Does Bootstrapping work for hard tech? My story.

Everywhere you look in the tech press, companies and entrepreneurs are seeking investment. In fact, many seem to believe that investment equals success, and if they fail at that, then they’ve failed.

Often, during my initial meetings with entrepreneurs, after they’ve finished telling me all about their idea(s), they conclude by asking, so do you know any investors I can contact?

I’m here to point you to another way. Bootstrapping.

Bootstrapping does not mean that you drain your savings to build a company, or wear your shoes out chasing investors. Instead, it refers to building your company using money from CUSTOMERS.

I was in a hard tech company that was bootstrapped from 0 to $120M—customer funded all the way.

The main founder often talked of putting $4,000 on his credit card in the first month of the company’s life, and paying it off from revenue before it came due. He was very proud of that.

I joined as the fifth employee and stayed until there were 900+.

In the early days, the company did contract or work-for-hire projects to pay the bills, while taking full advantage of government programs that funded R&D, investment tax credits, and the like.

As soon as possible, the company began to develop its own products. In the beginning, the products were simple. But they got more complex as time passed.

As it turned out, we built several products that enabled the first cable modem networks in the late 1990’s. We became an OEM supplier to Cisco, and helped them grow their Cable BU from $0 to $big.  At one point, our CFO liked to tell investors that 60% of the traffic on the Internet flowed through our gear.

By our peak, we had become adept at delivering product in the telecom, cable, government, and consumer sectors…to a range of demanding customers from small to Cisco to government.

Our products included RF (0–48 GHz), digital, analog, MPEG, FPGA, network processing, Ethernet/GbE, Fiber, CATV, software…I could go on and on. All hard tech through and through. It was often the case where we didn’t know if we could do what we said we would do. But we stuck to it and succeeded more often than not.

Midway through the ride, there was an IPO for various reasons…but I digress.

What were the keys to bootstrapping success?

  1. The CEO watched the cash balance like a hawk. He looked at it daily, if not more often. He always said, business is not complicated. You just have to keep more cash coming in than is going out.
  1. The CEO doggedly pursued POs, and often received them even before the products were built and/or finished.
  1. The CEO refused to chase rainbows. A PO or other commitment from customers was (often) required before real money was spent on product development.
  1. The CEO stayed close to customers, and never let go. He still had in his Rolodex people he had met years before.  And, when times were lean, he’d call them up and ask for more business, no matter how much time had passed.
  1. The company really understood its core competence…the black magic of RF all the way up to 48 GHz. Later, we built a lot of products based on IP, Ethernet, and MPEG, but they were always wrapped around our core RF expertise.
  1. The company retained its IP. Sometimes, the company took NRE to customize an existing product or design a new product to meet specific customer needs.But, the NRE only gave the customer ownership of the customizations, and rarely if ever the core IP.
  1. The sales strategy was to go where the key prospects were going to be. In our case, this meant attending a lot of tradeshows. By constantly being visible and present and by doing good solid work, our reputation began to spread and one thing led to another.
  1. Luck and timing. As I mentioned, we built some the key products that enabled the cable modem revolution. We didn’t know cable modems were going to happen just then. But they did, and we grew. Sometime later, we build other products to support Verizon’s multi-billion $$ FTTH rollout, and we grew some more. I could go on.

Bootstrapping is a viable option.

Does this give you some ideas?

*I use ‘hard tech’ to mean a company where there is doubt that the technology can be built at all. It often involves some mashup of software, firmware, hardware, and the like. But when physics and the laws of nature get involved, that’s ‘hard science’.

What to do if you have an idea for a startup, but there’s already a well funded startup with a related idea

Someone asked me: I have an idea for a startup, but there’s already a well funded startup with a related idea, what should I do?

There appears to be a belief that if a company is “well-funded” then they must be successful, and you won’t be.

But it just isn’t true!

Ideas are worthless. The value is in the execution. Execute well and you can win. Regardless of the competition.

Always remember that no amount of VC/Angel/Strategic/F&F/pocket/inheritance money can guarantee the quality of the execution. That’s up to YOU and YOUR TEAM.

Don’t believe me? Take some time to read through these articles:

108 Of The Biggest, Costliest Startup Failures Of All Time

204 Startup Failure Post-Mortems

And then DO IT.

Alibaba, Jack Ma, and Me

The story of Alibaba as told by Jack Ma is amazing!

