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bootstrapping your business

Page five of five | Previous page

mario morino: at what level do you want to play?

First of all, thanks to everyone for being here this morning, especially the panel.  I also want to take a minute to thank Mary, Fran, Mitch, Ben, Cathlin and the whole Netpreneur team; as well as to thank you for the support we get from the people who volunteer to help and the partners we work with.  Today, in particular, I want to thank the parents who brought their children.  I think it's phenomenal, and I brought two of mine.  They are the love of my life back there, and there is another one in Cleveland who is very jealous right now, my son, but he will get through that in time.  I think it's great to let the kids see what we are doing.

          That's one of the problems of starting a business, by the way.  I have kids now because I could never have done it before.

          I'm going to cut right to the chase.  It's tough. It's very difficult to be in that hot kitchen and have anything else in your life.  People don't like to hear that, but that's life and you have to decide what level you want to play at.

          Talk about years of bootstrapping, I started before 1970, so I go back a long time in this respect.  Do you know what?  The rules are the same and there is not a lot of difference today.  I see people here that we went through a lot with more than 20 or 30 years ago, and we’ve seen the same patterns start to come up again.  Ironically, if we’ve lived through a “fantasy land” recently, we’ve come back to the basics now.

          This session was very refreshing for me.  Bootstrapping is very much back in vogue.  There is no question about it, and probably more so than in the last 10 years.

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history repeats itself

          If you look at it, there have been three phases.  The first I'm going to characterize as running roughly from 1970¾which I know for some of you is a tough date to comprehend¾to 1985.  This was a period of bootstrapping at remarkable levels, especially since people were pioneering a lot of new ideas.  Providers and clients existed, but the markets were much smaller and lacked the maturity that came in the 1980s.  I call it the Pre-Consolidation Era in the software and services industry when you had literally thousands of small businesses trying to sell things.

          From 1986 to 1993, the software industry went Big Time.  One phenomenon that triggered it was a transaction.  Computer Associates bought a company called UCCEL and forever changed the landscape of what distribution meant in the software industry, basically putting into play what Merrill Lynch’s Steve McClelland had predicted in 1983 about consolidation in the industry.  The other phenomenon that triggered it was that the glass house was breaking.  The “glass house” was what we called the corporate IT departments and data centers which had the mainframes and control of information technology, and had been the mainstay of IBM for years.  The Oracles, Microsofts and Novells penetrated the enterprise through the business units and line managers, breaking down the central IT control and changing the role of the glass house.  It wasn't obvious yet to the IT people or to the IT providers that this had happened as profoundly as we would come to understand, but, clearly, these two events caused the industry to change and mature.  All of a sudden, the software and services business had to be about more than technology, with marketing and distribution taking the lead to business success.

          Next, we went through the Fantasy Land of 1994 to 2000.  The interesting thing about the Fantasy Land was that the pendulum swung toward the ridiculous¾and there was a bunch of stuff that was ridiculous.  Momentum investing was ridiculous.  Valuations were ridiculous.  Many business plans were ridiculous.  We all were a part of it and saw them first hand.  We saw them and read them.

          On the other hand, I will say that we have the makings of the most significant technological transformation that we have seen since the innovation of computers in the 1950s and 1960s.  No matter how you fathom it, the Internet, the Web and wireless have introduced tremendous paradigm issues and changes.  We are only beginning to understand how they are going to transform businesses.  Marketswitch is an example, or Tradeum and pricing models.  The changes are phenomenal.  The limitation is the vision of the client to understand and apply this technology to their needs.  That's not meant to be a negative comment; it just takes markets longer to assimilate these kind of transformational changes.

          So, the framework for growth was established, yet we let the Fantasy Land get away from us.  I think what will happen now, from 2001 onward¾at least until history repeats itself again (and it will)¾is that we are back to where we have great fundamentals, regardless of how the economy looks.  If you take a longer view of it, there are great market fundamentals.

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what we forgot

We lost sight of the importance of proprietary technologies in gaining true strategic advantage.  I couldn't agree more with Drew's comment on that.  People come in and you ask, “How long did it take to you develop this?”  They say three months and you say to yourself, “Is this person crazy?  Can't they put two and two together?”  If you did it in three months, don't you think somebody else can do it in three months, six months at worst, and clean your clock?  That’s as opposed to taking the time to develop something substantial by someone who has a background of 15 years in your space and such a compelling understanding of it that it would take any other 20 people three years to get to the same point.  Those are market barriers.

