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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."
