I've always bootstrapped my ventures. My last venture I started with $6k of my own money; we broke even in 3 months, we never had debt, and on our sixth year we were acquired by one of our customers. It is always exciting to bootstrap - it requires patience, love of your craft and of getting your hands dirty, optimism and _obsessive_ attention to cash management. It is scary, but it is also educational, and the freedom it brings (if you're successful!) is hard to beat.

I bootstrapped Ideyatech (http://www.ideyatech.com) from my own savings about 2 years ago... my hard earned savings. The risks are great, but the excitement and adrenaline rush are worth it. It feels like you're pushing yourself outside your limits.

Besides by using my own money, it makes me more responsible for my company operations and ensure sustainable growth and profitability.

Now, I have 25 Java developers working on various enterprise projects.

Btw, I'll ask individual permissions later on to include your quotes in the course material. Keep posting and thanks to Michael and Allan, so far!

I bootstrapped sandmansystems.com Y2000 with 64k php...after SEC cleared it, I used it to buy 2 computers. :) We now have  50 employees. I had a buyout offer last year but I declined because ...well it was missing a zero or two. :) Recently started 2 new ventures. One is being bootstrapped from my funds and the retirement funds of a partner/friend. The other one is being funded by the initial beta users of a system that is yet to be built.  Hope that helps. Regards.

One thing I'd like to point out is how important it is to stay very close to your customers. Don't keep them at arm's length. They are everything to a startup. They define what your products or services should look like, they determine the necessary quality level, they define your ideal customer management process, and of course they pay your bills. I have seen so many startups fail because the proponent felt that the product was so good that it ought to sell itself. It never is. The technology is only 20% of your product. Sometimes a startup fails because the product was not what the customer needed, or it was launched too late because of too many features, or it cost too much to develop and they ran out of cash. Stay close to the customer, prototype your product or soft-launch your service early, get early feedback from the customer, and refine your model as you go. It also helps your cashflow.

We were able to go a step further and have a major customer fund the growth of the company for the first two years, albeit indirectly. We had good technology and were able to get a good margin on pricing. We also stayed very close to the customer's admin staff in order to turn around projects faster, get paid faster, and grow faster. Customers can be good sources of funds! In a few rare cases you might also be able to get a customer to actually invest in your company, but as it is with bringing in any investor that has its pros and cons.

Great question, Ruben!  All good startups and smart entrepreneurs like those who responded to you  will start with their own hard earned savings.  That is the start.  What happens after depends on the financial requirements of the new company and the ability of the business to provide for the needed cash flow of the company to achieve the goals planned by the founders. All these (cash requirements, and profits) have to scale according to the objectives of the entrepreneurs. The answer to this question DEPENDS A LOT ON THE ULTIMATE GOALS OF THE FOUNDERS/ENTREPRENEURS.

I will try and share two scenarios to illustrate my point. (you are a teacher and others here are entrepreneurs, I apologize if I sound polemic but I was hoping that my response might be useful to other would-be entrepreneurs.)

Scenario A:  The Aggressive Wanna-Be Silicon Valley Team -  which is traditional and  follows the following sequence of events:

1) After the above mentioned boot-strapping, a prototype product or initial service is proven and customers are interested.  Follow-ons, beta products are done in relative small volumes and can be funded with existing boot-strap capital.

2) If the goal of the Entrepreneurial Founders’ Team is to grow fast and/or even to be large enough to go public within a certain number of years (entrepreneurs wish this so they can cash in at least part of their sweat equity), then the cash generated has to be healthy enough from good profit margins to allow the desired hockey stick growth in revenue. Often, this phase is hard to bootstrap from existing profits.

Take the following example: Imagine somehow one managed to bootstrap a team that generated PHP 5 million in profits in your first year from a cool product.   Realistically, maybe that would be 20% net profit from PHP25 million in sales. Nice!

