Monday, October 4, 2010

Bootstrap for Slow Growth or Raise Equity to Accelerate

There is a lot of talk and content on the internet about "bootstrapping." I had an interesting experience with this just last week. A company is looking to roll-out an innovative business model in a very competitive online business space. One partner in the business wants to grow slowly, gaining customers slowly and using the revenue generated to fund future growth. Another partner wants to raise millions of dollars, throw it all into aggressive marketing plans, and accelerate growth exponentially.  I don't think either plan is fundamentally flawed, but I favor the slower growth plan, and here is why.

The partner in favor or raising millions of dollars and using them primarily in a marketing campaign is afraid of competition. He wants to blow the doors off of every potential competitor, mainly motivated by the fear that others will do what is commonly called "rip-off and design." His is a first-mover-advantage mentality. In some scenarios I think the fear is justified, but not in this one. You see, the business is so different from the traditional model that is it highly disruptive. And highly disruptive businesses are usually ignored by bigger competitors with deeper pockets because they initially discount the new-comer with rationalizations rather than consider them a serious threat.

This provides a great opportunity for the company to focus on retaining its equity and slowly gaining proof of concept and a loyal customer base. Is there a risk to this strategy? Of course there is. But the risk of giving away most of your company on marketing, in this situation, is far greater with significantly reduced opportunities for return.