It was in Seattle where Ma said his friend encouraged him to try searching the Internet for the first time. Initially, he hesitated since he knew that computers were expensive, and if he broke it, he wouldn’t be able to afford to replace it.

“He said ‘just search it,’ so I searched the first word ‘beer,” he said. “I don’t know why, but maybe because it was easy to spell? I see beers from Germany, U.S.A. and Japan, but I don’t see any from China, so I searched for the second word ‘China,’ and there was nothing.”

So, he recalls that they made a small, “ugly-looking” page, and three hours after launching it, “I got a phone call from my friend who said, “Jack, you have five emails, and I said ‘What is email?”

Based on the number of responses, he said, “This is something interesting, so we should do it.”

Starting from this “ugly-looking” page, the business grew into Alibaba where Jack Ma recently hosted the largest IPO ever at $25 billion.

Why didn’t I start it?

I think there is one big reason … I don’t REALLY know how to notice what’s not there!

When I type some words into a search engine and get no results, I type different words until I get results.  And then I settle for whatever I eventually find.

Jack Ma had no preconceptions of what was normal or possible, or even what he was doing. He typed some words into the search engine, got no results, noticed a gap, and then he and his friend built something to fill it.  Even if it was ugly.

He created a site to give him (and others like him) the results he wanted … not the ones he had to settle for.

I can learn a lot from that approach.

So can you.

Is taking “dumb money” ever a smart idea?

I found myself talking about “dumb money” today with an entrepreneurial friend. In our conversation, “dumb money” referred to money that came with hidden harm.

We could each tell stories of companies that were seriously affected as a result of taking “dumb money”. This one blew up (think detonation, not acceleration). That one imploded (think black hole). Another one sold for pennies (what’s the ROI on that?). And on and on.

As this article observed, entrepreneurs tie themselves with alarming frequency to investors who are actively harmful to their company. Just as the body can have a malignant tumour, companies can have malignant lines on their cap table. Start-up investors typically have tremendous power over their portfolio companies, generally over a period of many years.

So, how should an aspiring entrepreneur avoid the pitfalls of “dumb money”?

They need to know what to look for … (taken from here and here and here)

  • Smart Money is money plus the promise of help that’s worth paying for. This type of money is not damaging to the entrepreneur.
  • Mostly Money is mostly money. This can be called benign money and is not damaging to the entrepreneur.
  • Dumb Money is money plus hidden harm. This can be referred to as Malignant Money or Cancerous money. This type of money is certainly damaging to the entrepreneur

Then they need to do their due diligence on any potential investor. Don’t assume any investor won’t be harmful. Do the diligence to prove otherwise:

  • Do you trust him?
  • Is he going to waste your time?
  • Will he provide his pro rata in the next round? (Not so important for seed funds and angels.)
  • Are his financing plans aligned with yours?
  • Are his hopes for top line growth aligned with yours?
  • Will he support you if the company is going sideways?
  • Does he have impeccable references?
  • Does he want control?
  • When it comes time to sell the company, will he let you?
  • Will he let you expand the option pool to hire someone great?
  • Does he want to replace you as CEO?
  • Will he try to merge you with a dying company from his portfolio?
  • Do you want to marry him for the life of the company?
  • Would he make the wrong board member?
  • Is he committed to investing in startups and does he have a reputation to protect in the startup world?
  • et cetera…

With all that said, I really like this advice from Venture Hacks.

Whether you raise Smart Money or Mostly Money, you should raise money as if your investors were Mostly Money. In other words, unbundle money and value-add.  Get money on the best terms possible and get value-add on the best terms possible.

You can buy advice and introductions for 1/10th of the price that most investors charge. An investor will buy 15–30% of your company. An advisor or independent director will require 0.25–2.5% of your company with a vesting schedule of 2–4 years.

Happy Hunting!

3 Business Lessons from the 1964 Launch of Chrysler’s 426 Hemi

Fifty years ago this past March (2014), Richard Petty went 174.639 mph in his ’64 Plymouth–his 426 Hemi-powered ’64 Plymouth, and NASCAR would never be the same again. Chrysler’s new engine took the top three finishes at the 1964 Daytona 500, the very first motorsport event it entered and pandemonium ensued.

How did underdog Chrysler build this amazing engine and win a race that General Motors (with all its money) could not, and then get gear heads to talk about it for 5 decades?

It’s because Chrysler made the Hemi recognizable, available, and relatable.

