Trench-vision is my term for the negative effects of a very positive thing. As someone who spends most of my waking hours meeting entrepreneurs, I can say there are few things as impressive as a company that has bootstrapped its way from idea to revenues. Companies that are able to bootstrap benefit from a number of advantages:
- Product-market fit questions get resolved earlier. By definition, bootstrapping means that customers have agreed to use your product and pay something for it. Typically, you can’t get there unless you have begun to wrestle with the key product-market fit questions and found effective answers. No amount of due diligence is as compelling as a real purchase order from a savvy customer.
- Progress down the sales learning curve. The sales learning curve (SLC – described in this outstanding slide deck by Mark Leslie) is a constraint facing all start-ups – and understanding it is a challenge that takes time and money – the question is: how much? When a company is bootstrapping, it has already begun to progress down the SLC which means that a lot of otherwise theoretical questions about the selling process and the customer adoption cycle can be addressed with some initial real-world data. When a CEO can show me his real data from Salesforce.com or her real pipeline in Excel – that’s immensely valuable and often very impressive.
- Customer interactions. You can’t bootstrap unless you are out there talking to customers and partners – something that almost every start-up should be doing from day one (I am rarely an advocate of total stealth mode). In my experience, CEOs that are bootstrapping tend to have better market insights than others because they are engaged with customers.
- Indication on pricing. Bootstrapping companies get an early indication of price – of how much their product or service is really worth. Even if they are selling at a huge discount to early customers, this information is, pardon the pun, priceless.
- A real budget. Bootstrapping companies don’t have the luxury of building Excel budgets to meet VC fantasies. They are running real businesses, which means that their financial forecasts often have an inescapable air of reality to them. In addition, because the business is real and not imaginary, they tend to run a tight ship. I like that.
- The best source of financing. Revenues are the best and lowest cost source of financing for a company (double points if they are recurring!). All things being equal, as an investor, I would much rather my investment dollars be matched by revenue dollars than by more equity dollars (which dilute both management and me) or by debt dollars (which bring other problems of their own).
- Management proof point. Perhaps most importantly, bootstrapped companies have tangible evidence of management ability to define a product, bring it to market, and generate sales. At the end, it’s about people and there is no proof better than the pudding itself.
Trench-vision. There are, however, a handful of dangers that face the bootstrapping CEO, and I wanted to point them out. Bootstrapping is very demanding – financially, emotionally, and physically. Bootstrapping founders are like soldiers engaged in hand-to-hand combat deep in the trenches. They are fighting their way forward one knife-fight and one customer at a time. It’s slow, painful, and all-encompassing. Ironically, the focus and determination needed to prevail down in the trenches of bootstrapping can work against you when you are sitting at the polished VC table trying to pitch your start-up. This is trench-vision, and it has a few symptoms:
- It’s hard to see the dream from inside the trench. VCs come in many different flavors, but a lot of us are also vision people and most of us are really focused on generating LP returns which means we need big exits. Basically, we need you to sell us a dream and a realistic path to get there. We know that your first revenues might be coming from a less sexy product or that you will have to jump through all kinds of hoops to win your first sales – but at some point, we need to fall in love with your long-term (3-year) vision for the company – the same vision that got you started down this path in the first place. Make sure you share that with us. It’s hard to be visionary if you are in the middle of a knife-fight – but try to step back enough to see out of the trench you are in right now.
- VCs are a source of cash. Be sure to focus your presentation on what your plans are assuming you have an influx of fresh VC money. As a VC, I’m very interested in what you have achieved so far and in how efficient you have been (and will be). But my objective is to put money to work so you can do great things with it and grow the business as fast as possible. Make sure you talk about that vision. Don’t limit your plans based on the amount of cash you can generate from operations or the amount of financing you think you can raise from insiders or angels – if you’re raising a VC-scale round, show me a VC-scale plan.
- Don’t forget scalability. Early customer wins are impressive and very important for all the reasons listed above, but to grow large, the company will need to find a scalable formula for repeated sales. In other words, you have to show me how you will continue to progress down the SLC and convince me that there is a good chance you’ll achieve real scalability. In bootstrap mode, the most pressing goal is often survival which means managing cash flow. In VC-backed mode, the most important objective is usually growth, which means focusing on scalability in all its aspects: market fit, product, technology, sales, team, etc.
Again – there is nothing as impressive as the bootstrapped start-up. On your way into the VC meeting, however, just make sure you aren’t suffering from trench-vision.
Attempting to explain phase two of market penetration, France, 1917.