Bootstrap or VC?

I'll explain why I named my blog Lucky7 on a later post and why I started blogging in this new phase of my life, as an entrepreneur now dedicated to helping other entrepreneurs achieve their dreams. For now, I woke up around 4:30am today thinking about the roots of Bazaarvoice, what I want to teach entrepreneurs, and the debates I used to have with a group that I am indebted to - Bootstrap Austin, started by Bijoy Goswami. The original Bootstrap Austin was truly special and Bijoy did an amazing job bringing together some terrific entrepreneurs. It was there that I met Eric Simone (one of the first investors in Bazaarvoice) as well as Josh Baer (one of the first investors in Bazaarvoice through his team building our first solution and getting paid primarily in equity versus cash).

Below is a post I wrote on their Yahoo! Groups list on March 15, 2005. My first day at Bazaarvoice was just a few weeks later, on May 2, 2005, and we built a company from inception to IPO on around $12m of capital use (out of the $24m we raised) in 7 years, creating over a thousand jobs and impacting clients all over the world - starting the global social commerce movement and changing the face of commerce forever. This post addresses a topic that is still very prevalent in my hometown of Austin today - a never-ending debate about bootstrapping versus VC-backing. Unlike the Valley, Austin entrepreneurs are not as experienced in this area, and, unfortunately, it holds our city back from creating jobs and wealth more quickly - which ultimately drives everything, from philanthrophy to the achievement of your life dreams. As an entrepreneur, you make your own choices about how to raise capital and how ambitious you actually are. What I am dedicated to now is educating on the possibilities - and helping you decide on the path. But to be ignorant is to hold our city, my hometown, back. That is why I am stepping up to help those that want to be helped.

Written on March 15, 2005


I have been following this thread with a lot of interest. Ultimately, I find this to be a religious debate with no right answer - only your personal desires as an entrepreneur will guide you through this one. And I am encouraged by how much frank detail Gary shared, so I thought I would weigh in with my thoughts.

My parents were always bootstrappers. They were lifestyle entrepreneurs. They didn't want to report to anyone, and they were successful in that goal for 30+ years in business. They are retired now and did pretty well. They also raised two kids that turned out to be pretty successful. Growing up, I can remember how jealous my friends were of my parents having so much time to be parents instead of work all of the time.

As a result, I grew up wanting to be an entrepreneur. I took a very non-traditional path to get there, going into IT consulting for Andersen Consulting (now Accenture) then to Deloitte Consulting and ultimately to get my MBA at Wharton, which was ranked #1 at the time (for six years in a row by Business Week). I wrote all of my MBA essays about starting a business. I felt good about getting in and full of entrepreneurial energy.

When I got to Wharton, I almost immediately begin to apply my IT consulting skills to do independent consulting work. I grossed $350/hour on some projects and felt pretty good about it. I went to school and almost always worked through the evening until 2-3am in the morning. I proved to myself that I could bootstrap. I started four businesses at Wharton - all profitable and bootstrapped - and a fifth, which was Coremetrics and angel then VC funded.

One was my consulting firm. Those are easy to bootstrap. I farmed out work to Wharton undergrads that were in the Management of Technology program. I paid them $25/hour and billed them out at $50/hour or more. These were super-smart folks with average SAT scores of 1470 or more as Wharton was/is also rated #1 in undergrad. I made good money consulting - more in the summer than almost all of my classmates who took traditional jobs. I never raised money because I didn't need to. Profitable from day one. I felt in control of my destiny but it wasn't going to be a huge company.

The second was MBA ZoNe. It was an ad supported virtual community. Still in business today and run by my co-founder. I sold $5,000 of banner advertising within one week of launching the site. It was then profitable, but of course we weren't paying ourselves salaries (unlike my consulting gig). I decided I wasn't passionate about running an ad-supported business and sold my stake to my co-founder.

The third was InSite Solutions. It was a virtual classroom management application and an outgrowth of one of my consulting projects. I had MIT, Harvard, Chicago, and other top-tier schools interested in buying it and Wharton actually using the solution (and they kept it for four years). I decided not to do it, ultimately, because the market was too small when I ran the numbers. And, ultimately, I wasn't that passionate about it. Passion is so important, especially at the beginning.

