Business

Feb. 19, 2013 11:30 am

Bootstrapping Philosophy: ‘investment is a tool, not a goal’ and 5 other reasons to self-fund your startup

In December, the trio behind Firefly, the browser screen sharing service that spun off their Airtime for Email product, was the first to accept money from the Dorm Room Fund, the experimental, undergrad-managed startup investment portfolio backed by First Round Capital. So it could seem strange that before that cofounders Dan Shipper, Patrick Leahy and […]

Firefly co-founders meet regularly in First Round Capital’s office space in University City.

Full Disclosure: Technically Philly offices are in the First Round Capital building, where Firefly also works out of.

In December, the trio behind Firefly, the browser screen sharing service that spun off their Airtime for Email product, was the first to accept money from the Dorm Room Fund, the experimental, undergrad-managed startup investment portfolio backed by First Round Capital.

So it could seem strange that before that cofounders Dan Shipper, Patrick Leahy and Justin Meltzer were a set of 21-year-old bootstrapping advocates. They used their own technical skills and a credit card to launch their service and set about attracting customers before ever looking for venture capital to help scale. (That’s bootstrapping: self-funding an effort and focusing on revenue to pay for growth)

But even after the modest $20,000 investment for marketing, the Firefly boys say that theirs is a bootstrapping-first mentality.

“Our philosophy is to build businesses that make money from day one,” Leahy said. “The reason we like bootstrapping is because it gives you control over the initial vision.”

Bootstrapping is a path best suited for services businesses or product companies that have a barrier to entry for competitors. Whatever the case though, the big picture takeaway is that taking on investment can’t be the goal, it has to be a tool. And if the tool hurts more than helps, focusing on revenue growth may be the best path to take.

For its cost, its talent and its lack of risk-tolerant investment, it might seem that Philadelphia is bound to have a higher rate of bootstrapped businesses. So what is the difference in philosophy between a startup seeking outside cash and one focused first on growing a customer base?

Watch a video interview with the Firefly cofounders on their bootstrapping philosophy.

LEARN AND EXPLORE

Meltzer said the Firefly team wanted to figure out how to create a business on their own before they took other people’s money for investment in Firefly.

“One of the things that we like to say is that we want to figure out how to manage our own money before we manage someone else’s,” Meltzer said.

Mike Krupit, who organizes the local Bootstrappers Breakfast and is cofounder and COO of Real Food Works, recommends bootstrapping for startups because it gives business owners absolute control of their companies. Although Krupit thinks the idea of bootstrapping is ideal, he also sees the difficulty in keeping a business afloat without investments.

KEEP CONTROL

“I think bootstrapping is great, if you can do it. I would always recommend that somebody would try to bootstrap. It gives you control over the destiny of your company,” Krupit, 49, said. “The minute you bring on investors now your goals are not necessarily your goals, your goals have to be aligned with their goals.”

Krupit’s business, a healthy meal delivery company, was initially bootstrapped but this month announced its plans to raise $1 million.

Krupit explained that while investors bring more than capital to the table, the most important part of running a business is your vision, your passion and your commitment – that’s what’s going to make your company successful, he said.

“Bootstrapping, if you’re able to do it, gives you complete control over that,” Krupit said.

FOCUS ON SLOW, STEADY GROWTH

Chris Alfano, cofounder of software engineering company Jarv.us and collaboration workspace Devnuts, said through traditional investing methods, a business owner can spend a year pitching and hoping for investments and possibly never get any. But, bootstrapping allows business owners to focus on finding customers and building a viable product right away.

“To me bootstrapping means keeping things in your own control and going incrementally,” Alfano, 26, said.

John Fazio, cofounder with Alfano of Jarv.us and Devnuts, said it used to be an intimate experience between a company and an investor and now it’s more of a numbers game. People now are investing in several companies hoping that a few of them turn a profit, rather than hoping that all of them do well, he said.

“I don’t think that’s the problem with venture capital as the concept, I think it’s a problem with venture capital with how it’s executed here in our community,” 24-year-old Fazio said. “We like that we have the freedom to do what we want, that we have the freedom to switch technologies, or switch processes on a dime. If we had someone overseeing us with capital investment those changes would be significantly less versatile.”

Listen to a soundslide presentation from Krupit discussing his history and perspective on bootstrapping.

FAILURE TO ATTRACT FUNDING

However, Krupit thinks that a lot of people are bootstrapping businesses today because of the economy.

“I think a lot of people are bootstrapping not because they want to, but because they have to,” Krupit said. “Bootstrapping is a fallback to a business that can’t fund itself any other way.”

But, Krupit said he doesn’t think bootstrapping is a complete failure

“If I had the choice, and if I could grow my company by bootstrapping I’d say do it,” Krupit said.

RETAIN GREATER OWNERSHIP

Yasmine Mustafa, 30, bootstrapped 123LinkIt, a software solution for bloggers to help them generate revenue from product keywords. Mustafa said she moved the early stages of her company to Philadelphia to help her business grow in a startup hub. She eventually sold the company to NetLine Corporation in Lansdale, Pa., where she currently works. Mustafa said bootstrapping her company had its pros and cons.

“In terms of pros, it allowed me to switch directions easily and cheaply – we pivoted twice early on. You also don’t have to answer to anyone so you can focus on the business,” she said. “The biggest downside is it hinders growth. Without extra resources funding would bring, you can’t grow as fast. Looking back, I wouldn’t change anything we’ve done. If we had not been acquired, we would have tried to seek funding.”

Krupit said more businesses, especially technology-related businesses, are more likely to succeed from bootstrapping.

“Some businesses are much more likely to succeed being bootstrapped than others,” Krupit said. “If you have a technology-based business and you are a technologist or have a technologist on your team, then bootstrapping is possible because you don’t have to go out and pay for design and pay for development.”

FOCUS ON NON-CAPITAL-INTENSIVE BUSINESS

Leahy agreed that bootstrapping worked for Firefly because of the type of company it is.

“For us, we’re not building factories, we’re building software, and that is very much aligned with the bootstrapping philosophy,” Leahy said. “So bootstrapping works in a certain number of businesses. Maybe in small hardware businesses or definitely in software businesses.”

Many bootstrapped startups see the need to begin taking investments in order to expand. Krupit said Real Food Works needed to start looking for investments for marketing, staff salaries and for other resources.

“Growing a food business requires capital because a lot of our marketing has to be done offline and a lot of the goods we have to purchase are physical goods,” Krupit said.

Firefly also decided to take investments so it could start expanding its brand by marketing.

“For us, we bootstrapped from January 2012 until [December],” Shipper said. “We took a little bit of money, where it’ll allow us to explore different marketing channels we wouldn’t be able to do because they’re expensive to pursue.”

For Firefly, they took on investment when it made sense for their growth. That’s a bootstrapping mentality.

This report was done in partnership with Temple University’s Philadelphia Neighborhoods program, the capstone class for the Temple’s Department of Journalism.

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Kristen Gillette is a freelancer who has written for a wide variety of publications including Philly2Night.com, two.one.five. Magazine, and Cred Magazine, thINKingDANCE.net, the Philadelphia Dance Journal and more.The Temple University graduate was a fall 2012 multimedia intern for Technically Philly.

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