1. It was recognizable -> It was painted Bright Hemi Orange

2. It was available –> There were enough engines in the wild that you’d know somebody who had one. But not so many that they became belly-button boring.

3. It was relatable -> because it had a prominent wide valve cover with spark plugs in the middle–to ensure everyone knew what they were looking at.

Ask a car guy to explain the advantage of the Hemi head, however, and most won’t be able to do so–but it turns out that doesn’t actually matter. “It’s a Hemi.”

Is your own product recognizable, available, and relatable? If so, Great! If not, then you have some work to do!

These lessons come from a couple of great columns in a recent issue of Hot Rod Magazine by Thom Taylor and David Kennedy.

Beautiful Lies in the Tech Industry

I heard “The Lies That I Believe” by Thornley the other day. The chorus went like this:

The lies that I believe are simple
The lies that I believe are true
The lies that I believe are so beautiful
The lies that I believe are true

This got me thinking about some of the beautiful lies I hear everyday in the tech industry. They are simple and beautiful, and so many want them to be true.

Lie #1: All you need is an App!

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An app is just a case of Red Bull, a small team, and a long weekend away!

After all, Yo was an incredibly simple app created in 8 hours that later received $1,000,000+ in investment! I ask myself, why can’t I do the same?

The reality is that competition is fierce! When I last checked, there are 1,300,000+ apps on each of the Android and iOS app stores, and most apps make NOTHING!

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Lie #2: You will experience Rocket Ship Growth!

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The reality is that your path will more likely be shallow and rocky,

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if you are growing at all.

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Lie #3: You will make lots of Money!

After all, if these companies did it, why can’t I!

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The reality is that most startups fail, and others just limp along. Here are some of the top reasons startups fail based on an analysis of 101 Startup Post Mortems by CBInsights:

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What beautiful lies do YOU believe?

Great Interview Questions

I have been a team member, a team leader, a department leader overseeing teams, and a CEO building companies of teams. All of this team building has required me to conduct a lot of interviews, and to think long and hard about what to ask.

I have spent quite a bit of time searching Google or Bing to gain insight into great questions, but this kind of impersonal searching doesn’t compare with talking with an expert face to face.

A few weeks back, I had the opportunity to discuss this subject with someone that used to work for Jimmy Pattison.

(Aside: For those who are unfamiliar with Jimmy Pattison, he lives in Vancouver BC Canada. Pattison’s business holdings all began with a single Pontiac Buick car dealership in 1961. It grew from that point to now, and had sales of more than $7.5 billion in 2012 — the fruit of more than 35,000 employees working at 470 locations across the world.)

My counterpart at coffee said that Jimmy Pattison is most concerned with getting the answers to 5 specific questions. Only after he has those answers does he move on to the resume and other details.

These are the questions:

1. Is the candidate intelligent?
2. Is the candidate hard-working?
3. Is the candidate honest?
4. Is the candidate able to work as a team?
5. Is the candidate able to communicate?

When I first heard these questions, I thought they were very insightful and I have been thinking about them ever since. I know that I will certainly leverage these questions in my next interview, and I hope you will too.

Thanks for reading!

Having the Best People Won’t Give You the Best Team.

I came across an excellent article written by T. Boone Pickens called, “Having the Best People Won’t Give You the Best Team”. I agree whole heartedly when the article states that, “It is not about bring the best people on board. It’s about bringing the right people on board.”

The key question to consider is best at what? It is not enough to make teams out of people who are all best at something because IMHO everyone is best at something. In order to create a strong team, all members need to be best at something that is related to the goal. At the same time, not all members should be best at the same something. Sound confusing?

I believe teams should be spiky. Not spiky in the gladiator sense, but spiky in the sense that everyone is good at some things and less good at others. To build a strong team, the skills and weaknesses of everyone on the team need to fit together in an interlocking fashion.

To put it another way, the team needs to be unified yet diverse yet equal. Overemphasis on any 1 or 2 of these elements creates dysfunction. It is only when all 3 are balanced, that the true power of the team is released.

So, what is the problem with creating business teams? I think that the root problem is goal setting and execution. We do not really set clear goals and make workable plans to match. The goal for teams of firefighters is clear – put out the fire! The goal for teams of police is clear – catch the bad guy! The same is true in hockey – put the puck in the net!

What is the goal in business? It depends. That means the makeup of the best team depends as well. But I don’t think we properly account for that. After all, as Lewis Carroll (Alice in Wonderland) said, if you don’t know where you are going, any road will get you there.