Up and Running:

Guy Kawasaki’s recent repost of his “The Art of Bootstrapping” reminds me how much I liked it when it first came out, along with Seth Godin’s “Bootstrapper’s Bible” and Thomas Frey’s “10 Rules for Bootstrapping Your Business.” This is the real world. Bootstrapping is often the only way to start, build and grow your business.

And I probably don’t have to remind anybody about the obvious fact that we’re going to be seeing a lot more bootstrapping in the near future.

For years now, I’ve complained every so often about how we (in blogs, business plan contests, academia and entrepreneurship in general) tend to idealize the venture capital-financed startup, the SBA loan and the more formalized and carefully planned financial strategy. This is especially true in venture competitions.

And, frankly, I’ve earned the right to post about bootstrapping because Palo Alto Software, my company, didn’t get outside financing or even a straight business loan until it was already 13 years old and didn’t need it. We grew it from zero to 30-some employees the old-fashioned way, meaning we had to sell something and get the money from it before we could spend something.

It wasn’t easy. At one point we had three mortgages and $65,000 in credit card debt. That’s a nightmare.

On the other hand, having built a business through bootstrapping means that when you do it, you don’t have co-owners, investors or partners as quasi-bosses; and you don’t have to repay the bank, either. It’s yours.

There’s a lot to be said for not having debt when you get to the hard times.

And also the simple fact that the best financing is sales. Money from customers. You get to spend it, and it validates your business at the same time.

As I write this Thursday afternoon, I’m about to take off from my office in my home town of Eugene, Oregon to Myrtle Creek, a small town about 90 minutes south of here, where I’m going to be conducting a workshop on business planning.

I think this is a very interesting example of what local governments can do these days to actually help local businesses. The city government of Myrtle Creek has purchased 50 copies of Business Plan Pro for local businesses, and invited me to go down the interstate a bit and help people get going with their planning.

As I leave–which is when I’m posting, although I’m scheduling it to appear Friday morning–I think it’s a great idea, and I’m happy to be participating.

Even in these tough times, as you look toward starting up, it’s still way too easy to focus on “getting financed” instead of focusing on getting financed right, getting financed well or, perhaps, getting no financing at all.

Amazing but true: Sometimes no financing at all is better than the wrong financing.

I was at the Forbes.com headquarters in New York last week, as a judge at the Forbes.com Boost Your Business contest, which includes a $100,000 prize. By the way, if you’re interested, you get to vote on this one, so click here for details on that.

On the Forbes.com site, I discovered The Right And Wrong Ways To Raise Money, written last month by Dileep Rao. He tells a story that illustrates my point:

Take it from Consumer Products Company. (I have disguised the real name to save the owner the embarrassment.) CPC was started by a young entrepreneur with a new product. He obtained his funding from a rich investor to whom he sold a controlling stake.

When the product started to take off, the majority investor took control and threw the entrepreneur out on his ear. The poor guy sued, recovering a little over $100,000 (after substantial legal fees); meanwhile, the investor unloaded the company a few years later for over $100 million.

Seems unfair, I suppose. But, just my opinion here, there are two sides to some of these stories. That $100,000 investment is a lot of money. Would you invest that much without control? If you had the money? Maybe. With the right team, the right product, the right plan . . . but maybe not. These issues aren’t all that simple.

For another view, try Choose Investors Carefully, or Not at All, on my other blog.

Dileep Rao goes on to add some additional good advice on watching this carefully:

Then there was Healthcare Company, a contract home-care provider. HC had raised nearly $400,000 of working capital from a bank and was also planning to lease $70,000 worth of computers. About a year after the original financing, my phone rang. The frantic entrepreneur explained that while he was tracking his sales targets, he needed another $70,000 to cover working capital.

When I looked at his financial statements, I found that he had used $70,000 of that original $400,000 to buy computers because Dell (nasdaq: DELL – news – people ) was not willing to lease them. I asked him if he had looked into other leasing companies–he hadn’t. HC never recovered, and the bank foreclosed on the business.

