Bootstrapper.com - Confessions of Serial Entrepreneurs

Bootstrap Your Business for Growth and Growth Will Happen, Take It from Me…

MedeFinance began as a vision to solve a common set of challenges facing healthcare financial professionals in 1994, and launched as a company in 2001 with the release of on-demand analytic software and services for improving financial performance in the healthcare industry. The six-year journey to launch and four-year processional that followed were paved with lessons that can serve as legitimate guidelines for building a successful venture the old fashioned way – bootstrapping through the early years.

We initially opted to take a modest sum of angel investment and instead relied primarily on real customer revenues. This was a novel concept in the late nineties, but one that my 20 years of industry experience assured me would offer the most opportunity, flexibility, and ultimately guarantee the founders could maintain the largest stake in the company.

While the journey took a bit longer as an “accountable” business that actually relied on customer revenues to pay the bills, we realized the success of our bootstrapped path in 2003 when MedeFinance revenues hit $5 million. At that point, we recognized that it was time to raise growth capital if we were going to efficiently scale our sales and marketing organizations – necessary steps if we were going to grow.

Within the 24 months following our first venture round, MedeFinance has grown into a $30+ million run-rate with all recurring revenue. A key to our success was raising “smart” capital from experienced investors to finance scaling the business. In addition, we recruited the necessary executive talent to steer the company in the right direction. By using our resources wisely and taking a patient approach to building the business, MedeFinance is now on a clear path to success for its shareholders. During our journey, we identified three important guidelines for successfully bootstrapping a company.

Guideline #1: Before starting a business and taking capital, validate your products with real customer pain

Through my own personal experience, I came to realize that the healthcare system was a large market riddled by dysfunction and a broken claims management system. I started the prototype of MedeFinance to streamline claims administration, however, as with most businesses, the plan evolved as the company began to work with customers to identify their true pain points. Thankfully, we had not raised any venture capital at the early stage of the company, so we had the flexibility to shift directions. My expenses were low enough that we could appoint adequate time to honing on real market needs.

We went through several iterations of the company over the next five years before hitting the winning formula. It was largely a game of trial, error and, eventually, success. Thankfully, because we were not tempted by too much early-stage capital in the beginning, I had maintained the largest equity stake in the company.

The big win for MedeFinance came in 1998. Customers were lukewarm with regards to the claims management business. In fact, we began to see the market as one with declining margins and undergoing heavy consolidation. So we looked even closer and learned that customers did have a keen interest, but in a different area: analytics platform and business process improvement solutions. We quickly responded to market demand and revamped the entire company focus. In the last seven years, we’ve seen revenues increase by over 100 percent annually.

Guideline #2: Bootstrap for the right reasons, raise capital for the right reasons

MedeFinance raised “friends and family” money that kept the company floating through 1998. This patient capital enabled us to be a nimble company during our formative years. We raised another $500,000 in seed money following the change in direction to a company focused on analytics. During this same period we were able to obtain and retire early $1 million in debt from investors and trading partners. However, as we approached our 10th customer and revenues hovered at $5 million, we quickly realized that we could not scale without more resources and support.

Now, bear in mind that I didn’t really feel like we needed the money. We had $1 million in profits and $2 million in cash on the balance sheet. What we did need were smart resources. We needed a strong management team and board that could help grow the company into a $100 million business. I also wanted some liquidity. To scale the business the way we were going to grow it would require more risk, and I wanted to diversify some of my holdings. We also needed cash to grow aggressively, win major deals with partners, and potentially do some acquisitions. It was clear to me that it was time to raise some capital.

Guideline #3: When you decide to raise capital, find good partners to help grow your business

I knew that the right partners, especially our investor, were key if MedeFinance was going to get there with skin in the game. We worked with a consulting firm, Nucleus Partners, to help us present our story and the right information to potential investors. Sal De Trane, a partner at Nucleus, did a great job in making the right introductions. In fact, I liked him so much that today he is MedeFinance’s VP of Finance and Corporate Development and a key member of our team.

We looked at almost a dozen venture capital firms and received interest from several investors before narrowing the field down to just two. In the end, we went with the team that we felt would add the most value as board members, a firm that specializes in working closely with bootstrapped companies – Kennet Partners.

