I’ve been a bootstrapper my entire career.
In business, “bootstrapping” means starting a business without external help or capital. These startups fund the development of their company through internal cash flow, and are very cautious with their expenses. They prove their business concept before doing any real marketing or advertising–or at least without a large expense burden. They hire slow (and fire fast). And they only make growth decisions based on how much revenue is currently coming through the door.
This is how I have approached every one of my companies, using as little money as possible to start a business (including my own).
However, bootstrapping isn’t necessarily the most popular (or flashy) way to begin a new venture. Bootstrapping is a slow process, and requires a significant amount of work on the part of the founder(s). What seems way more enticing is to look for an investor to raise a healthy chunk of cash, because that’s what “high-growth startups do.” In this case, founders would prefer to give up a portion of their company now, for capital in order to make it grow faster.
But the truth is, unless you’re trying to build the next Uber or Airbnb, you’ll probably be better off in the long run by bootstrapping or even acquiring debt–financially speaking.
I sold 55 percent of my first company, Wilmar, at a $50 million valuation.
In 1995, I was approached by Summit Partners, a prestigious private equity firm with billions of dollars under management. They told me they wanted to buy 55% of Wilmar, and presented it as an opportunity for me to “take some of my chips off the table.” I had building the company for almost a decade, and by every measure, this was my pay day.
What made the opportunity alluring was the fact that Summit Partners wasn’t one of our competitors trying to swallow us up. They genuinely wanted to invest in Wilmar, buy a majority ownership take, and then continue building the company together.
I accepted the offer, took the company public, and learned one of the most valuable lessons of my entire entrepreneurship career.
10 months later, the company was worth twice what I had originally sold it for. Had I continued to bootstrap, I would have had to find other ways to acquire capital for growth–for example, taking on debt. If I took on debt, I would be risking my current situation. But in giving up equity, I was able to take some of my chips off the table, while still being able to have plenty of capital to grow the company.
I still stand by my decision to bring on Summit as a value-add partner. Their investment (with the majority of my chips off the table) was the financial-engineering catalyst that fueled the company’s amazing growth rate. But 12 years later, Wilmar sold for $1.6 billion–and by then, I had no ownership left in the company.
In 2017, I repeated the decision by selling a minority equity stake in my current startup, LendingOne. I made the decision to sell part of the company not because we couldn’t fund our own growth, but because I believed well-chosen investors could add immeasurable value to the business from an advisory perspective.
As an entrepreneur, this will be one of the biggest decisions you’ll have make along your journey.
“If I can’t bootstrap, which is better? Debt or equity?”
The truth is, you have to go with the road you’re most comfortable with, but also the one you’re most confident delivering on. If you question your ability to execute, or if this is your first venture, I highly discourage you from acquiring debt.
Ask yourself, “How long will it take for me to be profitable?” Debt is great, as long as you’re confident this short-term loan will lead to a much longer term payoff. But acquiring debt for a business that hasn’t proven itself profitable yet is risky. Start small, and use debt to scale once you’ve crossed into profitability territory.
If you’re thinking about raising money, on the other hand, ask yourself, “What am I really trying to get out of this? Do I need money to prove my idea? Do I need money to grow? If I’m going to give away equity, who can I get to invest that will add value beyond just writing a check?”
Once your company is starting to generate real cash, and you find yourself paying out healthy sums to investors who got in early on (or if you sell the percentage you own versus your investors selling their shares), you’re going to look back and have wondered, “How much would I be making right now if I had bootstrapped?”