Bootstrapping means building your business one
customer and contract at a time.
It’s the sweat equity an entrepreneur used to prove her
case before the days of the Internet bubble when getting venture
capital seemed to become so easy.
Now, with investors tightening their grips and doing even
more due diligence, bootstrapping is all but de rigueur again,
whether in place of or in preparation for outside funding. Even during the silly
season, however, some entrepreneurs foreswore the easy money and
chose the bootstrap route for their own reasons. They explained their experiences at this Netpreneur Coffee
& DoughNets meeting held April 26, 2001, joined by veteran
bootstrapper Mario Morino who explained that the process really
hasn’t changed very much at all.
made at Netpreneur events and recorded here reflect solely the views
of the speakers and have not been reviewed or researched for
accuracy or truthfulness. These statements in no way reflect the
opinions or beliefs of the Morino Institute, Netpreneur.org or any
of their affiliates, agents, officers or directors. The archive
pages are provided "as is" and your use is at your own
2002 Morino Institute. All rights reserved. Edited for length and
Eginton, Chairman, President and CEO, Marketswitch, Corp.
Payne, President and CEO, Cigital, Inc.
Revo-Cohen, Principal, SCENDIS
fran witzel: welcome
morning. I'm Fran
Witzel, Vice President of Morino Institute's Netpreneur.
Since it's “Take Our Daughters to Work Day,” I was
thinking about dressing up as Mr. Rogers . . . Can you say
“learning community for the new economy?”
Of course you can.
But I couldn't find my cardigan sweater, so I decided against
it. I was having a
little trouble with the shoes, too.
I do want to let you know, however, that we have some
activities set up outside the room for our special guests who are
here as part of “Take Our Daughters to Work Day.”
It's a supervised activity session for the children . . .and
for the bigger children, in case you get a little antsy or ADD, you
can join them.
I want to thank the volunteers who helped us with the event
today. We have Pete
Amstutz, Greg Bramham with Crabtree
+ Co., Laura Quirk with CyberCFO
and Mary Wilson with antic
so much. It's really a big help to have participants from the
community pitch in.
Whether or not your business is headed for venture funding,
we believe that you are going to benefit from the experiences and
the advice on bootstrapping from our panel, today, and from Mario
Morino, who will wrap up our discussion.
Moderating our session is our dear friend, Dr.
April Young, Senior Vice President and manager of Imperial
Bank's Mid-Atlantic Emerging Growth Division.
April is an influential leader in Washington's business
community and a trusted and sought-after advisor for startups.
I have had the pleasure of working with April on the
organizing board of MindShare and when she was the founding
Executive Director of the Potomac KnowledgeWay.
Please give a warm welcome to April.
april young: introduction
a pleasure to be here. As
many of you know, these Netpreneur events started some five years
ago. It was Mario's
vision that we needed a way to come together and begin to share
information. We thought the word “DoughNets” was really clever back
then; at least it's not an “e,” like eDoughNets, or we
would have to take that off now.
Netpreneur’s Mary McPherson, who you all know and love, put
together a fabulous program yesterday for the entrepreneurs who have
been selected to present their business plans at the upcoming Mid-Atlantic
Venture Association’s Capital
Connection conference in late May.
We call it a “boot camp,” and it's a day filled with¾mostly
bad news lately, unfortunately¾but
also lots of great tips about how to raise money.
As I sat there last night, I was thinking that there was a
time before venture capital became the lingua franca of the
entrepreneurial community in which people built companies from the
I remember in Mario's early talks about entrepreneurship how
he used to talk about not quitting your day job, about how hard it
was to raise money. When
I first started looking at this phenomenon, only one out of every
200 plans were getting funded, anyway.
Yes, it's extremely hard, but it's always been
The panelists today represent, in my mind, “the best of the
best” in people who either used their own energy to bootstrap all
the way, or to build a platform onto which they could eventually
attach venture capital to blow the doors out.
In all three cases they have created enormous value¾companies
that have terrific value propositions and have demonstrated again
and again how valuable the products and services they provide are to
the rest of the economy.
Eginton wasn't listening when I asked, “Who wants to go
first?” he gets to go first.
