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Ken Hess - Bootstrapping vs VC funding

More from the Edinburgh - Stanford link/EDI Bus School Entrepreneurship Club (see previous post) lectures: a Scottish Executive funded research exchange, esp in the AI and language technology areas. Also tasked to improve the entrepreneurial culture at the university. Tonight's talk was by Ken Hess, the "World Expert on Bootstrapping" (not is words), well he's written the book anyway ;-)

His big success was Family Tree Maker: the company behind it made 23m turnover, 150 employees, eventually sold to Broderbound.

Free notes, no claims to accuracy or completeness; the entrepreneurship club promised to put up the slides.

  • Bootstrapping: pull yourself up by your own bootstraps;
  • Today: very limited capital; cant do it with every company.
What's the point?
  • if done right it earns more money for the entrepreneur than through VC funding (but only if not a homerun exit)
  • however, even if you compare a $100m exit with a bootstrapped $20m exit, the likelyhood of the latter is much greater... [hm, is that on comparable timescales?]
  • plus: fundraisng is costly: opportunity cost, VCs have different agendas from entrepreneurs not least concerning the exit.
  • arguably constrained funding increases creativity, example of unsuccessfully hiring an ad agency
  • Being in the marketplace is more valuable than just sniffing around; get feedback and have knowledge of the channels
  • With an bootstrapped, low burn rate you get to know about opportunities first
  • With VC funding, you switch on a rocket and cant switch it off again, or alter direction easily...

Product development
  • crucial to pick the right product:
    • high value product that sells itself, which can sustain direct personal selling
    • a solution to a task people perform despite difficulties which gives you a 10x improvement
  • criteria:
    • productivity play: differentiable, solvable problem/task, that people perform anyway despite the difficulty, yielding a solution that provides an order of magnitude improvement. Why? because otherwise the sale is too tough
    • management offers special expertise in product area - you need to be the world expert in the given area
    • no significant existing competition and barriers to entry
    • takes advantage of technology
    • profitable: very short development time and reasonable support cost
    • control over all key technologies and relationships
    • Key lessons:
    • top management attention to product architecture (best years out)
    • essential features only to begin with, scruffy is good enough
    • resourceful and on time strategy: subordinate design to available components and features set to schedule
    • don't rely on opinions when facts are cheap: test test test
    • I would have thought even a vc backed firm would benefit from this advice.
    • Early sales and marketing:
    • Ken says stay in stealth/under the radar before you ship
    • Direct sales channel is best: control message, caputer feedback, distributors are too powerful, simpler & cheaper
    • Learn about sales options (aka Sales learning curve)
    • Development team:
    • as small as possible (cheaper and faster cf "the mythical man month", Fred Brooks)
    • one team member must be able to hold the whole design in their head (irrespecive of written spec which is also essential)
    • founders should be able to code
Cash management & finance
    •  preliminaries:
    • don't quit your day job as long as you can
    • dont rent an office, Go bedouin!
    • apply for credit lne before you quit job
    • Play on being small
    • measure everything so you don't repeat mistakes
    • Just say no: eg dont believe the minimum 3 advertisements to judge its effect
    • Bootstrappers paradox:
    • salary is biggest expense hire young or experienced hires?
    • sweet spot: some experience, but not too much: expenses are moderate, traning is minimal and respond well to growth opportunities
    • plus: move sweet spot: good documentation, hire self learners, not ust self starters (use tests for that)
    • "entry department": one manager to focus on training and acculturation; eg create one expert at hiring and training
    • Hiring: controls
    • only hire people if you had extra x$ in sale per employee ie hire ONLY after extra sales are achieved

Leaving bootstrap mode
    • When product has sustainability
    • markers: founder must delegate tasks, look at product development again, increase employee experience level cautiously

Q&A comments
Very likely: first product will be not quite right, but gives you the market knowledge to succeed; require very good market knowledge to really go for the 10x improvement.

My takeaway: comparison of VC funded vs bootstrapped is bogus.

The argument goes like this: 1 out of 100 firms manage to raise VC money, and if they do, much time and effort is spent on managing the investors. Moreover, the success probabilities of VC funded firms are rather low (few home runs, a couple of middling exits, an few insolvencies) - so the odds are stacked against you as an entrepreneur even then. So Ken had some figures that showed the chances for the entrepreneur for a vc sized return are not worse in the bootstrapped area, due to the higher ownership retained, and the likelihood of success is much higher. The risk is more that it takes longer and the downside is potentially it just turning into a lifestyle business. The important qualification here is that the bootstrapping approach is a genuine alternative for entrepreneurs, but probably not in markets that are so large as to attract venture funded entrants. So look for the 10x improvements but think niche not google sized markets. On the plus side, if you manage to identify a product/service that does offer a 10x improvement and practically sells itself, then you should be able to take VC money if your competitors are threatening to, but on rather better terms. Punchline: VC vs bootstrapping is a a somewhat bogus contest, and I imagine it's only really an issue if you have VCs banging on your door but you can see that you can bootstrap successfully anyway (like Microsoft, or OpenBC closer to home - although both eventually took the money).

March 14, 2006 in Finance & Technology, Scotland | Permalink


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