Will my bootstrap start-up business plan work?

Q: I am planning to start an optical-equipment company geared toward the consumer industry. What do you think of my business plan, which follows the bootstrap start-up model you published in the LFW series on entrepreneurship?

A: Since you asked, I want to make sure you apply what I wrote correctly. For those unfamiliar with that model, it suggests starting with a small investment and building the business over time. Two assumptions are made about the nature of the business to make this model applicable: there are no market-window, first-mover strategic-advantage issues; and the business can succeed with a small up-front investment and incremental investments as the business expands. Consumer-related businesses are notoriously contrary to this model because market opportunities tend to be highly time dependent, and it takes a tremendous amount of financial resources to create consumer awareness. So make sure your business idea defies conventional wisdom.

The other assumption you make is that the first product will be highly profitable and provide you with the funds to pursue the second product. The reality is that growing businesses rarely generate positive cash flow and it is more likely you will need additional investments. However, your initial success will help you raise VC funding to pursue the second project.

This bootstrap approach has worked for me nearly every time because it trades off risk with patience. Most technical entrepreneurs I have worked with are starting businesses for the first time and therefore have no business experience; starting small without having to ramp the business rapidly significantly reduces the risk of failure. The company doesn't have to stay small because it can pursue bigger opportunities as the entrepreneur gains experience. This model was thrown out the window during the bubble but we are now seeing more business plans along this thinking.

Q: Should I consider joining a start-up company in the current business environment, when I'm just out of school?

A: This is a tough call and we are still seeing students hot on doing this. The decision is very personal but I still wonder if young people have all the data necessary to make a logical choice. I don't think so. More likely they have a gambling mentality of "why not take my chances." Because this is an important question, let us spend some quality time working it through.

Some people choose a startup because of the possibility of making a lot of money. If that's the reason, a winning strategy that has low risk with potential high reward is to get a "real job" to learn project-management skills and to be able to seize an opportunity when you see one. Building a company involves managing a complex project; by working for a professional mentor, you can acquire the required skills while you are prospecting for opportunities.

People often use an argument that goes like this: "If I don't do it now, I might miss an opportunity like Google or Yahoo." The probability of that is very low, of course. But if you must try, avoid making the wrong choice by spending quality time evaluating start-up opportunities. Make sure you subscribe to the vision and think highly of the people, check out potential customers, and develop an understanding of the market dynamics. Do no less than what a venture capitalist would do in making investment decisions, perhaps even more. To investors, money is a renewable resource; to you, time wasted is not. At the minimum make sure the company has the support of reputable VCs and a large bank account to pull it off.

The important thing is to learn. Learning by trial and error is inefficient when the knowledge is readily available from experienced, successful people. Learning professional skills from a group of well-meaning and enthusiastic people who are inexperienced is low yield. I'd get a real job!