The fourth was BodyMatrix, an online sports nutrition store. I built the eCommerce engine myself and self-funded the business. The margins were small given the competition (~10-20% depending on the item), but I grew the revenues at a pretty impressive clip and sold the business two years later.

The fifth business was Coremetrics. Coremetrics was a very different experience in a very large and competitive market. I almost immediately raised $2 million in angel funding. And, fast forward to today, I have raised $67 million total for the business with around $64 million from VCs. That is a ton of money. Too much, really. Would have never been that much if not for the crazy boom times where the mantra was get big fast, no matter the cost. But down the road it did lead to some great things. We service 350 retail clients today with 100 employees, 40 partners, and a solution that is rated #1 in our industry by Forrester Research and Jupiter Research. Of course, you could discount all of our execution by saying, "well, I could have easily done the same thing if I were funded with that much capital". And you may be right. I was young, got caught up in the hype, and have very much enjoyed the ride. The education has been far more valuable than what I learned at Wharton – and that isn't to say I don't value my MBA.

I'll spare you any more details, but would be happy to speak about my adventures in a future meeting. Coremetrics has been the biggest adventure of them all - I have been doing this for six years. A long time, but I have always been passionate about our idea and always wanted us to be #1 in our industry.

What have I learned from all of this? It is easy to get a business profitable without funding if it is service based and you personally have the skills to do the first few projects. It is also easy to get a business profitable if you are in a very niche market that is extraordinarily easy and cheap to launch, like a small retailer.

But if you want to swing for the fences with a huge business idea… it is almost impossible to do it without some funding. Why? Because it almost always requires capital to build a complex, difficult-to-copy solution. It isn't the early days of technology anymore. VCs didn't even exist prior to the 1970s and through the 1970s and 1980s it was almost all corporate VC money. Now VC capital is available by the tens of billions. And if you have a business that is going to be of any significant size, you will almost always need to raise money at some point. Because someone else that is more aggressive will launch into that industry with massive amounts of capital and almost always overtake you. You will be left with a niche business, which may be your goal and there is certainly nothing wrong with that. But you won't be #1… and if ever make it that far, it will be with a tremendous amount of luck.

In my humble opinion, the hat trick as an entrepreneur is to swing for the fences by launching a huge business idea, get it profitable early, and then get funding to accelerate your growth (if needed). I failed to do that with Coremetrics and I paid dearly for it with dilution. But I don't look at VCs or angel investors as evil. They are the capital enablers for big business ideas. And if your interests are aligned with them, you can both make a ton of money. It is prevalent all over the Valley. Most of the entrepreneurs driving the Bentleys (as was referenced in the article sent out in an earlier thread) grew their businesses fast with VC capital, got them public, and sold a ton of stock. It is much different here in Austin. Throughout Austin I have noticed there is a huge aversion to VCs. Almost too much so. Austin would be better off, economically, if more people were swinging for the fences.

A combination of the camel and rocket strategy is best. Holding your venture hostage to maintain 100% control may be the best way to protect your equity, but it certainly isn't going to propel you into market-leadership status. At the end of the day, you have to balance what is best for you personally with what is best for the business. Depending on how competitive and capital intensive your market is, the best thing you can do is be open to all options to fuel growth.

Now, if your goal is to own 100% always, be your own boss forever, and not worry about whether or not your company is going to be #1 at what it does, then my advice probably does not apply. And, as my parents showed me, it certainly leads to a very good quality of life (although there were a few rough years here and there). It all depends of your personal ambition. But to frown on others that raise money and think they are idiots for doing so is a religious argument, not a rational business argument. Depending on how capital intensive your business idea is and how much personal wealth you have to self-fund it, you may have to give up a little control and equity, bite the bullet, and raise some money from wealthier people that are looking to make 10x returns for themselves or their investors (as is the case for VCs).

BTW, I very much enjoy being a part of this group. Bijoy has put together an awesome group of people, and I have been learning some good lessons in our meetings (the speakers have been fantastic). I tell Bijoy that our speakers are better than many of the best presentations I attended while living in the Valley for four years. We are lucky to be part of this group during such a unique time in business history.

Best, Brett