Nesheim vs. Cowan on Bootstrap Economics

Written by Sean Murphy. Posted in Rules of Thumb, Startups

John Nesheim, author of High Tech Startup, has been blogging for a little over a year. His most recent post, just before Thanksgiving, gives his perspective on bootstrapping

BOTTOM LINE: Bootstraps are difficult to do. A few rare ones become giants (Dell). Most struggle and remain small, or go out of business. Buyers of such companies normally do not get rich. Think about it before you start off to do a bootstrap. The romance can quickly become a diet of stress and just plain hard work. They rarely can build an unfair advantage that converts them into amazing successes.

Wow. So venture backed startups must be easier, involve less struggle, and normally allow the founders to get rich. Of course the example he cites is a one man company selling cell phone games to the large American telco’s who are slow paying him because they can! I would think there are a number of other markets that aren’t quite so characterized by oligopsony (i.e. a market with so few buyers that they can set prices and other purchasing terms and conditions). But it doesn’t appear that he has done anything to preclude seeking at least angel funding, I don’t see why the choices are only to bootstrap on, or sell out, especially when he is anticipating revenues of 300K in the following year.

For another perspective we need to go back two weeks to David Cowan’s post “Get Big Cheap” (ellipses and hyperlinks added)

Consumer ventures used to burn so much time and money that most high tech entrepreneurs focused on carriers and large enterprises. […] Seduced by the proposition that more capital up front would buy branding and accelerate distribution, many venture investors bought into Neil Weintraut’s motto GET BIG FAST.

Wait a minute, in Lighting the Way for Your Competitors I attributed this motto to DFJ (and certainly item 4 in their investment philosophy seems to incorporate this injunction, albeit less succinctly; item 6 hits the same note again in case you missed item 4). But in a Business Week article on December 4, 1995 entitled “The Software Revolution” Neil Weintraut, then at Hambrecht and Quist, is quoted as saying

“The marching orders are: Get big fast, subjugate profit–even revenues. Just get your product out there.”

So he was also saying it as well. Cowan continues:

We all know how that turned out. No matter how proven a team may be, they still can’t predict consumer behavior, and so we spent about $30 billion acquiring eyeballs for web sites of dubious value, and when the capital dried up, so did the businesses.

But today, entrepreneurs have the opportunity to launch web sites so rapidly into a market that adopts technology so quickly, that with some iterative tweaking and feedback from users they can test their ideas in months, and on a shoestring budget. Without the need for capital, they needn’t sport a proven track record of success, and so many many more ideas can be tested, and the winners can come out of nowhere, from anywhere on earth. With the right user experience, the best innovations can attract 50 million users in their first year of general availability, as proven by Skype, Firefox, Wikipedia, YouTube and MySpace.

And so the winning recipe today for aspiring entrepreneurs is GET BIG CHEAP. Don’t waste expensive development on untested ideas, and don’t let a fat marketing budget mask a weak value proposition. If instead you tinker your way to scalable organic growth, you’ll have a valuable business on your hands. Don’t worry about how long it takes—just make sure your burn rate is low enough to accommodate several cycles of iteration.

There’s never been a better time to start a company. Find a community underserved by technology – be they disenfranchised American teenagers, bored commuters in Asia, or small business advertisers in Europe – and repeatedly craft a better user experience for them until you GET BIG CHEAP.

My personal bias is for bootstrapping as long as possible until you have met with an unexpected success that indicates your business would benefit from additional capital to exploit the opportunity you have uncovered.

Trackback from your site.

Comments (2)

  • SKMurphy ? June 2006 SDForum Interview

    |

    […] My firm’s focus is on strategy and business development for software startups. We work with early stage startups who sell to businesses. I personally have an interest in new technologies for collaboration–things like wikis, blogs, IM that are “new” in the sense that they are only a little over a decade old–and knowledge management methodologies like the “community of practice” model. So I look at the marketing issues from perspective that’s distinct from the consumer-oriented “get big fast” model that seems to be coming back into vogue: 2006 feels a lot like 1996 to me, with all of the various “pitch events” that are going on every month now. And I tend to work with teams that are bootstrapping both because it’s a mindset I find easier to relate to–I prefer pitching to prospects rather than VC’s–and because they tend to be more innovative than the VC-backed folks, who are normally channeled into a handful of predictable trajectories. […]

    Reply

  • SKMurphy » June 2006 SDForum Interview

    |

    […] My firm’s focus is on strategy and business development for software startups. We work with early stage startups who sell to businesses. I personally have an interest in new technologies for collaboration–things like wikis, blogs, IM that are “new” in the sense that they are only a little over a decade old–and knowledge management methodologies like the “community of practice” model. So I look at the marketing issues from perspective that’s distinct from the consumer-oriented “get big fast” model that seems to be coming back into vogue: 2006 feels a lot like 1996 to me, with all of the various “pitch events” that are going on every month now. And I tend to work with teams that are bootstrapping both because it’s a mindset I find easier to relate to–I prefer pitching to prospects rather than VC’s–and because they tend to be more innovative than the VC-backed folks, who are normally channeled into a handful of predictable trajectories. […]

    Reply

Leave a comment

Quick Links

Bootstrappers Breakfast Link Startup Stages Clients In the News Upcoming Events Office Hours Button Newsletter SignUp