A fair bit of entrepreneurial energy (at least when I am meeting with entrepreneurs) centers on getting equity capital.  Now, putting aside the limited sample size of people meeting with me because Amplifier has money to invest in their businesses, it does appear to me that most entrepreneurs I meet are making the assumption that the best way to grow their business is to obtain venture capital.  Well, I am not sure that for most of them I agree.  Actually, for most start ups and emerging businesses, venture capital should be the financing source of last resort. 

I am not saying this because venture capital (or the denizens of the industry) are “bad”, rather I am suggesting this because venture capital is a particular financing tool for a particular type of business. There are moments of time when a company is best suited for venture capital and many more times when it is not.  And, more to the point, venture capital money is very, very expensive.  We try to earn our money by helping our entrepreneurs grow great companies, but the fact is that even the best venture capital investor is a very expensive advisor and coach.

So, even in the best of economic times, the trade offs of obtaining venture capital are stark.  It makes sense to have an alternative plan to grow a business.  And, this makes even more sense in a time of economic uncertainty, when obtaining venture capital is generally harder. 

I am not a proud owner of a crystal ball (sadly), so I do not know whether 2008 is going to be a good market for venture capital financing of start ups.  However, I do know that whether the market is good or bad, a successful entrepreneur should be ready to grow a business without outside capital, particularly in the earlier stages of development.  I thought then that a few thoughts on how to bootstrap a business would be timely.

Bootstrapping is fundamentally a mindset – it’s the entrepreneur saying “I will figure out how to get this business launched.”  There are different flavors of this, but at its core bootstrapping is the entrepreneur leveraging small amounts of cash with a growing group of stake holders.  The best way to think about boot strapping is it that the entrepreneur is engaging in a long line of sales transactions, which have in common the goal of getting other individuals to “buy in” to the entrepreneur’s vision.  In other words, getting other individuals to make a significant (non financial) investment in the success of the entrepreneur.  Looked through this prism many traditional “bootstrap” activities start to look pretty similar.

With that, what are some of the most effective ways to bootstrap a business:

Personal Resources .  Use your personal resources.  It is rare that an entrepreneur does not have the ability to provide seed capital to start a business.  In many cases the capital comes from charge cards or savings, but most entrepreneurs have the financial wherewithal to start a business.  Frankly, if they do not have at least these limited resources, they probably won’t weather the experience of starting a business.  Even a rapidly growing start up will rarely generate much cash, if any, to provide the entrepreneur with any significant income.

Keep Your Day Job. There is not necessarily anything wrong with starting a business while you are employed elsewhere.  What can get an entrepreneur in trouble are things that interfere with a current position.  Things like existing employment agreements, employer intellectual property policies and business ethics shouldn’t be ignored.  But, if an entrepreneur is truly doing his new business idea on his own personal time, his startup is really not much different than taking up a new hobby.  If you would be OK with your current employer paying you while you learned how to play the cello on the weekends, then it might not be much of a stretch for you to take up the more time consuming hobby of company creation.

Find a Customer.  Few things help a business grow faster than customers.  Not only do they provide a start up with cash, but they also will provide her with references for new customers.  A start up that has customers is also, by the way, much more likely to obtain outside investors.  Of course, if you get enough customers you won’t want outside venture capital…..

Provide Services .  Although investors don’t like consulting or services businesses as an investment, they are often great ways to start a business, particularly if the consulting or services dovetail with the product business the entrepreneur is trying to start.  Think of this as a corollary of finding a customer or getting someone else to pay you while you start a business.  What is important here, however, is that the entrepreneur stay focused on this not becoming the primary business of his start up, if his vision is to create a broader technology or product.  As an aside the other thing to be mindful of is inadvertently creating for the consulting customer an ownership interest in your anticipated technology or product.  Make sure you are clear about who owns what if you are going to develop a technology or product while consulting for a customer.

Add Credible Stake Holders .  Nothing helps a business grow better than expertise.  It is a rare entrepreneur who can figure it all out on her own.  One of the most interesting things about a successful entrepreneur is that from very early on in his start up’s history he is able to attract to his side credible, experienced advisors.  Why? The experts have decided that they are likely to “win” by associating with the entrepreneur.  Winning can mean different things to the expert – as examples, it could be service revenue, a new job or the psychic gratification of helping a like minded person.  But, make no mistake, a credible stake holder will take a small amount of cash or equity in exchange for a winning opportunity.

Look at Government Investment Programs .  There are a number of very useful federal and state programs that are out there to financing technology development and company formation.  The Federal SBIR program can be of tremendous use to a technology start up, and if you are located in Maryland or Virginia there are some really useful programs that can help you.  Check out TEDCO or DBED in Maryland or the GAP Fund in Virginia.

Don’t Dismiss Incubators and Accelerators .  An incubator or accelerator program is often a great place to get infrastructure and expertise. Think of the best ones as a virtual credible stake holder.  There are some strong incubator programs in our region.  I work closely with the TAP Program and the Dingman Center at the University of Maryland, College Park, but there are many other good ones in Maryland and Virginia.

Friends and Family .  There is a strong role for friends and family in every successful start up.  Sometimes it’s financial support, but more often it’s emotional support or access to a home cooked meal on a weekend.  Entrepreneurship and company creation is a lonely and hard thing to do.  Most successful entrepreneurs have a support network of friends and family.  One thing to keep in mind if you do take money from a family member, structure the deal so that a subsequent equity financing (if one does occur) does not harm them.  For some thoughts on this take a look at my earlier blog entry on structuring these types of deals.

As you can see there are a lot of resources mentioned above.  It is rare that most of them are not available to an entrepreneur.  And, you will note, that none of them pre suppose or require outside equity capital.  What you might not necessarily have thought of though is that just about all successful start ups go through a bootstrapping phase.  It is both a path of demonstrating to venture investors the credibility of an entrepreneur and a potential path to success without venture capital.  Either way you’ll win by successfully boot strapping a business.