Bijoy and I have had a long standing discussion about whether or not you can apply bootstrapping principles to venture backed companies or not. I've always felt that the principles of bootstrapping could be recreated in a venture backed company at some level. For the last two years, I've gotten to be part of a living case study. Taking some time off has allowed me to spend a lot of time reflecting on the effect that raising venture capital money has on a bootstrap businesses. The Bootstrap Austin website talks about Plato's "Necessity, who is the mother of invention" and its bootstrap corollary "Constraint creates innovation". I don't think I appreciated how important the constraints are in helping a business find itself until now. Constraints are so amazingly important in helping businesses focus on the essence of what matters. Constraints force a bootstrap venture to communicate with customers and prospects to ensure that whatever is being delivered is something that is needed. The money that venture capital brings removes the constraints and my experience has been that when the constraint is removed, the focus on the customers' needs is replaced with either a shotgun approach ("lets see what sticks") or a focus on a perception of their needs.
There is a cultural shift that takes places after you raise venture money. First, it changes the mindset of employees who were part of the company before the venture money arrived. It's human nature that when money is scarce you are going to value it differently than when it is plentiful. Second, you begin to hire people who never knew the company as a bootstrap organization but only as a venture-backed one. The overall risk profile of the employee base shifts. Third, one of the benefits of taking venture capital is access to the resources of the venture capitalist who invested in the company. Among those resources are senior executives that will help you round out your team. Generally, the culture of those individuals are even further away from the culture of the company pre-VC.
When you add Silicon Valley to the mix, I believe all of these points blow up even more. The cost of living, the importance of speed often perceived as impatience, the sometimes incestuous relationships that maintain the cycle, and the search for the next Google are all factors that are magnified in Silicon Valley but are in no way exclusive to Silicon Valley.
Intellectually, I still believe you can apply bootstrap principals to venture backed companies but practically speaking, I believe it is very difficult to do so. Here are some random ideas, none of which have any proof of working, that I believe that would allow bootstrap companies to maintain some of the things that made them successful while still leveraging the catalyst that is money that venture capital provides.
Don't announce internally or externally how much you raised or that you raised money at all. Reducing the number of people that are aware of your the company's bank balance is one way of artificially maintaining a culture. Of course, this is not realistic and comes with other consequences that I feel would outweigh the positives.
Use budgets and targets to create artificial constraints. Controlling how much your sales team travels (e.g., 3 weeks per quarter) can create constraints that drives the right behavior. A sales person knowing that they have to make every travel day count will make sure that they prioritize the right customers (e.g., balancing the size of the deal with the likelyhood of closing the deal).
Create a culture of capital efficiency. One such tactic is to be a hawk on expense reports (esp. the first 1-2 that a new employee submits).
Lead by example. Employees will look to their leaders to determine acceptable behavior patterns. If their leaders are eating at Tavern on the Green and ordering $100 bottles of wine, the employees will think that is acceptable behavior.
I'll reiterate the leadership point. If the founders and leaders of the company test their ideas by talking to customers, it will create a culture that the "Customer is #1". If the founders and leaders answer support questions regularly or at a minimum on occasion, it will create a culture that support is important.
Use lore. I can not underestimate the power of stories in creating a company's culture. Every company has some stories the define it. Those stories course through the veins of the organization and every employee in the company knows those stories. When in an ambiguous situation, the employee will have the lore to fall back on to know how to handle that situation.
As I said, none of these ideas have been tested or proven. As such, I would love to get feedback on what things have worked for other companies or if it is even possible to maintain some of the bootstrapping culture in a venture backed company.
Neelan Choksi is currently enjoying a 4-6 month break from his efforts on the SpringSource management team, spending time with his pregnant wife and daughter, trying to get in shape, and knocking of the items on his "honey, to do" list.
Our speakers' experiences spanned the gamut in why, how, and the lessons learned in getting investors to pony-up for the growth of their venture. Three wise principles stand out:
Proceed with the end in mind
Go for the money before you need it
Choose your investors wisely
Before you go for the money, know where you eventually want to be with respect to the venture. What becomes of the founder in the future? Of course, whatever you want is ok. It's your business – for now. Remember that once you bring in investors you will be accountable to them, and depending on the terms of your funding and how much you raise, you may eventually lose control of your company, and if you don't perform you may lose your job!
It takes a very long time to get investment money. The tasks involve: getting the connections; establishing relationships; negotiating the terms; and, working full focused to move things through. Not only do these steps occur over time, during this time you still have your duties in your business and could be looking at some very long days. Start this process way before you're ready for the money. The day you wake up and decide you need funding, you will be thankful that you started conversations in the right circles - long before.
Your investors become your left-hand, your shadow, and your conscience. You want to know well about their motives, their expectations, and their interests in your company because when you take their money, you become accountable to them.
When considering investment funding for your business, keep in mind right action right time. The implications of this funding will vary markedly, depending on the stage of your business. For example, if your venture is in Ideation, your investors are likely to become your bosses and you become an employee who can then be fired. When your venture is beyond the VoD and in Growth, you are likely to have more influence in creating the terms of that funding and control in the business afterward. Nancy Schill, founder, Executive Intelligent Coaching and co-lead, Growth Subgroup
