Bootstrapping - the Third Way of Entrepreneurship

When I started the BD Tech Daily blog posts, I mentioned that bootstrapping is a third way of entrepreneurship, differentiated from the cookie-cutter/franchise and VC/funding approaches. Bootstrapping is actually an integration of these two paths. It brings together the low-cost features of the cookie-cutter, while generating the innovation of the VC. I hope this has become more clear as we have covered the 5 stages of Preideation, Ideation, Valley of Death, Growth and Rebootstrap.

This literal integration highlights the final key concept of the bootstrap process - the dance with duality. The key action of each stage - awaken, demo, sell, build, rebootstrap - is the coming together of two seemingly opposing motivations. The key ability that the bootstrapper and the organization must cultivate is holding these opposites together until they resolve - what Jim Collins has called the genius of the AND in his seminal book, Built to Last.

Each opposing motivation will seem to want to consume the other. Rather than allow this "collapse," the bootstrap holds both together until they resolve. In the VoD, the purity of the demo has to be resolved with the needs of customers. Notice how the Google founders found a way to do both. This Dance with Duality is symbolized by the yin yang symbol, particularly when seen as a flow diagram, moving around the perimeter and resolving in the center.

In the next series of posts, I will highlight bootstrappers from Bootstrap Austin who are using the various bootstrap principles in their businesses. I also look forward to answering your questions. Please drop me a line at: bdtechdaily AT aviri DOT com.

Rebootstrap

The Growth Stage does not last forever and the great ventures realize that they must continually repeat the Demo/Sell/Build actions of Ideation/VoD/Growth. In others words, they must rebootstrap. And if they are still involved with their companies, founders are the best-equipped to lead this process. Virgin and Apple are two of the most prominent and successful rebootstrap companies in the current landscape. Both are still led by their Evangelist founders, Steve Jobs and Richard Branson and rebootstrap in different ways.

Virgin finds Maven partners in different industries and uses its unique Evangelist core, to take the ventures through Ideation, Valley of Death and Growth. Virgin Galactic is a fine example of this process, partnering with Maven, Burt Rutan to create one of the first low-orbital space vehicles (Demo/Ideation). With the tagline, "Space is Virgin Territory," flights have already been pre-sold years before the vehicles are ready (Sell/VoD). Using its unique technology design sensibility, Apple has recently extended beyond personal computers and made successful forays into music and telephony with iTunes/iPod and iPhone.

All the bootstrap principles are in play. Neither company is guaranteed success with any of its new undertakings (Apple TV is yet to take off) and must discover the unique business model through bootstrapping - there is no skipping of steps. Apple's first version of the iPhone was the ROKR, a partnership with Motorola, incorporating iTunes. While not a dramatic success, it allowed the company to learn and subsequently develop the iPhone.

Apple and Virgin's continual rebootstrap efforts have led to the discovery of entirely new multi-billion dollar markets. Both companies demonstrate the power of a founder's continued involvement in their venture, long after the first Valley of Death is crossed.

Many large companies, occupied with the concerns of growing and defending existing products, rebootstrap in spite of themselves. Internal bootstrappers start clandestine projects in a process coined, "bootlegging." Bootstrap's Rebootstrap service helps large organizations proactively foster and support these efforts.

Growth!

In our ongoing tour of the Bootstrap Stages, we leave the Valley of Death/Opportunity and arrive at Growth. I wrote an article in the latest issue of Business District Magazine titled, "Investor Funding (much) later than you think," which covers some of the important considerations of the Growth phase, including the ever-prevalent question of investor capital.

Growth is paradoxically the most sought-after stage and often the least interesting to the founders, who are best suited to Ideation/VoD. In this first Growth stage, it's time to bring on a COO and management team. They will help turn a chaotic and dynamic beast into a smooth-running machine which systematically and predictably serves its customers, develops its products and takes care of its employees. In other words, it is time (finally) to build the organization around all the insights and lessons from the first three stages. Hello MBAs!

The founders must be attuned to their potentially divergent needs from those of their now-growing offspring. Many times Maven founders find the dynamics of a growing organization all too taxing and exit, either leaving entirely or retreating into the background. Some are content to have a lifestyle business, choosing to keep it small and stay involved. Others are excited by the thrill of growing a large organization. The Leagues, cofounders of the Alamo Drafthouse decided they enjoy running the theaters. They found a third party to take the Alamo national while they continue to operate the Austin Alamos. Jim Goodnight, the founder of SAS, one of the largest software companies in the world, still spends 30% of his time coding! Meanwhile, bootstrappers John Mackey and Michael Dell have helmed their companies through the growth stage and beyond.

Many bootstrappers are tempted to start brand new products or initiatives in the early Growth period. This is not yet the right action! That comes next, in the first Rebootstrap phase, which we will discuss next week.

Valley of Death (renamed!)

When the founders quit their job, they leave the heady Ideation stage armed with their Demo and enter the Valley of Death. Or is it? Earlier this week I had the pleasure of interviewing John Paul DeJoria for the Bootstrap Bootcamp DVD. JP spoke to Bootstrap Austin in November, 2005. He cofounded Paul Mitchell, Patron Spirits and is involved in numerous other startup ventures including John Paul Pet and DeJoria Diamonds. While agreeing with the Bootstrap stages, actions and principles, he made one modification, renaming the "Valley of Death" the "Valley of Opportunity." 

And indeed, that's exactly what it is, particularly for the Evangelist cofounder. The VOO is where the potentiality of Ideation comes to fruition through customers. The precariousness and possibility of "death" propels the bootstrapper toward the absolute necessity of discovering their customer. And as I wrote earlier, constraint creates innovation. This crucible is vital for the business to emerge and also why investor capital is the enemy of the venture at this stage. John Paul recounted how the planned $500K investment for Paul Mitchell fell through; the founders continued with a $700 combined investment. The scarcity of capital caused a number of innovations such as the use of a black/white color scheme for the bottles and outsourcing production. They were also able to get get distributors on board by first securing orders from salons before approaching them. 

