Boot Strapping Your Start-up: How Not to get Hooked

You have an idea. You are a very stingy individual. These two factors are the two ingredients most likely to lead to the lean, successful start-up. And that is where the true payoff lies. Last year we took our business plan to Jason Yelowitz, a seasoned, insightful, and respected business adviser. He reviewed it and told us exactly where we needed to go from there: get your presentation together and get ready to pitch to the VCs. We asked how that would work financially. He told us that we would get the money we wanted and then our shares would get diluted, and diluted, and diluted, and diluted. And diluted once more for good measure. Then we would spend any future success trying to get out from under other people owning our business. In other words, if you are going to be involved in your business in the long-term or you feel that you deserve a good payoff for your work DO NOT LOOK FOR VENTURE CAPITAL!

hooked

Don’t believe me? Here is a great example that just hit the internet today from Forbes concerning the founder of Chipotle – 

I skimmed over “Rich Dad, Poor Dad” by Kiyosaki. The gist is that some (i.e., poor) people put their resources into liabilities instead of assets. For example, if you buy a new and expensive car you have essentially wasted a lot of money. Buying a basic and less expensive car is far more productive because it allows you to put your money into something that appreciates in value as opposed to a car which almost always depreciates.

This is what you are doing when you take capital from outside sources in exchange for equity share. You are immediately depreciating your own assets (your shares).

I fully realize the benefits of capital in maximizing growth. And many people think it is a necessary evil. In those cases, capital should only be considered if you are competing to be first to market and/or win market share. Even then we are learning all the time that first to market can often be disadvantageous and even disastrous.

If you can afford to grow organically you will find that you will have more time to adjust and maneuver your product. You will avoid being forced to make decisions in the face of the unknown with huge stakes on the line (this is exactly what is required when you try to manage explosive growth). Just look at Solyndra – growing fast can kill you. If you are trying to win the race and you go all out on the gas pedal, you increase your chance of experiencing a race-ending crash. Boot strapping your start up may be the toughest part of your businesses development, but it may be the most important, too.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s