|Arnold Kling Essays | Short Book Reviews | Favorite Links | Under the Radar | Home|
March 28, 2001
Now that the Internet Bubble is over, there is a renewed interest in the concept of bootstrapping a start-up. In general, bootstrapping means funding a new business with a minimum of outside investment.
I think that some people may have the wrong idea about bootstrapping. This essay tries to address some potential misconceptions.
Clearing up Potential Misconceptions
Bootstrapping and venture capital are two distinct business systems. The differences are not limited to the method of initial funding.
As a baseball fan, I remember watching pitchers like Gibson, McDowell, and Koufax throw pitches 4 to 6 inches above the belt for strikes. In recent years, those pitches would have been called balls.
This change in the strike zone makes baseball a different game today than it was in the 1960's. The pitching technique is different, because you cannot throw the high hard one any more. Hitters can take harder swings, particularly with two strikes. Aggressive baserunning is not as important. Starting pitchers are taken out on the basis of number of pitches thrown rather than number of runs allowed. Rosters include more pitchers. In short, even though the rules of baseball have not changed--it's still three outs to an inning, nine innings to a game, team with the most runs at the end wins--the game is played completely differently.
The differences between bootstrapping and venture financing are at least as profound as the differences between baseball played in the 1960's and baseball played in recent years. Business is not played the same way under the two systems.
If you hand a venture capitalist a business plan for creating an enterprise that will be worth $20 million in three years, the plan will be crumpled up and thrown straight into the trash can, regardless of any other features of the plan. The same thing with a plan for a $100 million business. The venture capital system simply cannot afford to process business ideas whose scope is less than breathtaking.
I submit that the venture capitalist credo that the Fundamental Economic Unit is $1 billion is not valid on the Internet. The Internet may create a handful of billion-dollar franchises (I think of eBay and Yahoo! as examples), but I believe that most of the franchise value on the Internet will come in smaller units.
If my assessment is correct, then most Internet businesses will have to be bootstrapped. We should not think of the decline in the availability of venture capital as a temporary phenomenon. If my view is correct, then a low supply of venture capital for Internet businesses is the natural state, one that should have prevailed all along.
In the fall of 2000, I heard Reggie Aggarwal, a well-known figure in the local entrepreneurial community, give a short talk. At the time, Aggarwal was just starting to put together Cvent, an online event planning system.
Aggarwal said that he was going to try to stay away from venture capital. This sounded like bootstrapping.
However, Aggarwal then went on to describe his hiring criteria. He was going to look for people with resumes that said Wharton or Kellogg or Sloan.
Those sorts of caste prejudices are not a good fit for bootstrapping. Bootstrappers have to be willing to mix with the untouchables. You have to find equivalent talent that may have less polish and lighter credentials.
Business Professor Amar N. Bhide, author of The Origin and Evolution of New Businesses, argues that bootstrapping entrepreneurs must learn to operate using second-tier resources. I found the same thing when I interviewed over two dozen Internet bootstrappers for my forthcoming book, Under the Radar.
The venture capital system certainly tolerates, if it does not actively encourage, a fair amount of ego-strutting. In the February 5, 2001 issue of Business Week Online, Derek Proudian of Ironweed Capital described his criteria for evaluating an entrepreneur.
It's when you meet some guy and, after half an hour, you decide the laws of physics have been suspended, the laws of economics are out the window, and this thing is really going to work.
If this is your skill set--making people swoon like that--then you should play the game the venture capitalist way. Instead, if your skill set is more grounded in rolling up your sleeves, selling to customers, and delivering products and services as promised, you have the personality of a bootstrapper.
In the venture capital system, the entrepreneur projects outward. You "pitch" your ideas and broadcast your vision.
In the bootstrap system, the entrepreneur demonstrates empathy. Your success depends on your ability to grasp and meet the needs of customers, employees, and partners. If you got into an elevator with a potential investor, instead of giving a "pitch" you would be more likely to try to find out something about the investor's needs and interests.
The bootstrapping entrepreneur does not care about getting on the cover of Fortune or Forbes. It is your business that matters, not your ego.
Meanwhile, all along, bootstrap-funded companies have been successful on the Internet. Some of them have competed directly against prominent venture-funded firms.
I doubt that bootstrappers ever will achieve the glamor that the VC-funded entrepreneurs enjoyed during the Internet Bubble. And, as always, many start-ups will fail. However, my guess is that by 2004 we will see that one of the fastest growing segments of American business was the bootstrapped start-up.