We selected Kennet because they knew how bootstrapped businesses operate, and they understood our motivations and desires for partnership and growth. We also trusted that they would spend time advising and helping us to scale the company, providing resources even beyond capital. These resources have been essential to our growth.

Post Investment

Hindsight is always 20/20, and in our case we are fortunate that our early vision has led to a great outcome. We have launched many new products and hired several key executives that would have been impossible had we not received outside capital. Moreover, bootstrapping enabled me to retain enough equity that even after the financing I was a major shareholder.

Since raising our Series A round, business has been on a steady growth curve. We have attracted some excellent board members and the executive team has tripled. Our new corporate leaders have made invaluable contributions toward the success of the company.

Perhaps the biggest post-investment change that I have witnessed has been the pace of change in the business. Given our growth objectives, we are in a perpetual state of hiring people to match demand. Perhaps the most rewarding change has been moving from the old model where I “led the charge” on most initiatives, to working with a great team who can independently manage themselves and collaboratively manage the company.

MedeFinance still faces challenges like any business. However, challenges aside, we are a profitable company with a large backlog and a future that predicts revenue growth continuing at the current rapid pace through next year and beyond. Take it from me, patience, hard work, and determination can pay off if you don’t lose your vision and you seize the opportunity to finance for growth when the time is right.

About James Quist

Jim Quist brings to MedeFinance over 30 years of successful entrepreneurship and business experience and 12 years dedicated to delivering value to the healthcare industry. Jim founded MedeFinance, Inc. in 2001 as a successor company to two Healthcare technology companies which Jim founded starting in 1994. Before that, Jim was Senior Vice President for Triton Container International, a premier lessor of maritime intermodal equipment with annual sales in excess of $200 million. During his tenure at Triton, Jim successfully developed operations and sales worldwide. Prior to Triton, Jim held a variety of executive level positions for ITEL Corp., a $1-billion lessor of transportation assets. Jim has also had operational responsibilities at Olympic Steamship Co. and Sea-Land Services. Jim attended the University of Washington and served in the U.S. Merchant Marine.

Have You Considered Bootstrapping Your Business For Success?
By Javier Rojas

What if I told you that some of the leading public companies got there without taking early venture capital funding?

Microsoft, Dell, CISCO, Oracle, and eBay all “bootstrapped.” It’s a well kept secret, and for good reason. These founders took a different path to profitability and ultimately IPO, and because of that also made a lot more money than they might have otherwise. Not only are they THE leaders in their respective fields, but they attained that leadership by bootstrapping until they were between $4 and $60 million in revenues. Many other industry leaders have followed suit, including Siebel Systems, Checkpoint Software, and Broadcom. In fact, dozens of companies have bootstrapped through the early years – forgoing paychecks for a higher stake in the company, focusing on customers and real revenues rather than market sizing and early valuations. For an early-stage business seeking venture capital, there are compelling reasons to also consider bootstrapping. It’s a smart way to build a great business.

How It Works

Bootstrapping happens when a company develops with little or no outside funding. The company opts to fund its primary development and growth through internal cash flow using real customer revenues. The founders and a restricted set of early employees often forgo paychecks for equity in the company. Eventually these companies operate at a breakeven or profitable performance level by necessity. Some companies formed from breakeven or cash-positive corporate divestitures share these same qualities.

Bootstrapped companies find ways to generate revenue and sustain growth through consulting engagements, non-recurring engineering (NRE) engagements, value-added reseller (VAR) agreements, customer retainer fees, divestitures or protected supplier contracts with a parent company for a defined period of time, the classic “moonlighting,” and even waived compensation. They learn to generate revenue that funds growth and expansion until reaching a level of growth where it no longer makes sense to go it alone.

Building Great Companies

While not conventional for every business, bootstrapping does build great companies. There are numerous justifications for bootstrapping, namely establishing a solid foundation for future growth, product development, expansion, and market leadership. When a company becomes self-sufficient, early customer focus becomes baked into the company’s DNA. Bootstrapped companies must listen to their customers and react to what they are saying. They must develop products the marketplace will purchase, so often market-test their products and involve their customers. Executives who aren’t fundraising and appealing to investors are able to focus more time on customers, managing growth and building the company at a time when customer acquisition is necessary for sustainability.

A second salient point is that capital allocation is more rational and less speculative among bootstrapped companies. Investments are more gradual, burn rates are more sustainable, time as a resource can be spread more evenly across the company and not impeded by external forces.

