The Art of Doing It Yourself
Ditch the business plan and buy a lottery ticket. That's the advice I give new entrepreneurs who seek venture funding. The odds are better, and you'll get results sooner with the lottery. If you have a great idea that can change the world, then bootstrap your way until you can prove it. Funding will come just when you don't need it.
I founded two tech companies, co-produced a Hollywood film, and helped raise close to $100 million in private and public financing. Over the years, I've also mentored dozens of entrepreneurs. There always seems to be a catch-22 -- you need seed financing but no one will give you a cent until you have a marketable product. Ironically, raising millions of dollars is always easier than raising thousands.
A myth propagated by business schools is that the way to build a venture is to create a great business plan, perfect your elevator pitch, and present this to venture capitalists. If that doesn't work, you knock on the door of angel investors.
Ask any entrepreneur who has called on venture capitalists and they will likely tell you that it is almost impossible to even get calls returned. If you get lucky and are invited to present your idea, the due-diligence process will drag on for many months while you mortgage your assets and survive on hope. If you do hit the jackpot, you are required to trade away your first born in exchange for an investment.
To be fair, most business plans don't deserve funding. Venture capitalists receive hundreds of plans every week, and few are worth the paper they are printed on. Everyone jumps on the same new trend, or the ideas are so far out that they have no chance for success. And great ideas aren't enough; it takes experienced management, excellent execution, and a receptive market. It's hard for even the best venture capitalists to separate the wheat from the chaff.
So what should an entrepreneur do?
My advice to the few with realistic business plans is to bootstrap. Focus on validating your idea, building it, and selling for survival. You have to raise enough money to get started by begging and borrowing from family and friends. And be prepared to dip into your savings and credit cards, obtain second mortgages, and perhaps look for consulting work or customer advances.
There is no single recipe for bootstrapping a company, but there are some essential ingredients. Here are some pointers:
• Share your ideas with those who have done it before. You can learn a lot from the experiences of seasoned entrepreneurs, and they are much more approachable than you think (see BW Online, 6/7/05, "Ask for Help -- and Offer It"). If you can't find anyone who is excited about your idea, the chances are it isn't worth being excited about. This may be time to reflect deeply and come up with another.
• Find a way to connect with your market. Speak to potential customers, analysts, business partners -- anyone who can help you understand your target market. If you can sell customers on your concept, maybe they'll help you fund it or agree to be a test site or a valuable reference. Customers don't usually know what they want, but they always know what they don't need. Make sure that there is a real market for your product.
• Start small. Your idea may be grand and have the potential to change the world, but you are only going to do this one step at a time. Look for simple solutions, test them, and learn from the feedback. If you're starting a restaurant, work for someone else first. If you're creating a software product, learn by doing some consulting assignments or create some utilities. You don't have to start with the ultimate product.
• Focus on revenue and profitability from the start. Watch every penny. Find creative ways to earn cash by selling tactical products, prepaid licenses, or royalties. Pay employees partially in stock. And sweep the floors yourself. Look for free or leased hardware and lab facilities -- from universities, government subsidized incubators, friends -- any which way to avoid capital costs.
• Remember the importance of cash flow. This means setting aside the big opportunities while you complete small deals with a short sales cycle and recurring revenue.
• Think outside the box. There is always a better way to solve a problem. There is no point in following the path of others -- you're simply going to be battling established competitors on their turf.
• Learn to sell. To succeed in life you have to persuade people to give you what you want, and you achieve this by convincing them you're offering something good for them. As an entrepreneur, you're always selling -- whether you are marketing your product, recruiting talent, or raising capital (see BW Online, 7/12/05, "Selling for Survival").
• Prepare for the worst. It's going to take longer than you think. There will likely be product problems, unhappy customers, employee turnover, and lots of financial challenges. You may even fail a number of times before you achieve your goals. By learning from each success and failure alike, you increase the odds that you eventually make it (see BW Online, 8/10/05, "When Life Hands You Lemons...").
• Never forget the importance of ethics and integrity. (See BW Online, 11/8/05, "Integrating Ethics at the Core"). Also, focus on customer success. Ethics need to be carefully sown into the fabric of any startup. And the only way to reach long-term success is by achieving outstanding customer satisfaction.
With a lot of luck and hard work you may build a successful company that markets products customers really want. It is very likely that by this stage, you receive the phone calls from venture capitalists. This is the time to think of exit strategies and decide if you want to own a small piece of a big pie or a large piece of a small pie.