Sure, having too little money can slow you down. But having too much can kill you

Darwyn Williams remembers how easy it all was, back in the days he now refers to as his "butthead period." He recalls sitting comfortably in the tufted leather chair behind his expansive desk, staring idly at the Acadian artwork that hung from his walls and just dialing the number. It was a number he knew by heart. "I said, 'Hey, I want to buy a boat." On the other end of the line, his banker, who listened with friendly interest, had only one question. "What kind?" A Boston Whaler. It would cost $19,000, and Williams didn't intend to put a dime down on it. But that was irrelevant. "I said I'd swing by later that day" -- in a new BMW he had financed the same way -- "and sign a promissory note."

By Williams's reckoning, "that's when things got stupid."

Bank debt, which had capitalized his real-estate-development business since its inception, was now financing toys. "It was play money." Also, it was 1984, salad days for the oil and gas and real estate industries in Louisiana, where Williams, on leveraged wings, had come to view himself -- at the tender age of 24 -- as one of the entrepreneurial elite. After all, his Acadian Construction had rocketed to revenues of $1.5 million in less than two years. He was building houses, apartments, and a shopping center as fast as he could sign notes against them. "Things were rolling; banks were willing." And the company, flush with borrowed capital, was sprinting toward bankruptcy.

By the end of that year, in the wake of a real estate bust, Williams and his partner were spending their time in meetings with lawyers and bankers, negotiating long-term payouts and liquidation plans. The company owed more than $14 million on properties worth but a small fraction of the debt. "In the end the leverage killed us," says Williams, who watched the business he had propped up with outside capital collapse. By 1985 both the company and the supreme confidence he had called his own were gone.

Be it a timeless parable or just an '80s clichÉ, Williams's folly now seems almost quaint, even a little enviable. The nostalgia for easy money dies hard. What undercapitalized company builder today wouldn't welcome the opportunity to be so tempted by someone else's money? To fend off advances from eager lenders or investors? To worry about an excess of capital? Well, Williams, for one. You see, Williams, now an evangelical bootstrapper, isn't the least bit wistful about his bygone bounty -- even though he expects he'd use the capital more wisely today: to propel his $1.5 million Inc. 500 company (Combined Resource Technology, in Baton Rouge), for instance.

Instead, the once-prodigal Williams avers that too much outside capital is a curse, and too little is a blessing. Other people's money? "If it's not the root of all evil, it's at least the root of all complacency," he asserts.

Grail though it is, capital is no growth serum. It will not secure a single sale. And as heretical as it may sound, even the cheapest capital can foreclose as many opportunities as it unlocks. What you think are the "options" uniquely provided by capital become the mandates that doggedly fix your company's fate, determining everything from what markets it pursues, to how fast it must grow, to, ultimately, who calls the shots. So before you bemoan yet again the anemic bank account or the mounting payables or that thin, barely black edge your business survives on each day, stop to ponder the perils you're spared by bootstrapping. The hidden costs of capital are higher than you may think. Consider --

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The Ball and Chain
Yes, yes, everyone knows there are strings attached. But they're wound around more than the founders. When a company accepts debt or equity, it seals a commitment not just to investors or lenders but also to the market, the product, and the business plan those investors or lenders buy into. But what about when that original market or product or vision of the business isn't viable? Or, as often happens, is supplanted by a better opportunity?

Margaret Hamilton knows the problem only too well. "We had created this five-year plan," recalls Hamilton, whose first company, Higher Order Software, in Cambridge, Mass., burned through $15 million in venture capital before the doors were shut, in 1988. "We ended up handcuffed to that original concept." Investors, who ultimately gained a controlling interest in the company, could not be persuaded to change course. "We lost the freedom to go in a different direction." And flexibility was a high price to pay, insists Hamilton, who went on to found a second software company, Cambridge-based Hamilton Technologies Inc., this time unencumbered by capital.

