31 Oct While some bemoan lack of venture capital, entrepreneur touts `bootstrapping' for cash
Another in a line of reports paints a bleak picture for entrepreneurs seeking venture capital in Wisconsin, suggesting that such financing could be at its lowest level in 10 years if patterns through the third quarter continue to year’s end.
The Money Tree Survey, released last week by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, indicates that, unless millions of additional dollars is invested in Wisconsin companies in the fourth quarter, this could be the lowest venture capital investment year for the state since 1995.
It’s a situation that’s been much talked about in Wisconsin business circles, prompting formation of angel investor groups and sparking demands that more be done to make venture capital available here.
But while such financing can be critical to development of some companies, it’s not the realm of a vast majority of entrepreneurs, notes a businessman who recently told Wisconsin business men and women that cash flow from sales is the key source of business financing.
“Less than one percent of start-up companies raise venture capital,” says Greg Gianforte, founder and CEO of Right Now Technologies of Bozeman, Mont. “That begs the question: What did the other 99 percent do to get started?”
Gianforte, who addressed his Wisconsin audience at the Italian Conference Center in Milwaukee, said a good number of them bootstrapped it – finding a way to get their businesses going with little or no external start-up financing.
“A better way to start a business”
Bootstrapping “is a better way to start a business,” says Gianforte, who used the method to launch Brightwork Development Inc., in 1986, selling it eight years last for $10 million. He then started Right Now, which makes customer relationship management software. The company reported nearly $62 million in revenue last year (a 72 percent increase over the previous year) and has already surpassed $62 million in revenue as of Sept. 30 this year. The company has more than 1,400 clients worldwide, including Wisconsin companies.
Gianforte used about $5,000 to start Brightwork and admittedly had some resources when he started Right Now Technologies. And the company did raise $32 million in a public offering last year, selling 25 percent of its equity.
But Gianforte basically built his empire by insisting that sales comes first, and that money can’t flow out of the business until cash is coming in.
“You’ll just spend it”
If you go out and raise capital first, you’re likely to spend that money, sometimes with little to show for it, he says. “At some point, you have to go to a prospect and ask for money,” he told his Wisconsin audience.
Gianforte poses seven reasons for not seeking business financing:
1. Getting start-up capital “masks the hard questions” about the viability of your product or service.
2. Seeking capital takes time away from seeking customers.
3. Investment capital imposes “a new set of masters” on your business.
4. If you make a fatal mistake, you’re stuck with debt and no business.
5. Having investment capital can remove spending discipline.
6. Venture capital is tied to an exit strategy that is on your investor’s timetable, not your.
7. Your equity in the business should come at a very high price.
Businesses can make it on cash flow if they remember that sales is job No. 1, he said. Second, while not being “cheap,” they should not spend beyond their means.
He said the spending discipline part “sounds simple,” but can be challenging to accomplish. “You need to learn the difference between what is essential for your business to operate, and what is important,” he said, adding, “You need to be fanatical about this.”
Principles apply to other industries, too
While Gianforte has dealt in software companies, he says his bootstrapping principles can apply to other industries, as well, including retail.
“It is my firm belief that nearly all industries lend themselves to bootstrapping,” he said. “There would be numerous ways to handle a bootstrap start-up in retail. For example, get your suppliers to provide credit. Just make sure your cash collection polices are tighter than your suppliers — maybe require credit cards or cash rather than extending credit to your customers until you build up some cash reserves. Or, have suppliers drop ship for you directly to your customers. Again, collect faster than your suppliers require. Here you might require cash on delivery (COD) or pre-payment for initial orders to get jumpstarted.”
The principles also could be applied to manufacturing, he says. “In manufacturing, many manufacturers have excess capacity; find a way to use it in their off hours at a reduced rate. One entrepreneur we spoke with needed a laser metal cutter, a very expensive piece of equipment. He worked a deal with a local HVAC firm that had one but that used it only during normal business hours. He was able to use it for next to nothing on weekends and evenings. The moral of the story is: `There is always another way.'”
That’s all assuming that a market demand has been determined, which Gianforte includes in his six steps for starting a business. Those steps are:
1. Talk to lots of people about your idea. “It doesn’t matter what you know about your business; it’s what your prospects know.”
2. Develop a one-page description of your product or service.
3. Ask for orders.
4. Revise your description based on what you hear when asking for orders.
5. Go back to Step 3.
6. Build your product or develop your service offering, and then deliver it.
A higher purpose
Gianforte thought he would retire after he sold Brightwork and moved to Montana. But it wasn’t long before the entrepreneurial itch got to him, leading to the founding of Right Now Technologies. As the company continues to grow, Gianforte has continued to expound the virtues of bootstrapping, co-authoring the book “Bootstrapping Your Business” and continuing to speak on the topic.
But he’s also on another mission, of sorts: job creation.
“God has given us skills and we have an obligation to put those to use,” Gianforte says. “I didn’t want my tombstone to read, `He caught a lot of fish.'” He sees his “noble purpose” in life as “the creation of worthwhile livelihoods” for people in Bozeman and other communities where he has operations.
“I feel that to not work with all your heart, mind and soul is essentially poor stewardship of the skills God has entrusted to each of us,” Gianforte said. “I happen to be a leader of people and a technologist; those are the skills God has given me. Therefore I have concluded that my life work is to create worthwhile and useful livelihoods for other people in the software industry. I have set a personal goal of creating 2,000 jobs in over a 15-year period. I am 25 percent of the way there. There is tremendous satisfaction to know that the work you do each day has some higher purpose.”
Click to read Gianforte’s eight bootstrapping principles.