Is being able to rely on piles of money the key to success for a startup business? IEEE Member Dileep Rao, a professor at the University of Minnesota Carlson School of Management, in Minneapolis, sought the answer by interviewing 28 Minnesota entrepreneurs who had built their start-ups into organizations generating more than US $100 million each in annual sales. Rao then distilled his findings in a book, Bootstrap to Billions (Interfinance, 2010, US $29).
Rao, a columnist for Fortune magazine on entrepreneurial finance, new business development, business growth, and financing, has spent more than 33 years as a venture development speaker and teacher. He says he wrote the book because “most people think finance is too difficult and they don’t need to learn it.”
“We need to remove that mystique,” he says. “It’s really just numbers, and most of it is just subtraction. You can’t say, ‘I’m not a numbers guy’ and still hope to succeed.”
Rao recently presented lessons from his book in a series of five webinars sponsored by IEEE-USA. They covered how to link your business plans to your financing needs, whether to pursue venture capital, where to find financing, what makes for a successful business, and skills for succeeding.
The webinars and his book aren’t just for those who want to build gigantic companies. “Every business and every employee needs to know how to be ‘capital efficient,’” he says. “The lessons I learned from these entrepreneurs are applicable to anyone.” Each entrepreneur he interviewed started out with a great idea just waiting to be exploited or with leadership skills that turned a common product into a successful business venture.
IS VENTURE CAPITAL NECESSARY?
Conventional wisdom holds that entrepreneurs need venture capital to succeed, but one of the surprising things Rao discovered was that few of his 28 entrepreneurs relied on it, including the founders of the medical technology company Medtronic and the electronics retailer Best Buy. None started with such funding, and only six turned to venture capital to fund their growth. Only two of the six who took venture capital were able to retain control of their companies, something that most venture capitalists demand in exchange for funding.
“I think the old myths need to be reexamined,” Rao says. “Sometimes venture capital is necessary, but it’s not an either/or equation.”
He warns that venture capital companies won’t necessarily turn an idea into a success, no matter how unique or innovative it might be. He adds that as many as 32 percent of venture capital funded enterprises fail, and only 12 percent get to a public stock offering.
“How many great ideas will an entrepreneur have in his lifetime?” he asks. “If you have one great idea and give it to a venture capitalist who fails 80 percent of the time, what are the odds of coming up with another successful one?”
What does “bootstrapping” mean? To Rao it means finding unique ways to sell products and services without resorting to outside funding. People he interviewed were able to become more capital-efficient and decrease their reliance on outside investors. That, as much as their products or services, became their competitive advantage, he says.
“It’s crucial to learn how to run a company without wasting a single dollar and knowing how to spend money to grow the business,” he explains. The first step is coming up with a growth plan and understanding its effect on cash flow. “If you time your growth properly,” he says, “it reduces the need for money you might otherwise spend trying to grow too quickly.”
Where do you go for money? Make alliances with companies you deal with, ask customers for cash advances, see whether suppliers are willing to help fund you, and explore any relationship you can find that doesn’t require spending a lot of money up front. “Once you obtain venture capital, they end up controlling your company, and you can’t get it back,” Rao warns.
TEACHING TOMORROW’S LEADERS
Beyond the money itself, you also need to acquire certain skills to succeed. Culling the backgrounds of the 28 entrepreneurs, Rao found that 64 percent had sales experience. They also had accounting and financial management skills, as well as an understanding of the value of their products, which led to higher profits. “That’s a rare skill,” Rao says, “and it’s one that needs to be taught.”
One of the companies Rao profiled, the 43-year-old Fastenal, a manufacturer basically of nuts and bolts, grew by about 30 percent per year as it carefully managed its cash flow. “It kept its spending on a tight leash, and trained incoming managers to do the same,” he says. Because Fastenal’s founder, Bob Kierlin, was selling a common product, he had no competitive advantage other than the way he conducted business. Despite not having an original, groundbreaking product, Kierlin “had great leadership skills and built a great team,” Rao says.
“How do you sell nuts and bolts and build a $2.5 billion company? That’s the challenge for all of us,” Rao says.
Rao advises everyone, from entrepreneurs to employees, to ask themselves these key questions: How can I improve my skills? How can I become a better leader? How can I build a great team?
“You need to build good teams and a strong culture,” he says. “Don’t just hire people with the skills your company lacks. Attract leaders.”
Next, learn how to build a unique advantage over your competition by, for example, making your customers happier than they were before you came around. Finally, you need to run your company with less money and resources.
How can you sell, grow, and make customers happy without much money? That, Rao says, is the question that the successful companies he profiled were able to answer.
Learn more about Rao and the entrepreneurs he profiles at his Web site.