Imagine at that point that you want to grow suddenly very fast by increasing headcount by say 25 people.  Depending on how well you pay your staff, then 25 people can cost you FULLY LOADED (office rent, benefits, PCs/laptops) anywhere between1-3 million per month in expenses! Not counting the initial investment of CASH plunked into office equipment and improvements, rent deposits etc. (only part of this CASH investment is expensed monthly as depreciation/amortization).  Clearly the profits are stretched to pay for that kind of growth.

* and we are not yet including in my VERY ROUGH calculations the costs of selling and promoting a product that is targeted to sell in a hockey-stick fashion world-wide.

Therefore, in the above example new money has to come in.  Now, everyone knows I am a VC working at NarraVC, but I will admit that VC is not for all, and moreover each VC is different. So EACH case is unique. I have seen some who went to angel investors or to relatives.  The difference is that Angels and VC's normally have experience in start-ups in the field being entered into and may have useful contacts there as well. Other Angels and relatives might just be wealthy people looking for bankable projects and might not have very much to share with the entrepreneur(s).

3) If this kind of hyper growth continues and the margins are normal, then more rounds are required from outside. At some point Angels and relatives can't bank the growth requirements (think on the order of $5M-20M. Yes, there are angels and friends who can fund up to $5M.), so venture capital guys and private equity shops are probably your only choice.  Private equity shops like the $20-100million sizes as their funds tend to be in the >$1billion range and they can't have too many deals.

Scenario B:  The Web Service Geniuses - which can happen to a number of entrepreneurs in the Philippines (this can apply to those whose products have gross margins at >80%)

1)  Same as scenario A’s phase 1).  But we note that in this  scenario B that the capital REQUIRED to deliver the product could be less and gross profit margins can be higher. This is the case in software if  -as mentioned in other posts here - cloud infrastructure, open source software, and cheaper IT equipment prevalent today could be used. Growth could also be less expensive to fund.

Some other things that can help mitigate cash requirements:

1. NRE (consulting engineering projects) that might pay an advanced deposit as extra cash sources.
2. Or like Michael Hansson said above: the customer pays in advance for product development.
3. The company creates a software product or service with sufficient free cash profits (>80% gross margins and low overhead) that can be plowed into the growth.

2)  Next event: the web service catches on like wildfire and profits are enough to pay for a few more genius engineers that can fund new products.  The product grows virally in cyberspace and the team of 30 engineers is acquired by a large Silicon Valley internet monster firm. (Note: however, the concrete example given in Scenario A  above was for a software company in the Philippines and it did state that to grow to the number of people needed to create an interesting internet service would likely require tens of millions of pesos so plan accordingly.  The founders must have enough profits or NRE to fund that or be patient enough to wait till initial profits are sufficient to pay for the R&D effort to get one there.)

Scenario C: The Patient Entrepreneur  - which can happen to a number of entrepreneurs in the Philippines who don’t feel any need to be public, to liquidate or don’t want to have to report to anyone but themselves (or at least maybe only to their spouses J )

1)      Same as scenario B’s phase 1) including note on better profits and less capital required.

2)      But, now this entrepreneur couldn’t care less about how long it takes to grow as long as he gets enough profits to fund his lifestyle. So, this person will only invest in growth as sufficient funds come in. There won’t be anyone else invited to the party and he will work hard and doggedly to make the company a success. An exit or IPO will come if and  when it comes but it could take 10-20 years or never at all.  He will likely decide he continues to not want to report to anyone, much less the public. There are many millionaires in the Philippines like this.  Either selling coffee, sago, books, furniture, jewelry, etc. It is unclear what will happen to the business when they die.  Likely it will be passed on the kids if they want it. If no one wants it, then bankers will sell it in toto to new investors.

Therefore, in the end,  it really depends on what the entrepreneurs desire in terms of: pace of growth, eventual size of the business, strategy for financial exits , level of head-ache/stress and responsibility.

Each case is different and the entrepreneurs have to decide for themselves.

I hope this is helpful and not too boring.

Cheers,

-Paco

PS. By the way, Narra Venture Capital Management as a fund management business did not require venture capital or any angel investment to get it started. I started without pay for the first 6 months and used savings to pay for an assistant and the electricity bills from my den. :-)