Investors, especially unsophisticated ones (those who take your business plan seriously), often object to a company's inevitable need to transform itself into something other than what the investors thought they bought. Change becomes a matter of consensus building, a process that can be painstaking, slow, and sometimes impossible.

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Time Is Not on Your Side
On average, it takes three to six months to raise a round of capital. Or to find out you can't. The weeks and months spent chasing money often prove fruitless and hazardous to the health of the business. "I spent all my time raising money," recalls Hamilton. "It was absolutely diversionary. And there wasn't enough time left to worry about product development or marketing or sales -- the things I should have been concentrating on."

The irony is that the time a business most desperately needs capital -- in the yaw of a cash crisis -- is usually the time it can least afford a prolonged treasure hunt. The hours and effort devoted to finding capital might be better spent righting the profit-and-loss statement and selling. Even if you do manage to hustle up some money, you're compelled to spend plenty of time afterward coddling investors, as much as you would your biggest customer. "I was so involved with investors and the board," confesses Hamilton, "I started losing touch with what was really going on with the business." Says Tom Gregory, a veteran of one renowned failure and one celebrated success (Ovation Technology and Smartfoods, respectively): "When you bring on investors, you create a set of expectations that you don't satisfy until you sell the company or take it public. Until you do that, you're managing those expectations. You can spend all your time doing it."

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A Full Belly Has No Fire
Call it the natural law of money. If you don't need it, you don't make it. And, well, when someone else supplies it, you don't need it. "That capital just became part of income," recalls Williams, the profligate borrower. "It became a substitute for income.

"We got caught up in the fake reality of a leveraged existence," he says. "We had all the trappings of success; we just weren't making money. And all the niceties surrounding us were owned by somebody else." Fancy digs, high-priced hires, expense accounts, company cars, and big-name investors all create the illusion that you've already made it. You can look around at all the lavish accessories -- the way Williams did his well-appointed office -- and be duped into thinking, Hey, we're already successful; it's happened. When, in fact, all you've done is eaten into the bottom line and lost sight of the top one. It's axiomatic: if we aren't hungry, we aren't selling.

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Start With a Dowry, End in a Divorce
Not only does outside capital suppress the drive to make money, but it can also arouse the impulse to spend it. At Hamilton's Higher Order, 30 marketing and sales people were hired before the product was ready to be sold. The company kept moving into larger and tonier quarters. Why are we spending all this money? Hamilton wondered aloud, only to be exhorted by investors to "Think Success."

Capital often lures you into staffing up prematurely and hiring the wrong people: "Let's go get a hotshot, a big corporate gun, someone who's been there." It's a common conceit. If there's venture money in the company, there's even more pressure to bring in heavyweights, the code word for professional managers. Sounds enticing, except for one catch. When you change direction (as so many companies do), you end up with a high-priced marketing VP who knows everything there is to know about a business you're no longer in.

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Money Talks (Will You Like What It Has to Say?)
Capital can be addictive. If you imagine that one round will catapult the company into perpetual orbit, think again. You'll always need more than you project. And the second round, as those who've done it attest, can yield uglier valuations or, worse, an outbreak of civil war among investors. Second-round investors resent the sweet deals first-round investors were granted. First-round investors protest the valuations or dilution wrought by subsequent investors. The bickering over share price and board seats and warrants and dividends makes for unbearable board meetings and can prove fatal if -- when? -- the company faces trouble.

Of course, all that presumes a founder can stomach giving up equity in the first place. "It's like you have this child, and suddenly these new parents come in, and you're supposed to share custody," says Hamilton. "They don't want to raise it the same way. They don't love it the way you do. It's very painful." Especially when you're left with a minority stake, and your influence as well as your equity has been diluted.

So be honest: since odds are good that the founder driving a young company out of the gate is an individual who is, shall we say, highly autonomous (did someone mumble control freak?), how happy would such a personality be if someone else had bought the right to second-guess, naysay, or veto decisions? Would such a founder just end up working for that someone?

