So you have a big idea but very little money. The best way to bootstrap is to tap friends and family. There is an amazing amount of work that you can do with very little money. You can build prototypes, get angel employees, study the domain and the competition. In most cases you may be able to talk to potential customers and find your USP.
Lets say you have done all this and are prepared to work for free but still need that extra $20,000 for operating expenses before you can close an angel round. I thought there was no answer because you will need to give too much of your company away to a bootstrap investor which may then make it hard for you to build a big company.
DFJ ( Draper Fisher Jurvetson) have an interesting way of providing bootstrap money without taking too much of the equity. They issue convertibles which will convert at the same valuation as the next round of funding that the entrepreneur takes.
So bottom line is if you can find a bootstrap investor who is excited enough to give you the $20,000 with the same structure that DFJ uses then you may have a way out of the bootstrap dilemma without giving up too much equity.
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Entre,
Here is an extract from http://www.dfj-tie.org/rules.htm. This mentions an “Exhibit A” I could not find “Exhibit A”
Prize Money
Two winners will be selected from the final round of the competition and awarded a prize consisting of a minimum investment of $100,000 from DFJ and its partners. Depending on the nature and needs of the winning companies, the investment could be more than $100,000. DFJ and TiE reserve the right to award other prizes as well though make no guarantees beyond the two winning prizes.
Structure of the Prize
Each contestant understands and agrees that the Prize Money shall be awarded by DFJ and/or its partners in the IVC as a seed investment in the company that owns the business proposition (the “Company”). The investment will be in the form of a convertible promissory note from the company attached hereto as Exhibit A (the “Note”). Each Note shall have a principal amount equal to the Prize Money and shall be convertible into equity securities of the Company in the next equity financing of the Company as provided in the Note. The principal amount of the Note shall convert into the same type of securities, and at the same price per share, as are sold in the Next Equity Financing. The idea behind this structure is to offer the investment to the company without imposing a valuation on it at the time of the award. The valuation will be decided at the time of the next equity financing by the company and the note will convert to equity at this valuation.
Contestants who have not yet formed an entity (corporation, limited liability company or otherwise) for their Business Idea agree to do so as a condition to receiving Prize Money.
“DFJ ( Draper Fisher Jurvetson) have an interesting way of providing bootstrap money without taking too much of the equity. They issue convertibles which will convert at the same valuation as the next round of funding that the entrepreneur takes”
Sanjay, it would be great help if you could elaborate this a bit more. Thanx.
I do agree – best way to bootstrap is friends and family but there do exist a limit on how much you can get, given the fact most people belong to middle tier income group. Even the incubators at IIT’s do provide an initial investment of $20,000 , but that’s always not sufficient. If the initial team is big (that can have its own problems), people can perhaps slog on without taking any salary but if the team is small and one needs to hire employees, $20,000 doesn’t mean much in reality. For young people coming out of indian colleges, there are very few takers who would be willing to work in a software garage.
Even if you get to a prototype stage, have a viable business model, market study etc. , investors are still wary unless they don’t perhaps see a team that had had prior success or you already have a market presence. One needs to keep on doing the bootstrap process unless everything is just a hit. It’s not just bootstrapping, individuals need to keep in mind they need to build the whole business by themselves.
Great topic.
I think the way entrepreneurs finance their companies says a lot about them personally.
To be blunt, I have a limited regard for company founders who raise outside finance prior to revenues (except in certain, pure sciences scenarios).
In my experience, the two essential sources of bootstrap finance are different to FFF (friends, fools and families).
Customers: Even for web services (like squarespace.com), brilliant company founders have managed to take deposits from customers in return for discounts when they finally deliver the products. This way of financing is truly commendable in my books.
Sweat Equity (and favours): Entrepreneur, like the Google team for example, and some people that I know personally, have an ability to convince others to lend them capital equipment and donate their time to kick start the venture. For anybody, who can articulate an elegant vision and convince highly paid experts to work for “free” (i.e. no cash expense), I reserve a lot of kudos.
To repeat: I think it’s a common feeling in the venture community that there is an implicit limit on the degree of respect we award to entrepreneurs who jump at the idea of outside financing the first time they get the chance. There is, however, a lot of goodwill reserved for entrepreneurs who tap into customer financing and convince others to invest sweat equity.