          We lost sight of all that.  We got so carried away with “time to market.”  Timing in the market is important, by the way, if you are in a learning, adaptive organization.  In fact, I'll argue that one of the big advantages of a bootstrap operation is that you get into the market quickly.  You get a client fast and you begin to learn in real time, as opposed to sitting back and pontificating about your business plan and how the market is going to respond.  A bootstrapper has to find things out really fast.

          I look at those three phases and I think that the business fundamentals are great for you.  I would argue that any business today that has sound economics and a good model has no trouble getting money.  You may hate to hear this.  We said it when we started Netpreneur years ago, and that people would hate it.  Money always finds good companies; I guarantee you that.  Therefore, if you haven't got any money, ask the hard questions of yourself first, not of the venture community just yet.  It's a hard comment, but it's a real one, and that's why it's held since 1970.  If you really have something, the money will find you.

          I said that I found the panelists refreshing, and I really mean that.  As an industry, we did get away from ourselves and we forgot fundamentals too much, but we don't want to forget how exciting what we have in front of us really is.  The great entrepreneur sees change and then capitalizes on that change.  We have some remarkable change, and the opportunity is very good for those of you who can see it.

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a shorts story

Lynne mentioned that they started with $3,000.  We started with $1,200.  The only reason we had $1,200 is that we needed $1,200 to make the books legal.  We actually had no cash, but we had a contract.  We went out the door with a contract, so somebody was paying our bills from day one.

          I'm sure that many of you have lived through something like this, but you just have to picture this scene in 1976 or 1977.  Fran Witzel had just come on board what was Morino Associates and we were selling our first product commercially.

          When we went out to sell in the field, let me tell you that we were buttoned-down and looking good.  Our literature was in place and we looked like a real company.  When we got back, however, we were sitting in my basement in a home on North 29th Street in Arlington, a classic World War II, two-bedroom bungalow.  The basement was painted in psychedelic colors.  Whatever we could find that we could get for free was on the floor or against the walls.  It was summer and the air conditioning didn't work so the two of us would be sitting only in our shorts¾the last layer, not even Bermuda shorts¾with fans on us as we tried to sell a product over the telephone. The “production department” was next to us¾they were shelves with the manuals we would get up and go assemble if the order came in or if we got the lead.

          While you were pitching, though, you had to make the prospect think they were talking to IBM; you had to project an image that was greater than reality¾never deceiving, but being very careful to know your capacity to deliver.  The reality is, if you are truly bootstrapping, you find every nickel and dime along the floor to get you there.  That context is very real.

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living on the edge

I'll argue that bootstrapping is the very edge of entrepreneurship.  Bootstrappers may not reach the success of Bill Gates or Larry Ellison, but they are probably the fabric of the American economy today.  Whether you are pushing the $10 million business, the $1 million business or the $50 million business, at the end of the day, the strongest entrepreneur probably has bootstrapped.  Why?  Because you live it every minute of your day.

          When I invest, that's exactly the kind of spirit I like to invest in.  I hated it when a person looking for early funding came in and discussed their exit strategy in our first meeting.  To me, it was an oxymoron.  I couldn't say it any stronger than that.  If somebody is coming in and the first thing out of the box is to tell me how they are going to get out of the business, do you think I'm going to invest in that?  Shoot me now and save me the pain.  This was what that fantasy was about.

          Bootstrappers, by definition, are advanced workaholics.  What I mean by this is that you have to picture yourselves as those two people trying to create the image of a large business while you are really in the basement. I'll describe a very typical day.  It starts with you in Chicago doing a seminar in the morning, then making three sales calls in the afternoon¾not one or two, but three¾then flying home that evening where you are going to go back into the office and test the product all night because you still have development work going on.

          You have just lived in two worlds.  You have been selling all afternoon and at night you are coding.  You go from suit to jeans and you know what?  These 24-hour cycles don't stop.  The only time they stop is when you go out to blow off steam.  It's one of the problems, and it's a fact of life, but I do believe that the issue of being an advanced workaholic is an absolutely essential ingredient to bootstrapping.  The odds against you are just so strong, and only your will can overcome them.

