Monday, July 27, 2009

Three Stages, Three Types of Capital

Bootstrap entrepreneurs find ourselves constantly juggling multiple activities. Some of these directly generate revenue, others do not. How to prioritize and order them? Here is a simple model to understand and prioritize your efforts.

Your activities generate one of three kinds of capital: social, working and bootstrap. All three are vital to the bootstrap entrepreneur and serve a particular purpose. It's also important to balance your activities amongst them. Creating only one or two types of capital does not provide motive power to the venture.

Social Capital is derived from any work you undertake that does not generate revenue. Activities range from giving time to others (coffees, lunches), sharing your expertise (in forums such as Bootstrap Austin), or being a Contributor in a community (such as leading a Bootstrap Subgroup). Social capital is the easiest to generate and also vital because it creates a network of resources that can, in turn, give the bootstrapper access to valuable help. Social capital also generates collaborators of all kinds who are willing to work on your project. It also figures most prominently in the Ideation Stage of the venture. Since social capital is easy to generate - simply offer your time/knowledge/skills where needed - one can also fall into the trap of overdoing it. Pure social capital is not sufficient to make a successful bootstrap venture.

Working Capital is $ generated from a skill or knowledge. You bill out your time and make an hourly rate. Working capital pays for your basic expenses. As a bootstrap entrepreneur, you have already reduced your personal burn rate and are living a simple and frugal existence. Generating ongoing working capital ensures you have an infinite runway. It figures most prominently in the Valley of Death Stage of the venture. Another way to generate working capital is through a spouse who continues with their day job. However, as we will see later, there is another reason for you to continue to generate working capital, even when you have spousal support. Solely generating working capital does not make a successful either since you are still in a linear relationship between your time and revenue. It's also unlikely you are innovating if you purely generate working capital.

Bootstrap Capital is where the long-term potential lies. This is revenue generated from bootstrapping a unique product, service, experience, community, etc. Of the 3, this is the hardest capital to come by as you are creating something new and unknown in the marketplace. Often, you don't know what it as as you iteratively demo/sell/build and eagerly await what emerges. Bootstrap Capital is key to the Growth Stage of the venture.

An equation that helps describe the relationship between the 3 types of capital reveals:

social + working = bootstrap

When creating social capital, innovation naturally occurs, leading to a Demo. Think of Steve Wozniak sharing his computer designs at the Homebrew Computer Club. The feedback he received helped him advance his ideas to what would eventually become the Apple I. You might not be able to immediately capitalize on social capital, but you gain a deep understanding of a particular domain and build your community of fell0w-practitioners. Working capital provides access to customer problems. While solving generic issues, the bootstrapper is given insight into non-generic problems that customers face and this also helps uncover unmet demand for solutions. Combining social and working capital leads to bootstrap capital, the gold that creates a long-term business.

Be aware of your expenditure of time and continually seek to balance the three types of capital in your venture. Even as a particular kind of capital occupies a core focus during a particular stage, do not neglect the other two.

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