I first saw Marketswitch
a couple of years ago when Drew had raised some money and was
looking to raise some more, so it seems very appropriate, Drew, that
you should start this morning.
drew eginton: Ben Graham Entrepreneur
you, April. I would
just like to begin by noting that in the early days of Marketswitch¾when the Morino Institute was just being formed,
and its PR blitz was in full swing, I'm
sure that Mario was receiving hundreds of unsolicited inquiries
daily. Yet he took the time to respond to me via email in a
thoughtful note with recommendations on our initial funding.
It's that kind of graciousness that I think all of us should
attempt to emulate; no matter how busy we are or what the daily
stresses are. I
I'd like to briefly discuss Marketswitch and what's different
about the company. I believe that our approach to building a business is, in
fact, a proprietary advantage today.
It was a contrarian approach until roughly April 12, 2000. I think it's fair to say that two years ago I wouldn't have
been on this panel because we appeared to be driving the car
straight into the weeds, following a business development model much
more suited to the late 1980s, early 1990s.
That's because I'm obsolete as a CEO.
I'm 43 years old. I
started my first company in 1983 ,and that's all I knew how to do.
When we started this business, I spent about six months doing
research, then hired the first person in the first quarter of 1997.
I believed very much, at the time, that companies were
confusing the process of raising money with material business
success, and I believed the environment for emerging companies was
being corrupted by this. I
believed, also, that I would never realize the gains I wanted for
myself, my staff and my investors if I subscribed to that approach.
So I didn’t. I started it, and I got to make that decision.
It was difficult. In essence, I believe that there remain a few verities in the
software business that have assisted us and made it possible for us
to simultaneously build a business of sufficient value without a lot
of external capital participation, then utilize the smart capital of
the private equity marketplace in a way that has accelerated our
Inevitably, when people have these discussions, it all sounds
so neat and simple because we’re supposed to package it that way. But
the stresses and strains involved in doing this should not be
fact, one of the pathologies over the last five years was that
everybody wanted to be an entrepreneur, but nobody really knew what
it was going to cost. I
will spend a moment on what I would call the “dark side” of all
of this because I think there are human costs to this kind of
I believe the way to bootstrap a business intelligently is to
bring a financial economic
perspective to it. My
job as a technology entrepreneur is to find people for whom the
following realization is front
and center everyday¾we
can always get more money, but we cannot get more time.
Even now there is money everywhere for an appropriate,
significant, defensible idea, technology or set of services, but we
can't get more time.
In my career, I always focused on finding people who value
time more highly than money. I know that our job in this food chain is to do things faster
and better and smarter than big companies that are rolling in cash
and sucking wind when it comes to true innovation delivered on a
timely basis. So what
do we do? Well, we sell the discounted present value of a set of ideas
and technologies. Smart
people will make that trade. People
running companies will make that trade.
That was my first insight, I guess, in the construction of
The result was that we effectively spent two years
implementing a business model that was largely wrong.
I'm an experienced, successful CEO, and I have never failed.
I have never shot the lights out, but I have never failed.
I have done turnarounds of a couple of companies, one of
which had a billion dollar balance sheet.
I started this company filled with bright ideas, massive
amounts of energy and a seven-figure net worth.
I poured it all into this business because I was wrong.
We are always wrong. And
the only way to find out if you are right is to put something on the
line and go see customers and find out if they are going to give you
money for something.
So, that's what we did.
After our first product failed, we went out and secured very
significant pre-buy contracts over time with household name
companies. This gave us
the financial flexibility to incrementally build staff, to
incrementally build out a market presence and to incrementally build
financial and market credibility behind our particular point of
view. In our case, what
we built was the first scalable mathematical optimization solution
for what we called “the demand chain,” or the customer side of
the business. There
already is optimization firmly entrenched in the supply chain and
capital markets, field management applications and the business of
transportation, but nobody ever delivered a solution that was scaled
to the dimensionality of the marketing space, so that's what we did.
Everybody said it was impossible, but we solved the problem
– with no money, no fancy offices, no marketing, no PR, no VC’s,
nothing. If you look at
the assets of the average, busted dot-com, assume that we had none
of them. But we got it
Then, we had to go sell the discounted present value of that
idea to significant companies, and, if people didn't want to give us
a million dollars, I just went home. It was as simple as that, and we got off to a rocky start.
As I said, ur first product was not the right product, so I
said, “Okay, it's the wrong product.”