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the great barrier niche

The focus on proprietary systems came up several times today, and I can't emphasize it enough.  Whether it is through technology or methodology, you have to have something that is sustainable, keeps competition away and gives you a true strategic advantage when you go to the marketplace.  Where that becomes problematic for the bootstrapper is when, like the earlier questioner mentioned, you’re in a niche market and you’re not alone.  I believe that niche markets make for great companies.  I think niche markets are the way you start; and I think that grand visions¾from an execution standpoint¾are the way you go down the drain.

          A great company knows a vision, but what they really know is how they are coming out of the box in the next year or two and what they are going to build.  The great company is going to listen to a marketplace that tells them how to evolve once they are in the field.  Do you think Bill Gates saw Microsoft the way it is today?  Do you think Larry Ellison saw Oracle the way it is today?  Did Jim Goodnight see SAS the way it is today?  No, but they were brilliant about getting into the market, then reacting, adapting and growing their businesses based on what they learned.

          Look at the kernels those companies started with, how they grew, how they took advantage of markets, responded to opportunities and moved.  I think, again, that the issue of getting out into the marketplace and being very focused is key because it gives you the time and knowledge.  It's problematic when you are in a field where there is high competition right out of the box.  You are never going to have the power to sustain yourself if you are selling against somebody who already has a very large field operation in place.  It's very difficult to do that with a Web-based sell or telesales against somebody with 2000 feet on the street.  No matter how good your technology is, there is a sales rep right there selling against you, face-to-face, and it's a tough thing to overcome.

          When you are picking spaces, there is nothing wrong with a niche.  A niche doesn't have to be small; it's a niche¾a very defined, focused area.  You are going after it.  If you are the one who owns it, you are the very best in that niche.  The customer is going to buy your confidence and your knowledge even more than the product, and that is an interesting part of the bootstrapping phenomenon.

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bootstrappers, naturally

The bootstrapper has to be a naturally, highly effective salesperson.  You are never a “bag-carrying territory person,” but you have to have a great capacity to sell your concept.  A bootstrapper without that skill is not going to get off the ground, because, as all of you know, you are trying to sell a concept.  When you are small, do you know what the company is really buying?  They are not buying a product.  They are buying you.  That's right, they are buying you because they know everything about the company.  They know you are small.  Once you get past all the image issues, they know your real size, and they are buying you anyway.  All the faith they're putting in is not just that the technology works¾they know that.  They are investing in you, that you are going to make it work the next year and the year after that as well.  Your ability to sell your concept and yourself is crucial for the success of a bootstrapper.

          Bootstrappers are naturally highly mistrustful of funders because you work too hard to get there.  You can't understand the balance between what you’ve invested in blood and sweat and what they get as an investor.  We started in 1973, and we were very tiny¾microscopic is a better way to describe it.  We stayed tiny, and, finally, around 1982, we actually considered outside money.  Not for need of cash, by the way, but for need of liquidation of some amount of principal money, and we didn't go looking for it, a firm came to us.

          A number of firms had asked before, but this one caught our attention.  I can't begin to tell you how difficult this was for me.  It took a year, through all of the courtship and the dancing and the relationship-building, for me to get confidence that they were legit, because this was our baby.  There were two of us.  My partner was Bill Witzel, Fran's dad, and this was our thing, you know?  Having somebody come in and take a piece of the action without putting any sweat into this baby was really hard to take.  That year allowed us to understand the value of what a good investor brings.  It took a year, and it was highly introspective.  It was gut-wrenching to go through the change.  That was the most significant emotional change I went through short of when we did a merger that forever changed the complexion of the company.  The IPO paled in comparison. 

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a big league choice

I'll come back to the issue of personal costs.  People at other sessions have heard me get on this topic before.  You have to make a life choice and a decision about your business.  It's paramount.  It sounds very harsh, but it's coming from my heart in telling you this.  I think that there are basically three models of businesses.