Moral: Startup capital is precious. Do not deplete your working-capital reserves until the venture is kicking off positive cash flow–chances are you will regret it.

And I want to add my own conclusion, from a more recent post on my other blog. This is a quote from William Sahlman, whose 1997 article on business plans is one of the most-often downloaded articles on the Harvard Business Review site. He was asked how his views have changed in 10 years. One of my favorite pieces of his answer was:

The best money comes from customers, not external investors.

Yesterday afternoon I watched two very good startup business presentations, for two local companies that will be presenting in a couple of weeks to our new community startup group, called Smartups. The group, which is just a few months old, seems like a good example of what a few interested people can do to build some community amongst local startups.

For example, the next event, on Oct. 14, will get about 100 people together for a couple of hours after work to hear three 12-minute business pitches and several more one-minute pitches from some local startups, including the two I heard this afternoon in a preview and coaching session: Golden Signals, with new technology for linking computers to televisions; and Take Shape, with technology to do a health-and-fitness body scan in a few seconds. Both are interesting companies. It’s a privilege to get to listen to their pitches.

The winners of the Oct. 14 event will compete in November at an angel investor event in Portland.

That’s been done by three or four active organizers and a total of maybe a dozen or so interested sometimes-organizers. They’ve established the organization, built the website, set up a calendar, recruited speakers for some events and presenters for others, rented the location, notified the media and made things happen.

A year ago some of these people were complaining that there were no community peer groups for startups. Those complaints turned into a couple of meetings, which became an organization and then events. The group is now a chapter of the statewide Oregon Entrepreneurs Network, based in Portland, about two hours away.

Eugene is a city of about 150,000 total population, two hours from Portland, but not a suburb. It is the home of the University of Oregon, which has about 20,000 students, so that certainly adds to the community. The university has an entrepreneurship center, but Smartups, ironically, has been mainly the work of a few individuals, some law firms and the local Small Business Development Center.

For the people involved and the people who come to events, what they get is community: peers, service providers, some experts, some potential investors and, generally, an opportunity to talk about starting businesses, being entrepreneurs and getting help from other interested people.

You may already have something like this in your community. If you don’t, then use Smartups as an example. Get going.

The simple pitch at fairsoftware.net is very attractive: Team up (find people you can trust), sell, share (reward your team).

Our unique system is powered by a legally sound contract, the “Software Bill Of Rights,” in which virtual “shares” represent decision-making and revenue-sharing rights.

It’s easy to give shares to anyone who helps out in some way, large or small. You hire people with shares instead of cash, growing a team that is committed to the project’s success.

I haven’t used this new product/site offering, but I have been involved in the past with software development paid in part by revenue sharing. That worked for me. It took a fair amount of negotiation and legal work, which this new site seems to suggest it can help solve.

I heard about this site from a post titled Innovator to Watch on the Demo.com site, just two days after the fall Demo conference.

People used to say you couldn’t be too thin or too rich, and I think we know now that both points are sometimes wrong. Too thin isn’t my problem, so let that one go; but too rich is a problem for some startups. Not when too rich refers to your own money, perhaps, but with startups it’s almost always investor money that creates a problem–meaning: not your money, but their money.

Taking their investment is your promise to deliver. And the more investment you take in, the more return you’re promising to deliver. So if you got more money in than you can spend productively, you’re in trouble.

I once heard a person suggest that he wanted more investment than his plan said he needed for “peace of mind.” Bad idea. You won’t get peace of mind by having somebody else’s money in your bank account gathering the implied promise of delivering something.

What you get sometimes is people wasting money on bad marketing spends because they can’t find good spends, and they have to spend the money before they face the investors. This explains a lot of very unproductive Super Bowl ads during the dot-com madness.

I picked up on that over the weekend reading Roger Ehrenberg’s “Monitor 110: a Post Mortem” on his Information Arbitrage blog.

