Bootstrapping Your Start-Up

Here are some of my thoughts on how you can start your business NOW and avoid spending the next 12 months trying (and failing) to raise venture capital. The article come from an interview conducted in April by Gene Stowe and published in the Tribune Business Weekly on March 19th, 2008. [Thanks Gene, for making my rambling conversation sound linear, if not logical.]

Seasoned entrepreneur gives advice on ‘bootstrapping’
By GENE STOWE
Tribune Correspondent

Many entrepreneurs think in three steps: 1. Have a good idea. 2. Get money to start a business. 3. Serve the customers.

Jim Larkin skips Step 2. He figures that the money will come with the customers.

Larkin should know. He started Environmental Health Laboratories (EHL) in 1986, sold the company to Underwriters Laboratories in 2001 and started Scientific Methods Inc. (SMI) the day after he left Underwriters Laboratories in 2003.


He’s active in the University of Notre Dame’s IrishAngels, a group that supports entrepreneurship, and speaks to classes about how to start their own business – but he doesn’t recommend seeking venture capital. (Not to mention that most venture capitalists made their money in businesses that did not start with venture capital.)

“Most startups are of zero interest to venture capitalists,” Larkin explains. “If you say one idea in 300 is a feasible venture capital idea, in a classroom of 30 kids there are none.”

Instead, he wants to give students a sense of the emotional and psychological aspects of running a business that they won’t find in a textbook. He promotes creative ways of low-cost startups that he calls “bootstrapping.”

“You have to be exposed to it in other ways,” he says. “It’s a little bit like describing how to ride a bicycle. There’s a lot more going on under the surface that you really have to experience yourself.

“There isn’t anybody who’s going to give you $3 million in two years to get your business off the ground. If you are successful, they will come find you.”

The question is how to be successful from the start.

“It may be possible and it may be necessary to bootstrap your own business,” Larkin says. “In almost all of these startups, there is a need to bootstrap, to get by with what you have now. If you do that for some period of time, you change the value proportion for your business.

“Every small business is different and faces different problems than other small businesses.”

One issue common to all is the importance of identifying a market. Look for the need first and tailor the product or service to meet the need, rather than creating a product or service and going in search of someone who needs it.

“One thing that’s really going to make you or break you is market,” Larkin says.

“Not always, but frequently you find the government creates the need. It’s all about matching the market needs with the capabilities.

“We need to be focused directly on identifying that customer, identifying what they need and then providing that. We make it a lot more complicated than we need to.”

One place to look is the public Federal Register that lists requirements the federal government will impose. That’s where he found that the EPA was gong to require municipalities who use surface water to test for certain protozoa. He bought the necessary equipment and offered the service.

“There is an emerging market there,” he says. “We got as much business as we could handle.”

Similar opportunities come up in transportation, agriculture, construction and other fields.

For example, a requirement that banks disclose the total amount that will be paid on a mortgage can lead to computer programming companies. A requirement that hospitals protect the privacy of patients can lead to document destruction services.

A trend toward certifiable environmentally friendly construction provides openings not only for builders and architects who get accreditations but also for those who provide the accreditation training or inspect the buildings.

“It’s not like anybody’s blocking anyone from seeing what the opportunities are,” Larkin says. “Small businesses really compete well in one of two areas” — product development or custom work, such as high-end cabinetry that will find buyers while locally produced run-of-the-mill cabinets have difficulty competing with big-box retailers.

“People don’t need to worry about small businesses going away. It’s all about being the right size for the opportunity.”

Once the idea is matched to the market, the entrepreneur can go looking for the necessary means without money.

“Find out what your needs are and find out how you can get those needs met without cash,” Larkin says. “The message is that it’s not so much you need money but you need the things money can buy.

“A lot of my talk centers on the idea of partnering. Nobody in this world succeeds by themselves. A partner is someone who benefits who you benefit. – you help produce value for me.”

Entrepreneurs shouldn’t worry that partners might steal their ideas – the partners are too busy working on their own ideas, he says.

“Most people are so frightened that somebody is going to steal their idea that they don’t reach out,” Larkin says. “The partners are going to help you grow your business – find opportunities,network, help you meet people.”

Aligning interests can replace seeking capital.

“I’m not saying there aren’t problems with having partners,” he says. “So much of it is an issue of the amount of passion that is brought to the equation. Spending money is not the only way to attract resources.”

Typically, two big needs are buildings and equipment.

“I talk about office space, for example,” Larkin says. “There is so much empty office space. Go to downtown Mishawaka (for example),” with this offer:

“‘I want to use this space. I’m not going to pay you any rent for six months, but what I will do is paint the walls and pay the utilities in the wintertime. If I’m successful, I’ll pay you rent in the seventh month. I’ll pay you more rent in the eighth month.’

“There’s a very good chance they’ll say no,” but someone else on the street might say yes to keep the lights on in an otherwise vacant building.

Larkin, who is president of SMI with Fu-Chih Shu as Director of operations and Rebecca Wong as Director of Molecular Biology, has plenty of experience getting equipment from partners. He got the use of a $200,000 piece of equipment by becoming a beta site for its manufacturer.

“We would feed back all kinds of suggestions on how to improve their software,” he says. “The other 39 hours of the week, we were using that instrument to make money.”

A Massachusetts company wants to commercialize its continuous flow centrifuge, created for blood separation, to the water-testing industry. They gave Larkin a $12,000 piece of equipment for his work.

“If you are a research organization, the customer tends to be the government,” says Larkin, whose company has won small business innovation research grants.

Entrepreneurs who start companies while holding other jobs should be prepared to focus full attention on their own business at the right time, Larkin says.

“Don’t quit your day job until you find that customer,” he says. “Then you do need to quit your day job.”