The Art and Science of Bootstrapping

1. The Art and Science of Bootstrapping Presented ByJaine Lucas, Executive DirectorInnovation and Entrepreneurship InstituteTemple University February, 2013

2. A Dream and $10,000: Slingshot SEO • 3,597% growth in three years; #58 on the Inc 500 list of fastest growing firms • “Looking back, it’s clear three major factors led to our exceptionally rapid growth in spite of our financial limitations, extremely limited staff and, basically, a zero-dollar marketing campaign. Those three factors were treating our customers right, focus and innovation” • Strategies included: • Unprofitable projects to prove the concept • Didn’t take a salary for the first year • Every penny reinvested into the company

3. INC Magazine’sTop Growth Businesses That Can be Bootstrapped* • Green & Sustainable Building Construction – 23% • Healthcare Consulting – 6% • Digital Forensics – 13.7% • Photography – 2% • Artificial Grass Turf Installation – 12.3% • IT Consulting – 3.2% • Relaxation Drinks – 24.8% • Translation Services – 2.8% • Environmental Consulting – 2.8% • Elderly & Disabled Services – 4.7% 5-Year Projected Annual Growth Rates * Data from independent research firm IBISWorld to pinpoint the best industries for bootstrapping a company right now.

4. START-UPS ARE TYPICALLY CASH POOR • The average small business start-up kicks off with $30K or less in capital (2009 Ewing Marion Kauffman Foundation) • Companies launched with $10K or less in initial capital had almost the same median growth rate as those with abundant capital (2002 Inc 500 Survey) • Like it or not, bootstrapping is an essential skill set for entrepreneurs!

5. WHAT THE HECK IS BOOTSTRAPPING? • Using a variety of techniques to strategically maximize the impact of the venture’s available cash • Using creativity and ingenuity to launch and grow a business with few available resources • Starting a business without an infusion of cash OR maximizing the impact of funding invested by the entrepreneur or others AND continuously optimizing cash flow and preserving capital • Living the mantra: Cash is King!

6. QUITE SIMPLY… • Bootstrapping means you scrape by until cash flow becomes positive through bartering, sharing, delayed spending and creatively exploiting opportunities

7. WHAT BOOTSTRAPPING ISN’T • Not just finding the cheapest way to get things done • Goals, objectives and milestones must be met • Never spending money – you’ll have to! • Behaving immorally or unethically • Not just for small or emerging businesses • Large corporations are bootstrap to preserve cpaital & maximize efficiency, cash flow and profitability • It’s not just something you do because you can’t get debt or equity funding

8. WHY DO FIRMS BOOTSTRAP? • Limited or no funding available • Banks don’t finance start-ups • Less than 0.038% of firms receive venture capital • $6.5 billion in 890 deals in 3Q of 2012, according to the MoneyTree™ Report from PricewaterhouseCoopers LLP and the National Venture Capital Association • Postpone or eliminate need for external funding • Avoids “dilution” maximizes % of ownership • Maintain control over venture • Can keep “special sauce” secret

9. WHY DO FIRMS BOOTSTRAP? • Build wealth and income • Cash flow is maximized, valuation too • Increased cash flow builds cash reserves faster • Minimize exposure to risk • Build cash reserves of 30 to 180 days • Guards against catastrophic events or economic downturns • Maximize operational efficiency • Utilize capital where it has the most impact

10. DISADVANTAGES OF BOOTSTRAPPING • Requires sacrifice and persistence – it is frequently uncomfortable and is often painful • Not all businesses can be equally bootstrapped • Pharma and medical device firms • Capital and labor intensive firms • Being outrun by well-financed competitor • Missing “window of opportunity” • Especially true for IT businesses • There is always something new coming from behind

11. SIMPLISTIC BREAKEVEN TOTAL FIXED COSTS UNIT PRICE – UNIT COST UNITS TO BREAKEVEN = • Business breaks even when operating profit from selling its products or services covers its overhead costs (wages and materials) • Lesson: minimize fix costs, contractual arrangements and other stuff you can’t get out of

12. BOOTSTRAPPING & BREAKING EVEN LESS FUNDING REQUIRED, EASIER CREDIT OVERHEAD (FIXED) EXPENSES LOWERED LESS TIME TO BREAK EVEN LOWER OPERATING COSTS LEADS TO HIGHER OPERATING MARGINS DRAW SALARY SOONER BENEFITS BOOTSTRAP MARKETING LEADS TO INCREASED SALES HIGHER PROFIT MARGINS & CASH FLOW INCREASE VALUATION

13. OVERHEAD EXPENSES • General and administrative costs • Support staff salary and benefits * • Rent, utilities, equipment, software, supplies, etc. • Professional services: legal and accounting • Marketing • Capital costs • Warehouses, machinery, equipment, technology, vehicles , etc. * Typically highest recurring cost

14. REDUCING GENERAL/ADMIN COSTS • Bootstrapping employee costs: • Entrepreneur multi-tasks & works long hours • Family and friends help at no cost • Shared admin supports • Using temps for high volume periods • Use unpaid interns and retirees, but beware of legal implications • Bring on seasoned talent for equity • Stretch employees to max, use perks & incentives

15. REDUCING GENERAL/ADMIN COSTS • Office space • Incubation space, shared office space, rent unused space from downsized company, work from home • Utilities: Go Green • Unplug electrical/electronic devices when not in use, maintain reasonable office temps, reduce water consumption, turn off lights • Opt for free software or free trials • Purchase used computers and furniture • Volume purchase w/other businesses

16. REDUCING GENERAL/ADMIN COSTS • Reducing legal costs (average is $4-6K) • Free legal clinics: Temple Small Business Development Center and many legal trade organizations • Filing your own incorporation paperwork • Writing your own contracts • Templating and modifying available documents (legalzoom.com) • Friends and family • Pay for the critical stuff only • Get referrals, estimates, rates, etc.