Finally, because there are fewer distractions, managers tend to be more focused and goals more closely aligned when a company bootstraps. Typically teams are smaller and have fewer projects in the hopper. And because bootstrapped companies cannot afford to simply throw money at a problem, they must focus on solving the real issue – from internal matters with employees, to external customer issues, to developmental product concerns.

Angel Capital Is Patient

Angel capital can play an important role in a company’s future, and companies often bootstrap with a little help from their “friends and family.” Typically this early capital represents a more patient investment in individuals who the investors know and trust rather than venture capital, which is third-party investment and carries a different level of accountability. Angel capital offers bootstrapped companies a financial resource without having to seek venture capital too early.

How Much Bootstrapping Is Enough

Raising money at the right time can transform a company’s growth rate, so it is important to know when to raise capital. Companies should watch for signals that they’ve outgrown bootstrapping:

Market growth rate is accelerating. If the market is growing faster than internal funding, you risk losing market share (and equity) by not sustaining growth.

Customers are buying products and sales are predictable. You can scale your sales team and/or channel effectively with the money you raise. As a rule of thumb, you should feel confident that you can predictably generate at least $2 in gross profit for every $1 in incurred sales and marketing expense. We recommend a $3:$1 ratio as an even safer barometer.

Complementary products or businesses become available. Is it time to expand your offerings through acquisition? Can you economically acquire new customers through a merger? If you are considering M&A activity and need money to finance your growth, it’s time to raise capital.

The current economic cycle favors growth. The current economic cycle appears favorable to increased technology investment and you see new growth areas on the horizon.

Your balance sheets need strengthening or you want to diversify risk. Co-mingled balance sheets can be a major challenge for bootstrapped businesses. A prudent decision for the company may be imprudent for the founder (for example, scaling sales at the expense of cash-flow). Selling some shares offers founders a way to diversify their own risk.

Where Do You Go From Here

If you’ve bootstrapped long enough for any of these events to occur, you’ve done a pretty good job steering your ship on a steady path, have maintained an equitable stake in your company, and can begin to look for the right partners to help you grow. The question you now may ask is, “What do I look for in an investor?”

Don’t simply look for an investor – look for a partner with vested equity interest to help you grow. If you have ambitions of rapid growth, what are the steps to getting there? The right partner will have experience walking the same path as you, and can help to secure your success. The reality is that many parts of your business and how you manage it will need to change internally and externally. The right partner should help you achieve this by offering substantive contributions – not just capital. Bottom line after coming this far is to find a partner – not just an investor.

Take Note: Bootstrapping Is Not For Everyone

Some startup businesses don’t have the luxury of bootstrapping. Their market may be immediate and, therefore, they don’t have three or four years to patiently grow the business. As well, their business may be capital-intensive, requiring funding from inception. In some cases, the founders simply can’t invest “sweat equity” in their business by forgoing pay for months and even years. Nevertheless, while bootstrapping doesn’t work for everyone, for the entrepreneur who has the time and wherewithal to grow their business through diligence and hard work, it can lead to a great business and even greater financial rewards. Bootstrapping for many is a sure path to success.

Author:

Javier Rojas is a managing director at Kennet Partners and leads its U.S. investment activities. He is currently on the board of Daptiv, IntelePeer, Go Internet Media, and Kapow Technologies. Prior to joining Kennet, he was a managing director of Broadview International and led their West Coast Software and Services practice. Javier specialized in advising high growth, early-stage companies on how to capitalize on emerging technology markets and partnering opportunities. He invested and/or advised on a number of successful companies and high value exits including Etek, Webex, Looksmart, Blue Mountain Arts, When.com and Rightworks. Previously, Javier was with Morgan Stanley. Earlier, he founded a software firm that developed products for capital markets interest rate and currency swap traders. He holds an MBA degree from The Harvard Business School and a BAS degree from Georgetown University.

So I had a conversation with a fellow blogger in the startup venture world who is currently trying to raise a cool young company some money and he said the following “Yeah we’ve gotten the “you guys should just raise angel money” several times. I’m like, “We’re only looking for $1-$3M, if we raise angel money what the fuck do we need you guys for then?”