We rarely get a chance to look backward as well or as openly as Ehrenberg does in this post. Calling his involvement with Monitor 110 “one of the most interesting and informative experiences of my life,” he offers us a view into the heart of it, well organized into a simple list of seven points:

1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the company and with the board

Those are good points, and the post expands on them well. It was “too much money” that caught my eye first because I’ve seen that problem in the past, but I think it’s not one a lot of people think of. Roger adds:

Too much money is like too much time; work expands to fill the time allotted, and ways to spend money multiply when abundant financial resources are available. By being simply too good at raising money, it enabled us to perpetuate poor organizational structure and suboptimal strategic decisions.

I also liked the reference to too much PR too early. I see that happening, too, and he puts it into a very understandable, concrete context:

[some] bad behaviors were reinforced by an unplanned event that sharply impacted our psyche: being on the front page of the Financial Times. It is hard to call it a mistake since we didn’t seek to get such exposure, but I put it down as Mistake #3. To be honest, this single fact was a very meaningful factor in our failure. It raised the level of expectations so high that it made us reluctant to release anything that wasn’t earth-shattering.

Both of these points are reminders that the hunt for financing is not just a simple quest for money. It’s about finding good partners, the right partners, and building long-term relationships and healthy businesses.

Information Arbitrage: Monitor110: A Post Mortem

Two out of three isn’t that bad. 37 Signals is a success, too. So I was curious when I saw “Advice for entrepreneurs: Throw out that five-year plan, build something now, and don’t take any money” on the 37 Signals blog.

It links to “Follow Your Dream” in Best Life magazine, with some good advice about starting your new business. It quotes experts including Scott Shane (author of Illusions of Entrepreneurship) and Greg Gianforte (author of Bootstrapping Your Business). I particularly like (and agree with) the emphasis on getting real, bootstrapping, as implied in the 37 signals blog post title.

Gianforte says:

The secret is to stop sweating your five-year plan and start moving the product from Day One. If your business idea requires more money than you have at hand, then shrink the idea.

That’s great advice. Frankly, I don’t like the plan bashing–that’s why I said two out of three in my first paragraph–but it’s still great advice. Ironically, I don’t like the plan bashing, but it’s not too different from what I’ve been saying about planning in my plan-as-you-go work: Get started, get going, use your planning from the first day. The plan bashing here is about the plan as an excuse for doing nothing. Some people use the plan like politicians use committees, as excuses to do more study.

The article itself has a sidebar on how to go and when to go, which includes four steps to take, called “Look Before You Leap.” The steps are 1) SCORE free advice 2) Find the unmet need 3) Make a plan and 4) Know when to go. For Make a Plan, it says:

Make a plan. Research shows that writing a formal business plan significantly enhances your chance of success. The folks at SCORE can help you do it right. Just remember that most investors won’t think much of your fancy hypothetical numbers until they see some real-life revenue.

For Know When to Go, more good advice, maybe:

Know when to go. Are your wife, kids and boss all crying out for attention while your sideline project morphs into a grasping mistress? You can try to juggle a job, a family and a thriving new business, but you will eventually drop a ball. So if your new venture has built up a solid client base, it may be time to take the plunge and make it your day job.

I say “maybe” because that’s good advice only if the new business succeeds. If it fails, it’s very bad advice. And we don’t get to know that until later.

Which is why I go back to fundamentals: Make a plan. Reduce your uncertainty. Don’t make a five-year plan that’s just an excuse to do nothing: Make a real plan, and do some real planning.

I’ve talked about this topic on my other blog, Planning Startups Stories. I don’t like the idea of retiring. I love what I do. And I’m 60 years old. But then, I recently changed what I do to focus on blogging, speaking, writing and teaching. And that gave me a new job.

Which made me take a personal interest in Brent Bowers’ New York Times piece about Early Retirees In New Ventures, Mostly for Fun. This is really cool, a great reminder that business–your own business, your startup–is supposed to be more than “just” business; it’s supposed to be new, exciting, challenging and fun.

The National Dialogue on Entrepreneurship’s latest newsletter has an interesting call to inventors (and educators):

If you’ve got a good idea for a new product or technology, you might want to check out some interesting grant programs sponsored by the National Collegiate Inventors and Innovators Alliance (NCIIA). Funded by the Lemelson Foundation, NCIIA now operates three separate grant programs that provide up to $50,000 to support efforts that move innovative products or technologies from the idea stage to prototype. They can also provide grants for innovative education programs focused on the same goal of moving ideas to commercialization. This is a great opportunity for colleges, universities, research institutions and their students. A new round of funds has just been announced, with deadlines in the fall and winter of 2008.

