Don’t Be Seduced By Series A–Bootstrap Your Destiny

On a stress index of 1-10, being hunted, caught, and mauled
by a nine-headed hydra is a 9.9. Bootstrapping your startup is a 13.

On a stress index of 1-10, being hunted, caught, and mauled
by a nine-headed hydra is a 9.9. Bootstrapping your startup is a 13.

The struggling. The clawing. The sleepless nights wondering,
”My God, what have I done?” But while venture funding might seem like a panacea, it brings night terrors of its own.

If your startup actually attracts VC funding — which far less than 1 percent do — you gain a fiduciary responsibility to investors who may not have your interests at heart. They’re riding you toward a massive liquidity event, not filling your kids’ college fund.

 

To fundraise or bootstrap: that is the question

I get the temptation. I’ve teetered between bootstrapping and raising money. When I started in the late ’90s, e-commerce was young and experimental. Dot-com companies were
 flying high and flaming out.

But rather than turn tail, I took a leap. With a trusted friend, I co-founded a company of my own. I faced a monumental question: Should I bootstrap my brand or find funding elsewhere?

I discovered the answer in my mother’s wisdom, herself a longtime successful bootstrapped entrepreneur. She gave me Robert Kiyosaki’s book “Rich Dad,
Poor Dad.” The book — and my mother’s own words — made me realize I didn’t want to slave away for someone else.

To control my own destiny, I needed to start a business. But not just any business. I didn’t want to grind toward an exit that may never happen. I wasn’t about to spend my best years chasing a mythical pot of gold at the rainbow’s end. No, I sought a stable, fulfilling life — the kind that can only come from a company that generates consistent cash flow and builds wealth.

The light bulb shone full-force. I became a bootstrapper.

 

What founders forget about venture capital

In e-commerce, deals like Dollar Shave Club’s billion-dollar buy or Jet.com’s massive liftoff leave founders dazzled, but the reality is that the chances of a big payday aren’t very big at all.

About 75 percent of VC-backed companies — which, remember, comprise less than 1 percent of startups — see zero-value exits. Still, many roll the dice and play the game.

Productivity Tips For Entrepreneurs
Photo: © GaudiLab, YFS Magazine

But there’s another option. Take Mike Dillard, a renowned lifestyle business bootstrapper. Upon turning 30, the Texas entrepreneur started Self Made Man, a growing self-help community, with a singular goal: to make the millions he’d need to fund a revolutionary hydroponics business.

“I figured out and and realized that I needed to start a business based on what I was really good at in order to fund this business,” Dillard told Forbes contributor Matt Hunckler. “Simply put, it will allow anyone in the world to grow enough organic herbs, fruits, and vegetables in their kitchen to feed a family of four every month — for less than $30 per month.”

Dillard’s approach doesn’t involve flashy fundraising and eye-popping valuations. It’s equally hard. And it works.

That’s not to say venture capital can’t work. In fact, raising capital makes sense when resources and connections for rapid growth are needed. But as Dillard and I realized, it’s a weighty sacrifice. It requires you to be smart with other people’s money — no easy task — and it often requires you to forfeit control.

When you take venture cash, you’re constantly pressured to scale. But when you bootstrap, you have the latitude to make mistakes. You’re under your own pressure — which should be plenty — not your own plus that of your investors and board.

Does that mean you shouldn’t set milestones? Of course not. I set goals as if I’d taken outside capital. And because I’m spending my own money, I make every decision with care. I haven’t always made the right call, but I have often enough to grow my company’s revenue 14 years running.

The bottom line is this: When you take venture capital, you no longer command your company’s destiny. And when you don’t command your company’s destiny, you no longer command your own.

 

Bootstrap for survival and success

The key to bootstrapping is to be financially meticulous. Be just as diligent as you’d be if you raised outside capital. Pay attention to your setup, process, pitch, business model, industry forecast, and daily execution.

Every penny is a seed. Some will be duds; others will grow. Learn how to scale with existing earnings. Invest proportionally in promising areas. Then, take your returns and reinvest them. Wash, rinse, repeat.

If you do it carefully — and have a little luck on your side — you’ll never need outside capital. To this day, we fund growth entirely from profits. We split investments into three areas: marketing and sales, product innovation, and process improvements to reduce expenses.

Photo: © visoook, YFS Magazine

If this sounds like too much finance, be warned: Bootstrapping requires you to master financial planning and analysis. By the time we placed our first Google ad, we had a solid handle on our conversion rates, margins, and customer lifetime value. We’d forecasted our finances, and we knew the levers that would be fundamental to our profitability.

In particular, you 
need to know your necessary return on invested capital (ROIC) ratio. For every dollar you spend, do you need a 2 times return? 5 times? 10 times? Know your metrics like the back of your hand. Then, whether it’s $10 or $10 million, measure the ROIC on every investment you make.

That’s not being cheap; it’s startup survival 101, and it’s important for self-funders and venture takers alike. After events like the 2000 dot-com bust and the 2008 credit crisis, the market can turn on a dime. When that happens, sustainably scaled businesses with lean infrastructures — typically bootstrapped ones — are the survivors.

I won’t pretend that bootstrapping a company is easy. Some days, I’d probably rather face the hydra. But if you have the discipline, want to control your own destiny, and crave lifelong income to support your lifestyle, there’s no better way to run a business.

 

This article has been edited.

Gene Ku is the founder and chairman of Mobovida, a vertically integrated online retailer and fashion-forward, direct-to-consumer mobile accessory brand. Since 2002, Gene has bootstrapped Mobovida and CellularOutfitter, the largest pure-play online retailer of mobile accessories. Using agile product development and a sophisticated digital marketing model, Gene has propelled Mobovida to a remarkable 14-year compounded annual growth rate with nine consecutive years and counting on the Inc. 5000 list. Gene is also a venture partner at K5 Ventures in Orange County, California, and serves as mentor and advisor to various startups.

 

 

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