I have the latitude to do that because I didn't have
significant venture capital breathing down my neck saying, “We
wanted a 1,000% IRR and liquidity in 22 months, and why haven’t
you done that yet?”
After two years, we closed a small Series A round, and we
continued incrementally building the business.
After two years, I had 25 employees.
We continued to make mistakes.
I continued to define our sales model and our marketing
model. The net result
is that we have achieved something really important that is worth a
great deal of money. Today
we have customers that are household names, such as NCR, IBM, Siebel,
Accenture, CapOne, AT&T, AOL, Exchange, Chordiant, Axiom, NTT,
Hitachi and NEC. We have started three companies now and, as of December 31,
2000, we've consumed net
capital of $8 million and raised $23 million.
We have a financial optimization of technology which is
overarching. I believe
that our valuation today is somewhere in the low nine figures.
I think there are three characteristics, as I said, that
define a successful company, and it informs this discussion as I
think you will see.
Number one, you have to have proprietary technology that
other people can't build. If anything can be built in three months, it's not worth
doing; not at this stage. Maybe
it was during the Internet bubble, but that was a joke.
Reality is that anything that can be built in three months
will be built in three months by other people, and you are not going
to get a lot of money for a commodity product. Deep, proprietary
technology affords one financial leverage in discussion with
companies ten thousand times larger than a little company.
Second, I believe that every successful software company in
history has had high gross margins.
I don't believe that the pricing dynamics introduced during
the Internet bubble were sensible, so I just set out to build a
company with 90% gross margins because that's what smart people that
I knew did in the past, and they have companies worth billions of
dollars. Some people on
my board, and the industry in general, thought that this was stupid.
Third, every successful software company I ever saw was able
to sell to the smart money. They
sold horizontally as well as to end users, because sometimes there
are OEMs or channel partners who will advance funds in significant
amounts early on, and because they are smart about defining the next
stage of any particular market.
These are the three characteristics that I attempted to
instantiate in Marketswitch.
I also think that there are three conditions necessary to any
growth-stage company that is attempting to bootstrap itself in this
rather classical¾ ¾fashion.
Number one, we live in an environment now that's increasingly
transactional¾transactional in our relationships with investors,
board members and staff – maybe even our spouses.
I don't think that works.
I have 95% retention in my business. My general counsel has
worked with me for 10 years. My first board member is my best
friend. My CTO started working with me two companies ago, and so on.
Your staff are your partners.
Build relationships over time.
Complex problems are not solved by strangers.
If there is a truism that one should not quit one's day job
to launch a new venture, I would assert a variation that you should
start your new venture five years before you leave your day job.
Make sure that you have people you trust, respect and, in
fact, care about personally. If you are not willing to fly all night to London and go
to work with somebody when you’re both hung over, sleep deprived,
and irritable because your wife (or, ex-wife) just yelled at you for
being away, don't hire them. It
will never work.
The problems we are facing is that we have seen corruption
with the business development process.
I could never figure out how to make payroll by telling my
staff that we had “captured” a lot of “eyeballs,” so I tried to use financial metrics
that are very classical and that a banker might recognize. I assert that there is value in making payroll every month,
and that requires money, not eyeballs, press releases or Barney
deals. I couldn’t
not, literally, comprehend what some of the leading investors in the
world told me were the new rules of the game.
So, mostly, I ignored them.
We have to choose if we are going to be in a
relationship-driven or transaction-oriented business environment.
Silicon Valley is gone.
You can't build a company like Marketswitch in Silicon Valley
today because everybody changes jobs every four months.
They flip companies like hamburgers.
I see that ethic drifting into our world.
I suppose it will continue to drift in here.
I don't think it's healthy, so, if you start a business, I
suggest that you decide what your core value set is, recruit to that
model and stick to it. If you are a minority voice, it doesn’t matter if you are
right. Markets are
We have seen in the environment a confusion between what a
real customer is and what mere activity is that earns a
salesman a bonus. In
our business, despite actual, significant board pressure, we never
sold to companies my mom hadn't heard of.
We are starting to do a little bit of that now, but we try to
focus on companies that you all know about.
They are the ones with the money; they are the ones with the
need; they are the ones with effective senior management who know
what they are doing and will be there more than three months.
We focus on that. I
think that's important. Not
everybody has been doing that, as you see.
You have seen people who have gotten funding with 30
companies listed on their Web site that you never heard of and, in
fact, you won't hear of. We
care about working with companies that are historically important.
