Thursday, July 30, 2009

Where's the bootstrap?

There's an old principle that if you don't come to the table knowing what you want, someone is sure to sell you a bill of goods and convince you it's just what you need. The circle is self-perpetuating: If I've been sold that bill of goods, I just may come to believe it is indeed what I always wanted; and I'll go on to persuade others as well.

What I'm familiar with just seems right: sauerkraut on hot dogs; corned beef on rye; the home team, because they're mine, not because it makes any objective sense. If I'm told over and over that raising investment capital is how you build a business, it seems backed by generations of experience. I may be inclined to believe it.

But then, innovation requires challenging underlying assumptions, finding alternate routes to the same destination. The goal is to build a successful company. What is needed to get there? Sure, capital: you need money to purchase equipment; to pay for an office; to hire and retain staff. But as they say "it all pays the same".

Interestingly, however, it doesn't all cost the same. What is the trade-off for any given source of capital? SBIR provides funds in exchange for the sponsoring agency's royalty-free access to the resultant technology; Banks provide loans (well, mythically at least) in exchange for a percentage of interest to be paid on top of the principal; Angels & VCs offer funding in exchange for a percentage of ownership. Each has its place. Which makes most sense for your business needs, and most especially your long-term plans?

Matt Storms at AlphaTech Counsel has penned an article about a study on how companies with various sources of startup capital fare at their Initial Public Offering (IPO). Among the pithy bits that he relates [emphasis is mine]:

The average size IPO for venture capital backed companies was smaller than any other group of companies. The highest average size IPO came from companies that were neither angel investor nor venture capital backed; in fact, the average size IPO of this group of companies was more than 2.5 times that of venture backed firms.

VC & Angel backed enterprises were quicker to go public (and likely quicker to be sold off or shutter their doors as well--they do call it an "exit strategy" after all). So, if you want quick and small rewards, VC funding is the best bet. But, if you're planning for the long haul, accomplishing something lasting, and garnering the greatest gains, perhaps a bootstrap is for you. And do bear in mind: even a bootstrap may someday come to seek outside investors. While conventional wisdom advises to seek capital before you need it, the longer you delay (assuming you remain successful and viable), the more valuable your company will be, when you do eventually seek it, reducing the cost of that capital in terms of ownership.

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