Essentials of Entrepreneurship: A Practical Approach

Many people think it is a great idea to use other people's money (OPM) when they are starting a business. Often times funds from other people such as venture capitalist are not available, because they typically do not invest in startups.

When an entrepreneur is able to obtain funds from other, unfortunately, there is a cost. By using money from other people, these investors will want some of the equity of the company. The entrepreneur thus must sell some of the equity in the venture. Equity is precious and the entrepreneur should treat it in that manner and only sell equity when funds are needed and he/she cannot avoid using funds from others.

The concept of bootstrap relates to launching a venture with modest personal funds. Examples of entrepreneurs who have used this approach include Michael Dell at Dell and Ross Perot at EDS. These individuals became multi-billionaires. Individuals using the bootstrap financing approach often use credit cards, second mortgages, and loans from parents and friends to start a company.

Amar Bhidé suggests entrepreneurs need to "fly on empty" and has seven suggestions for such individuals.¹

1. Get operational quickly

2. Look for quick break-even, cash-generating projects

3. Offer high-value products or services that can sustain direct personal selling

4. Forget about the crack team

5. Keep growth in check

6. Focus on cash, not on profits, market share, or anything else

7. Cultivate banks before the business becomes creditworthy

References

Bhidé, Amar, "Bootstrap Finance: The Art of Start-Ups," Harvard Business Review, November, 1992.


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