup, and as you draw close to that point, be prepared and start early to bring in outside cash.”
So where are good places to get the money for bootstrapping? Conventional wisdom often states that the best place for startup cash are the “three F’s” ¬-- friends, family, and fools. While this may be a little bit of investment humor, it’s no laughing matter. Tom Grant, chairman and CEO of RFID technology company ThingMagic Inc. in Cambridge and a one-time early-stage investor, says the last place he’d want to raise money is from people close to him. “If you start running out of cash and have trouble meeting your obligations, you have a business problem AND a personal problem.” Instead, ThingMagic initially raised cash by doing consulting for several years as they developed their technology. “This gave us the opportunity to figure things out at our own pace,” says Grant. “We finally took outside money when we had a product ready for manufacturing.”
For Randy Chinnock, CEO of Southbridge-based Optimum Technologies Inc., an optical products development firm, getting the cash to start his company in 1994 meant getting a second mortgage on his house. He, too, wanted to avoid tapping family or friends for money. “Those relationships are too valuable,” he says. Chinnock adds that if you’re going to use OPM — other people’s money — always borrow from people who can afford to lose it.
To preserve cash during his pre-eBay startup period, Chinnock shopped auctions or even tag sales for office furniture, machinery, and lab equipment. “I used freelance help for everything and bought nothing at full price.” Chinnock, who previously had bad experiences with partners, likes the independence and control that comes bootstrapping with his own resources. “I own the building and equipment, so I’m not interested in partners or investors.” Owning the property also provides Chinnock with another advantage — his company leases the building from him, providing Chinnock with another source of income.
Both Grant and Chinnock advise other entrepreneurs to plan ahead even further when bootstrapping with their own cash. “You better damn well know where your money is coming from once that first round is gone. You really need to think ahead several steps. Start working on finding more cash before you really need it.” Chinnock also cautions against getting in too far over your head. “A lot of entrepreneurs sign up for lines of credit without really thinking about it,” says Chinnock. “They mistakenly think that they’re protected if their company is a corporation, but banks usually make entrepreneurs sign a personal guarantee, which makes them liable” if the company goes belly-up.
For all four entrepreneurs, a conservative approach to spending cash has served them well with multiple startups. “If you have an IP-based company, I don’t think you need to spend money,” says Greene.
“We didn’t even get an office until we were shipping product.” Grant said. “When you have money, you tend to spend it. Money becomes a bad habit.”
Jim Schakenbach is a freelance writer in Jefferson.
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