17. REDUCING GENERAL/ADMIN COSTS • Reducing accounting costs • Accounting software packages • Retired bookkeepers • Contract unemployed accountants • Keep meticulous records, be prepared • Hire MBA student or accounting grad student • Friends and family • Get referrals and estimates • Barter if possible

18. REDUCING OPERATING COSTS • Operating costs = expenses to produce products or provide services • Goal is to reduce cost per unit • Inventory and/or process management tools to increase efficiency (Six Sigma) • Leverage competitor or similar business “best practices” • R&R: Read and research • Poll employees for cost cutting ideas • Use independent contractors

19. REDUCING OPERATING COSTS • Outsourcing can be “smart operating”: • Reduce space and staff costs • Manufacturing overseas can be cheaper • Can eliminate/reduce capital costs • Frees up time to provide additional value to customers • Eliminates inventory costs • Can reduce liability • Leverages economies of scale • Increase speed to market • Can improve or decrease quality

20. BOOTSTRAPPED MARKETING • Attracting customers and driving sales is key to growth and sustainability • Marketing is the process that gets it done • Bootstrap marketing = entrepreneurial marketing: maximize bang for buck • Easier today than ever before thanks to the web and social media • Think long and hard about messaging and media – both have to be spot on • Don’t “build it and hope they will come.”

21. LAY THE FOUNDATION FIRST • Establish a brand with a consistent voice, personality, core value and tenets • Understand market and industry trends • Understand the customer • What matters most? • Where do they go for information? • Don’t try to sell the kitchen sink: focus on one or two key product/service benefits • Segment and target the market properly • Can you market to it efficiently? • Where is the competition?

22. SHOE-STRING MARKETING People are watching 4 billion videos a day on YouTube and uploading 60 hours of video very minute. 4 billion hours are watched monthly! • Word of mouth • Networking • Public speaking • Customer referral programs • Buzz marketing campaigns • Post customer testimonials online • Viral marketing – WOM spread via internet • YouTube • Blogs In 2012, over 31 million bloggers in the US alone, and over 42 million blog sites.

23. SHOE-STRING MARKETING • Publicity/Public Relations • Has “third party” credibility • Minimal cost • NEW is NEWS worthy • Press releases – include “hook” and make it interesting, intriguing and thought provoking • Know the media, establish relationships • Create innovative events

24. SHOE-STRING MARKETING • Social Media • Builds online communities • Provides a variety of ways to dialog, connect, message, comment and share content • Allows entrepreneur to build awareness of business and products, and maintain a relationship

25. ACCORDING TO CHATTERBLAST MEDIA FIVE WAYS SOCIAL MEDIA CAN BE USED FOR NEW BUSINESSES • To create brand awareness • As an online reputation management tool • Learning, research and competitive recon • For recruiting and partnering • As a lead generation tool to find potential business prospects

26. BOOTSTRAP MARKETING ODDS & ENDS • Great design sells – an impactful, strategic and eye catching logo is essential • Websites are “cost of business” and an indication of credibility • Online directories and classified listings • Craig’s List – it’s free! • Brochures, flyers, business cards • Street teams • Newsletters • Trade shows – but watch for hidden costs and select carefully

27. MANAGING CASH • Beware: A business can be profitable but have negative cash flow • The #1 cause of start-up failure is death Death = Cash Depleted • Create systems to enter and track the inflows and outflows of cash • Bill promptly, ask for deposits in advance • Review customer accounts receivable – look at incentives for faster payments • Anticipate price increases, shortages, loss of customers, etc and plan ahead

28. ALTERNATE CAPITAL – Use it! INTELLECTUAL CAPITAL + RELATIONSHIP CAPITAL = FINANCIAL CAPITAL • Intellectual Capital • Be smart, be intelligent • Study, go to seminars, read and learn • Add value • Relationship Capital • Build relationships and help people • “Cash in” your relationship capital only when you need it most

29. Seven Bootstrapping Tips from Mashable • Test the market • Assess potential interest in the product & validate model – justify the firm! • Keep the team & salaries small; use incentives and equity as compensation • Interns – a “win win” • Marketing – Social media; MediaSync and Help a Reporter; • Outsourcing: Staff and projects • Social Networks: connect with customers and prospects & become the expert

30. FINAL WORDS • You must have a business plan • Recognize the difference between “wants” and “needs” • Don’t bootstrap to the point of strangling growth • Eliminate all unnecessary costs, minimize necessary ones and maximize impact of available cash • Look for additional revenue streams to increase reaching “breakeven” and fund organically • Don’t quit your day job • Get out of debt before launching a new enterprise • Treat every dollar like it was your own personal money

31. Go Forth and Bootstrap!