Looks interesting. You can find out more about this at the NCIIA grants page.

Nice treatment of an important question in Bootstrapping or Fundraising, That Is The Question by Alyssa Royce on the Seattle Post-Intelligencer reader blog, Start Her Up: for Women Entrepreneurs.

I’ve dealt with the same issue this blog addresses: The startup culture emphasizes raising money. But bootstrapping has some real advantages. Royce quotes several people and several points of view.

So, imagine my surprise when I sat down for a friendly cup of coffee (NOT a pitch) with a VC and she looked at me and earnestly asked me why I was raising money.

Um, because I HAVE to?

But I didn’t answer her, I just thought about it, and my answer changed to, “because I thought I had to.” I really thought about it, thought long and hard. What do I need money for, and how much will it take? Huh, that’s a good question.

I’ve come out before on the bootstrapping side of this question, both on this blog and my Planning Startups Stories. Part of that leaning is for reasons that Royce points out . . .

Raising money is a full-time job. Running your company is a full-time job. It’s very hard to do two full-time jobs well. (And exhausting!)

. . . and part of that leaning is also a long–some time in the future–post on the desirability of owning it all yourself, doing it all yourself, not sharing the decision process, independence and control.

But then there is that whole other side of this question. Can you do it by yourself, without additional money? Does that require too much compromise? Can you narrow the focus–can you start up a part of it on a smaller scale? And for that matter, is funding a real option? Do you have the track record you’d need to get investment? Does your business plan hold up to scrutiny?

These are all really important questions. More later . . .

So here’s a question I got in e-mail the other day:

I am an engineer and I’ve designed a machine and got it patented. I am struggling between selling my patent or starting my own business. I am trying to balance out all the pros and cons of a product-based business. I had really great offers for my patent, but I think more money can be made if I manufacture the machine and sell it myself. What do you think? What are the pros and cons of a product-based business?

And here’s my answer:

By the way, have you actually tried to sell rights to that patent? Make an informed decision. Something like a patent is worth what a buyer will pay for it. Most patents, the vast majority of patents, have no buyers.

And then there’s the problem of the buyer who offers a royalty for a license, then does nothing with the patent. You make no money.

And, on the other hand, there’s also the chance that you try to build a business and fail. Lose your shirt. Lose your house.

Which do you prefer, a bird in the hand or a successful business that you build yourself in the bush?

It started late last week with Jason Calacanis’ post “How to save money running a startup (17 really good tips).” He’s the founder of the search engine Mahalo and a Silicon Valley veteran. Read it. Think about it. The “really good” description in his headline is Calacanis’, not mine. Just so you know, “Fire everybody who isn’t a workaholic,” tip No. 11, doesn’t strike me as a really good tip.

That post set off fireworks. Michael Arrington summarized on TechCrunch. Follow his links for good reading.

Boy was he attacked. Bloggers lined up to take their shots at him. Examples are here, here, here and, especially, here.

He goes on, however, to agree with Calacanis. You should read his post, but read the others, also, and read the comments. Read Duncan Riley’s post on the same TechCrunch blog (interesting that Arrington, founder, owner and head knocker, handles that disagreement disarmingly well, by the way). Read the comments to that one, too.

Read also the related 37 Signals commentary, titled “Fire the Workaholics.”

My own experience argues against what Calacanis, Arrington and others say. I would hate to have a company full of workaholics. I don’t think that works. People burn out. Furthermore, I think that the founders making the big money forget–so easily, and so quickly–that the rest of the company has a few odd shares in options and won’t be making tens of millions of dollars if the company makes it. I think that the best company environments are built with people who have lives that they value, by companies that value their employees as people and respect the rest of their lives.

But that’s just me. You get to decide for yourself. Read about it, think about it, and make it work the way you believe it will work best.