 The pitch is the all-important tool of the Valley of Opportunity needed to make the sale. It articulates the value proposition in terms of the customer's needs. The pitch is perpetually presented, amended and reformulated before the right one emerges. Pitches are presented to various customers before the right ones emerge. It's a trial-and-error process with ongoing feedback, both from the customer and the Maven. Eventually, the finely-tuned pitch takes the venture out of the Valley of Opportunity into Growth. Meanwhile, the product evolves from a demo to a customer-driven version 1.0.

The conversation is on BootRap ATX Podcast, which is relaunched and available on multiple podcast platforms. 

Investor Funding, (much) later than you think

This is a guest post by Bijoy in the Nov 2007 issue of Austin Business District Magazine.

Most business schools teach us that the first step in starting a business is to write a business plan and raise capital from investors.

Except in a few very rare and exceptional cases, this is just about the worst thing you can do for yourself and your fledgling venture. To understand why, we must explore the critical stages of a business and what occurs in each stage.

How do Businesses Emerge?

Contrary to business mythology and corporate marketing departments, Michael Dell didn’t start his company because he saw the need for a direct approach to counter an inefficient PC distribution channel; Bill Gates didn’t start Microsoft with the vision of a PC on every desktop; Herb Kelleher didn’t start Southwest Airlines because the hub-and-spoke system was broken; Pierre Omidyar didn't start eBay because there was an untapped market for buyers and sellers; Howard Schultz didn’t start Starbucks because he saw the need for a “third space.”

 

And, Larry Page and Sergey Brin didn’t start Google to “organize the world’s knowledge.”

 

Google, an overnight success, only started generating substantial revenues five years after its inception. The first version of the Google search engine went live on a Stanford University server in August 1996. It was based on Page’s simple insight that websites have an inherent ranking based on the number of incoming links from other websites.

 

Google simply counted the links and presented the “most voted” at the top of the search results. Unlike other engines which showed pages upon pages of results, Google’s engine provided the most relevant ones in the first few pages.

By 2000 Google had built incredible momentum with an ever-increasing and loyal user base. Yet it faced a fundamental challenge: how to generate revenue. They clearly could not charge users to run searches.

The founders had earlier considered and rejected the idea of blending advertising with search as they felt this would compromise the user’s requirement of a trustworthy search result and bias the site towards advertisers.

However, Google’s many attempts to license the engine to portals received little to no traction. Worse, the bursting of the Internet bubble through 2000 meant that there would be no “exit” for the company through a sale, as the founders and their VC backers anticipated.

The company had to try something new to become self-sustainable.

As a desperate last measure, it launched AdWords, copying, with a twist, the idea from GoTo.com, a rival search engine. Bill Gross, the founder of GoTo had the insight that people and organizations that wanted to be found would pay for that privilege and had advertisers pay for keywords online.

Unlike the GoTo engine or the old Google engine, the newly-modified Google site was in fact two engines – one with the familiar Google results in the main body of the page and the second with paid results clearly marked at the top and right.

Google’s story is not unique. A close inspection of any of the aforementioned companies reveals a similar pattern.

Companies go through two critical stages before they reach the nirvanic and sought-after Growth Stage: Ideation and Valley of Death (VoD).

In Ideation, the company founders do not start with a grand vision, but something more prosaic; a simple demo. Like Google, the cofounders of Microsoft created a version of the BASIC programming language for the Altair. When Altair went bust some years later, Microsoft had no revenue for a year (VoD). Its seminal deal with IBM in 1981 to provide an operating system for the IBM PC happened accidentally and Microsoft resold an operating system, Q-DOS (quick-and-dirty operating system) it had bought from another company in Seattle.

The greatest of success stories in business do not start with clarity about what their business will become.

The idea that anyone can know this is not only borne from arrogance, it is foolhardy.

The business emerges through the VoD, and it is precisely the constraint that creates the key innovations. Furthermore, the VoD continues for an unknown duration.

So when are you in Growth?

Your venture emerges from the VoD and into Growth when it has developed a systematic and reproducible way to serve its customers and get paid doing so. This is finally the time when you can focus on scaling what you’ve learned.

The team can easily produce all the key elements of a business plan without making up the numbers and the true essence of the business has become clear to all. Pithy descriptions like “a PC on every desktop” ring true because they are. Not only that, you know with reliability what must be done to achieve growth.

To bring it full circle, most business schools concern themselves with the domain of growth – HR, marketing, leadership, management, infrastructure, information systems, customer service, culture, process. A crisp marketing message can now be developed because the value proposition to the customer is clear.

The unique culture of the organization must be reliably transmitted to new employees. A strong management team must be built, etc.

Right Action Right Time

Capital has one (and only one) important property: it is an amplifier. Whatever the organization is doing, an inflow of capital allows it to do bigger and faster. Moving a venture quickly in a particular direction in the first two stages creates momentum in the wrong direction and withers the organization's ability to quickly shift course, adapt and try new things.

In growth, however, capital provides the needed fuel for a correctly-pointed rocket. Meanwhile, the suppliers of capital seek one thing: a significant return on their capital in a predictable time period.

The Ideation/VoD business cannot deliver this and you will find yourself selling investors and spending all your time doing so. However, in Growth they will court you. Finally, you will retain control of your growth-funded business and not your Ideation/VoD-funded one.

Investor capital is the foe of the venture and the founder in Ideation/VoD and their friend inGrowth.

Have the discipline and courage to delay the funding event for as long as you can until you have emerged from the Valley of Death.

It will be painful, but you will be glad you did.