High Anxiety
Capital does not calm the seas. In fact, it may make them choppier. There is a myth that capital will smooth out the tumult of growth. If anything, it can exacerbate it. An infusion of capital comes with a harvest expectation. Investors demand a return -- sometimes well before the business or the CEO is ready to deliver it. You can find the company pressed into an inexorable march toward an initial public offering. The pressure to grow increases. It may abort product development or compromise quality or force you into incompatible markets. In short, it may cause you to abandon a promising strategy and mortgage the long-term success of the company.

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Those lessons may lie in the distant past for both Hamilton and Williams, but they serve as trusted guideposts for every decision the two make today. After starting over in a warehouse where he and his partner shared an office with a splendid view of tractor and combine parts below, Williams just recently moved his business, which offers cost-reduction consulting services, to a building he bought from the bank. At half its market value, he is quick to point out. "We remodeled the offices," he reports. "But we financed it the way we finance everything else these days: out of Hip Pocket National."

By his own account, Williams has been born again. Although his conversion to bootstrapping has not been wholly voluntary -- a previous bankruptcy tends to repel financiers quite effectively -- it has been embraced with all the fervor of a true disciple. Williams is mending his ways, to be sure -- the used 1982 Pontiac he drove until recently is Exhibit A -- but he hardly considers it a penance. Rather, he and other reformed cashoholics contend that bootstrapping quite simply makes for better company building.

Both Williams and Hamilton maintain that they're growing hardier companies now -- in part because they tie their efforts so closely to customers, with whom bootstrappers necessarily form near-conjugal relationships. For Hamilton, the customers are the market research; they are the financing. "They become extensions of us, really," she says. "They'll lend us equipment free. They'll give demos to other prospective customers so we can avoid travel costs. We actually have customers selling for us."

The lack of capital may exact a price -- internally financed growth can be synonymous with slower growth -- but the deprivation does pay other dividends. By fostering innovation, for one. "If you go without investments, you understand that you can create something out of nothing," says Hamilton. It also instills survival skills that better equip you to weather hard times. There's a discipline that can be bred only by the fear of running out of money. When you don't bring in cash, you don't eat. So you manage payables and receivables before they become a problem. You fix your manufacturing process before it's broken. You cut your costs before the ink runs red.

You master the nuts and bolts of your business early on and learn pretty fast how to manage cash flow. Says Williams: "No one balances my books but me, no one files my tax reports but me, no one generates the P&Ls but me. I pay all the bills for the company. I make all the deposits. I stay intimately involved with the basics of business operations." He almost intones it: "Income less expenses equals profit. I never lose sight of that now."

Beyond the earnest testimony of founders, there's even some academic research to suggest that entrepreneurs may build better companies if they bootstrap. In a study of public companies, Jim Collins, a lecturer at Stanford Business School, found that businesses that had institutional investors before their public offerings (versus those that were self-financed) tended to fare worse in the long haul. "If you want to grow fast, get rich, and get out, then by all means, go raise a bunch of money, and good luck," Collins concludes. "If what you want is to create a truly outstanding company, a Hewlett-Packard, a Disney, a Motorola, an L.L. Bean [which is still private] -- something that will be a crown jewel in its industry -- then do it yourself." It might take longer that way, but your business just may last longer, too.

Of course, there are hazards to growing your own: Always worrying about cash flow can be as distracting as trailing other people's money. You end up wooing vendors instead of investors. Or you become so preoccupied with cash flow that you spend your days balancing the checkbook.

"There are times when a check or a purchase order doesn't come in, and I really worry about it," admits Hamilton. "But I compare those times with days when I didn't have to worry about that stuff at all. In a company that was no longer mine. And I think, What's better? The answer is easy. Maybe I'm masochistic or something, but this is more fun.

"Freedom is worth a lot."