          One is truly a lifestyle business, and there is absolutely nothing wrong with that concept.  You are making a tradeoff between personal values, income and net worth, but your lifestyle business is likely based around your family, your faith or maybe where you want to live.  You have to set a target in terms of income, you have to make so much a year and you are fine with it. You made a lifestyle change, but, basically, your company has to support your lifestyle.

          The second model of business is one that has no desire to get long-term, significant growth and is more focused on proving a point, getting into a market, owning a particular space and basically staying private.  There are other problems with that model, but your value is not going to come out of equity.  You probably have to risk your own estate issues, but you learn.  You are not going to worry about that when you are starting a business, that's 40-60 years out.

          Then there is the businesses that goes for the gold, and that’s the big leagues.

          We were involved in a soccer league in Great Falls and even though I'm out of the business world and running the nonprofit Morino Institute, a person who was starting their own business said to me at one of the games, “Mario, you work so much!” 

          I said, “Yes, but not nearly what I did back in business.” 

          “How many hours a week?”

          “Only about 70 to 80.”

          “My gosh, you work a lot more than we do!”

          “Then stop your company now,” I said.  “Don't kid yourself.”

          You'll get absolutely eaten alive.  I guarantee you that there is somebody else in that space who is going 24x7x365 with the intensity of a rhinoceros that is going to take you right out.  Either get ready to accept that or get the heck out because you are kidding yourself and you are kidding your employees and you are not being fair to everybody around you.  That's what it takes.  That's competition.

          It's all about making the big leagues.  What do you think it's like to play cornerback like Darrell Green in the NFL?  It's a 365-day-a-year job.  Remember, I said that in 1986 things matured in the software and services industry.  This is the business, now.  This is the bigs.  If you want to get there, it's tough.  It doesn't mean you don't have another life at all, but it's very difficult to balance them in the emerging years.  Go and ask Steve Case and Jim Kimsey what they went through in the late 1980s and early 1990s to make AOL what it is today.  It was an enormous personal sacrifice of time, effort and money, but it paid off in the end.

          I'm not trying to be negative, you just have to come to the conclusion about what you really do.  Don't say that you want to be an entrepreneur, then come in with a lackadaisical business plan that shows you putting in maybe 60 hours a week.  It's not going to fly.  No one's going to believe it.  If it means we burst your bubble, better now than later because it's going to be tough.  If you love it, it's phenomenal; it's exhilarating.  When you win, let me tell you, it's an adrenaline rush like you can't believe, because it was all you; you did it and you know you did it.  You made the investment of your time, and that's key.

          I also want to touch on the critical necessity of a bootstrapper to manage the expectations of others.  You are always projecting an image that has to be bigger than what you are, because you have to come across in the marketplace as strong, confident, stable and having sustainability, especially if you are getting in the enterprise game and selling to the Fortune 500.  Those are players that are going to be around for a while, so you can’t look makeshift.

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stuff happens

The last thing I'll leave you with, and I can't emphasize it enough, is that you will screw up.  The key to the companies that you're selling to is how you respond.  Everybody knows you are going to mess up.  We have blown things up beyond all imagination in front of customers, but what they are looking for is how you are going to respond when you blow it, when you miss that deadline, when you miss the release schedule.  How you are going to handle that client?

          I pray that you never do what we did.  In 1970, we sold a technology that was still in our heads.  It was incredible arrogance.  I mean, we knew what we had to do as we had done it twice before.  But we had sold it before we had developed it, and now it was early December and we were flying in to do the installation while we were still coding on the plane.  We kept quietly working, still coding in the data center.  Finally, I had to go to the head of technology department and admit that we blew it.  Let me tell you, they were incensed.  I mean, this guy was ticked because the whole year's billing process was predicated on our work.  Here it is December 31 and they’re suppose to be billing January 1.

          I said, “Look, I know we screwed you.”  We pulled no punches.  I said, “You have to give me three weeks,.  If you give me three weeks, we will move heaven and earth to make this thing work.”

          You know what?  In three weeks we delivered it and for the rest of our life we had a great client, but we had to deliver.  In bootstrapping, you are going to fail at some point.  As Drew pointed out, there are just things that come up¾stuff happens.  When it does, respond very well.

          So, I wish you all success relative to your ambitions and that when you do succeed, you take the time to get involved in the community and help whoever you can in whatever way you can.  Thank you very much.

Page five of five | END

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