Singapore Entrepreneurs

As an entrepreneur, I came to the understanding that fundraising is not the best model for most start-ups. Here is the reason why and I take the opportunity to introduce a strategy that most successful entrepreneurs know and it’s called bootstrapping.

Contributed by BL

Whenever I attend a conference on raising capital for a start-up, I always hear the following words from the panellists, “There are three groups of people you go to raise your money from: the first, the 3Fs (Friends, Family and Fools), second, the business angels and lastly, the venture capitalists. If you happen to be in Singapore, you can go to the government too to raise money.” Of course, you can note that the panellists speaking in such panels are usually venture capitalists, business angels government employees and academics. In very rare circumstances, you get an entrepreneur to speak in such a panel. Guy Kawasaki said in his book “The Art of the Start” that “any entrepreneurs can bootstrap almost any business” - if the entrepreneur has no choice in the matter, he may never be invited to speak in a business school again. So, what else did they not tell you about raising capital? Yes, they did not tell you about the art of bootstrapping.

Yet, not many people realize that if you trace the history of big companies like Hewlett Packard, Dell, Virgin, Microsoft, Apple and eBay, you find an interesting correlation. None of the above mentioned startups made it big via fund raising. Why is it so? Here is a thought experiment which can help you to figure out why. Suppose you have a brilliant idea like the cure to cancer or a voice recognition system, the most likely thing you would do is to go to the business angels and venture capitalists. Now let’s assume that there are three founders (including yourself) to your idea and maybe a mentor, the equity split is now each founder takes 30% and the mentor takes 10%. After that, the venture capitalist decide to put in 1 million into your startup and they take away 40% of the company’s stake, and leaving your the remainder 60% to split in the 3:3:3:1 manner. If your product reaches the beta stage where it is ready for commercialization, you have run out of money and you have to fund raise again. Now the next investor wants another 40% of the overall stakes. By such continuous dilution, the founders will find themselves in a position that they are no different from working in a multi-national company maybe with a lower salary.

The moral of the story is that fundraising can be detrimental to a startup. As a matter of fact, it is one of the factors that lead to collapse of many companies. So, are they any alternatives? Yes, there is one which I am introducing here, and it’s called bootstrapping. Although the term means different things in different areas of knowledge, in entrepreneurship, bootstrapping is the process of starting a business with little or external funding. In this scenario, the entrepreneur does not need to chase the investors and beg for money.

On first look, it is counter intuitive to a entrepreneur who wants to make it big. Companies like Walmart and The Body Shop has shown that such a method can be used to create tomorrow’s leading companies. In the bootstrap approach, the rules are different from the funded ventures. First you need to establish the following characteristics for the bootstrappable business model: one, little capital from yourself to start up; two, quick sales; three, short payment terms; four, recurring revenue and five, simple advertising avenues such as blogs and word of mouth.

The revenue model in the bootstrapping strategy requires good cashflow management skills. The strategy is to acquire sales revenue quickly and at the same time, stretch the payment time to the suppliers. The profit is made by subtracting the expenditure and revenue with a positive number. In the bootstrapping model, the customer services are important. It is also important to ascertain your credibility with the suppliers and customers, otherwise, you will find that you are going to lose your venture. It is not true that bootstrapping cannot for hi-tech products. It can work if the product is already a product and can be shipped immediately to the customers. The game plan in the bootstrapping strategy assumes that once you can build up a strong client base, you can employ the mindsharing of the product to provoke a tsunami into the marketplace. At that point, there will be a heavy demand for your product, and you are ready to grow into a big company. Finally, with an established presence, you can diversify into other areas.

Next time, when you have a brilliant idea and decide to start a venture, do remember to ask yourself, “Other than raising 1M for your company, can you use the bootstrap strategy to make it work?” If you want some inspiration from local entrepreneurs, just check out the companies, Hyflux, BreadTalk and Qian Hu.

References:
1. Bootstrap Network
2. Guy Kawasaki, “The Art of the Start”
3. Seth Godin, “The Bootstrapper’s Bible”

Technorati Tags: Bootstrapping, Entrepreneurship, Singapore

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