If you can’t figure out what is historically important,
don’t start a company.
I think that deal structures today are arcane, confusing and
punitive to entrepreneurs. Once again, I don't do venture capital deals that I cannot
explain to my mom¾
“400% liquidity f preference, plus thiss ratchet and that
preferred equity, blah blah blah” ¾these
kinds of things which conflate debt and equity characteristics are
deals we don't do. We sell capital in our business.
We care for our investors.
We are going to make them rich.
We like simple deal structures.
That's changing, particularly right now, because it's
no longer a seller’s market in private equity, but that is our
The last problem is one that I'm wrestling with in the
business today, and it's a big one. When you bootstrap a business,
if you are successful, it's very common for your technology to
grossly outstrip your business development and sales function.
I had no marketing whatsoever.
Marketing was Drew and a PowerPoint slide show until a year
ago. My marketing now
has caught up, my sales
force is on the build¾building
the sales force in the worst software sales market in 10 years.
Good timing, Drew.
I'm wrapping up. I'm
You must have eyes in the back of your head.
There is no yellow light.
You know, this is my life.
This is what I do. This is my identity. I
like to build things, make things out of nothing. I like working in cheap corrugated steel buildings doing
stuff that other people can't do.
Other guys want to work where there are marble toilets.
That’s not where I work.
Finally, there are personal costs to this that I think are
generally underestimated in the popular press.
I urge anybody doing this the first time to talk to somebody
who has done it, particularly when you take outside investment.
Nobody is going to be interested at all¾that
your son is mad at you because you didn't get to Little League, for
example, or anything else, okay?
They won’t care, and you are going to have to deal with it.
It's a very serious issue because on the one hand, if you
want mature management, it means that you don't have 30-year-old
CEOs. On the other
hand, a 43-year-old person like me has a more complicated life than
he did when he was 30. There
are personal costs to this that I believe should be properly
weighed. This isn't
“two years and I'm a millionaire.” That's not reality, in my judgment, not if you are going to
build a company this way. If
it does happen, it's luck. Make
sure that you are prepared to pay the price.
I assure you that you don’t know what that price is going
The other thing is that it's sometimes difficult building a
business like this with rigorous devotion to the classical
principles. You are
going to have to choose honor in your business performance over
friendship. Just as
business is going to consume elements of your personal life that you
didn't realize it would, it will consume some of your personal
relationships if you follow your utility function as a CEO and put
the best team on the field every single day, irrespective of
That's my quick overview on Marketswitch.
I'm a value investor of my
own time. I'm not a
momentum investor, I'm a value investor, a Ben Graham investor.
If you are a value investor, you are in the Warren Buffet
camp, you are not a day trader.
I find it to be rewarding today, and we are back in fashion.
Thank you all very much.
Thank you, Drew. There were some great nuggets there and I want to underline
three of them. One
thing that often surprises me is how long CEOs go along before
really evaluating what I call the “ka-ching” factor.
People come in and tell me about their business, but I can't
figure out how they are going to make money.
You know the old joke about the guy who loses money on every
transaction but he is going to make it up in volume?
I have heard this, honest.
The other thing that Drew talked about which I think we have
lost track of is the marketplace.
Kevin Burns of Lazard
Technology Partners said something yesterday about the only
thing worse than not having a market that's big enough is having one
that's too big so that you are lost in the ocean.
What I heard from Drew echoed something that Mark Walsh of VerticalNet
said, that a lot of the attention on the Web has been focused on the
buy side, which is to say helping people buy deodorant and
industrial supplies and lumber and whatever else cheaper.
That's a very limited market and there is only so far you can
cut margins. Marketswitch
went right to that. I
think we lost a deal with them to one of my competitors because my
competitor figured out and was absolutely convinced that Drew's
algorithm had IP value, which speaks to the third thing, which is
this issue of building something with a true barrier to entry.
It's very hard. The idea of the first mover advantage has now dropped in the
trash pile with a bunch of other things.
What mostly happens if you are the first movers is that you
get to lose a lot of money before anybody figures out whether it's
actually going to work or not.
Our next speaker is Jeff
Payne, one of my poster children for somebody who built a very
successful company, Cigital,
in a tough space just by mainstreaming offerings, going at it,
figuring out a value proposition, putting himself in his company and
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