This is a chain of feedback i’ve heard a lot recently, where funds telling entrepreneurs to raise angel money or bootstrap. It’s an interesting line of thought given, 9/10 times that was the original goal of the entrepreneur (who wants to give away stock when they can avoid it?) but the current angel market for the most part is dead. Why? Say someone was worth $10MM and was actively investing 5% of his net worth (what’s suggested for Angels) or $500,000. This person lost 50% of his net worth and is now worth $5MM. His allocation for new Angel Investments = $0. Now repeat times 100. People still have lots of cash but are much less lilkely Angels.

Also, in terms of Bootstrapping, I highly recommend it of course but given the markets, every entrepreneur should always be pitching for money even if they don’t need it to raise awareness and have dry powder. No one knows when or where we are going in this economy so it’s always better to have cash on hand. If you bootstrap too hard, you risk breaking your laces before your shoes whither.

I was recently asked why I started Shiny Door.  My response:

I was in a tough spot.  The startup I had been with did not make it.  I looked around for a position but I could not find a good fit.  I really wanted a job that I would love and that would make a difference in the world.  Through networking, the idea of teach a social networking class came about.  As I thought more about it and talked to others about it, I realized I could turn that idea into a business plan.

I love people.  I love figuring out web applications.  I understand the struggles of small/medium businesses and nonprofits.  I have found value from networking in general and online social networking in particular.  The pieces all seemed to fit together.

I love to talk social media but I recognize my specialty is relationship building.  I teach folks the importance of integrating online and offline networking.

I never could have launched Shiny Door without my network.  My network not only helped me find my initial clients but also helped me with my website, my logo, my curriculum, my business model, etc.  Thanks to my network (and a lot of hard work), I was able to launch Shiny Door within three weeks of inception and become profitable within eight weeks of inception.

As the only person developing Shiny Door, I very much needed (and do still need) feedback from my friends and colleagues.  My network provides the guidance and support that all startups require.

I have more receipts from coffee shops than any other place.  I don’t even drink coffee! The sustainability of Shiny Door is reliant upon me having a strong network.  To have a strong network, I must meet with online colleagues offline and interact with as many contacts as possible online.  I believe in quality over quantity.  Colleagues who know me and trust me are more likely to recommend me and/or provide guidance to me.

Shiny Door is the best social networking success story I could possible tell folks.  Because its my story.  What’s your story?

This is taken from an email conversation with Allan

“ahaha - you quoted me about your neurotic entrepreneurialism…

I think you have a good argument…

the tough part is finding good team members that have the discipline to bootstrap…

raising big money, more than you need is also a good strategy - but that too requires discipline to not waste it when capital “seems” abundant…

talent and the right spirit/cultural fit is still the hardest part of the puzzle…”

Basically what hes saying is that if you can bootstrap bootstrap.

1. Relax
2. Ask advice.
3. Learn to listen
4. Repeat

For us Serialists Entrepreneurs, the hardest problem is not coming up with great ideas, it’s not even in the execution, it’s in the maintenance of a nearly successful product. Success is not your sales, it’s not your revenues, it’s not your profits, it’s your sustainability. Anyone can create a one hit wonder and get lucky but can you leverage that into sustained success and thus real value. One time success is fleeting, true success is long term viability. Getting lucky and selling a crappy idea to an idiot company is not success - that is luck.

Case in point: MyBlogLog.com, Broadcast.com. Now Mark Cuban is a genius and made a fortune but that wasn’t a successful business. HDNET and 2929 Productions of his I think are more successful. They have a purpose, stick to it and both produce product ahead of the curve consistently. Broadcast.com was a great domain, a great salesforce, most people don’t realize he had something like 40 sales guys before he sold it to Yahoo, which was pretty dam big, especially for back then but a shitty shitty product. Yahoo bought it and basically pissed it away. If you can turn something that shouldn’t be successful into billions- sure you could be brilliant but you are lucky. Quality businesses with sustained naturally almost smooth earnings or at least the ability to have consistent BIG BANGS in earnings (like a movie studio) are successful.

How do you get to that point. Build a quality product and a quality team and there’s a dam good chance you’ll need to replace yourself as CEO the second it starts getting smooth because let’s face it you will get bored. So if you are a Serlialist almost keep in mind that the secret to being successful is being able to build something sustainable which probably means conquering your ADHD for 10 minutes.

Ah quit whining and buy more. He’ll return the favor later.