Bootstrapping & Angel Investors Play Far Greater Roles Than Venture Capitalists in Financing Entrepr

"Rules of Success. #1: Sweat Equity is the best equity!" --Mark Cuban

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry. --William Shakespeare

Although MBA programs tend to emphasize venture capital when it comes to funding entrepreneurial ventures, angel investing and bootstrapping play a far greater role when it comes to financing startups--in fact, they provide funding for upwards of 90% of all enduring ventures.

Any book which emphasizes bootstrapping and thriftiness--which emphasizes taking maximum ownership in one's dreams and destiny--will be required reading in my Artistic Entrepreneurship &Technology class, right alongside Benjamin Franklin's Autobiography, in which he emphasizes the following virtues:

FRUGALITY. Make no expense but to do good to others or yourself; i.e., waste nothing.

INDUSTRY. Lose no time; be always employ'd in something useful; cut off all unnecessary actions.

Such a book is Angel Investing: Matching Startup Funds with Startup Companies, by Mark Van Osnabrugge and Robert J. Robinson. They write, "Funding is particularly critical to the success of a start-up firm, although ironically it is at this early stage that funding options are most limited because of the high risks involved. . . bootstrapping is the most likely source of initial equity for 94 percent of new technology-based firms (Freear, Sohl, and Wetzel, 1991); it was initially used by more than 80 percent of the five hundred fastest-growing privately held entrepreneurial firms in the United States (Bhide, 1992). Bootstrapping offers many advantages for entrepreneurs and is probably the best method to get an entrepreneurial firm operating and well positioned to seek equity capital from outside investors at a later time. For this reason, it is worth examining the strategies of bootstrapping, before turning to matters relating to angel investors and venture capitalists."

Bootstrapping is how Walmart, Microsoft, Amazon, and Epic Games all started. Bootstrapping is how the vast majority of record labels and film production companies came to be, and it is how J.R.R. Tolkien created the billion-dollar Lord of The Rings empire. Bootstrapping ought be emphasized in any class on entrepreneurship.

Angel Invetsing goes on to state:

"If effectively used, bootstrapping can present entrepreneurs with a wealth of new and alternative options (Van Osnabrugge, Robinson). . ."

Bootstrapping offers a plethora of advantages, including:

"*Waiting as ong as possible to seek equity financing (Van Osnabrugge, Robinson)." This means that the entrepreneur can maintain a maximum amount of equity.

"*By waiting until the firm is more developed, entrepreneurs have greater authority and overall control (Van Osnabrugge, Robinson)." Whenever one accepts money--be it a loan, grant, or other form of financing, equity, along with control, is most usually given up. At that point, not only is one subject to one's own mistakes in the early stages of the company, but they are subject to the mistakes of others. Risk is generally enhanced as reward is lessened.

"*Deciding from day one to bootstrap the initial growth of a firm enables entrepreneurs to allocate all their times and resource to growing the firm (Van Osnabrugge, Robinson)." Instead of seeking investors, which can be a full-time job in itself, the company can focus on building the product, honing the website, and finding the most efficient road to deliver maximum value while retaining maxium equity.

"*It is also possible to experience problems associated with raising too much money." If one raises too much money too soon, one might be tempted to do such things as build one's own factory instead of outsourcing production (I heard how this happened to a drug manufacturer, and ended up shackling them in the long run.) Money is an accelerant, and if the early-stage company is heading in the wrong direction, it will only get there quicker, which leads us to the book's next point:

"*Hidden problems can be revealed (Van Osnabrugge, Robinson)." A lot of details can fall into place during the bootsrapping phase. A stronger brand or logo may emerge. A more efficient software solution may become apparent. A new patent might be filed, or another competitor may appear and be incorproated into the overall strategy. Bootstrapping in the early stages forces a natural due diligence, thusly lessening risk in the long run.

Of course one cannot wait for every light to be green before setting off, but generally speaking, one wants to wait as long as possible before giving up equity--one wants to see the shortest path to that distant goal before setting out, as entrepreneurship can be a long, hard road, full of twists and turns--twist and turns that a nimble sports car can handle far better than a bus filled with employees.

The art of bootstrapping and angel investing ought be an integral part of every curriculum on entrepreneurship, and every MBA program.

Indeed, venture capital enriched many insiders in 1999, while leaving the public holding worthless stocks, but VC is not the engine, nor the primary fuel, of our entrepreneurial economy. To a large degree, this is because money is a commodity. Whereas passion, talents, and innovations tend to be unique, money is not. The average value of all paper currencies over time is zero, while the value of ideas and innovations are infinite--indeed, ideas and innovation are from where money receives its value.

Entreprneurs,artists, and innovators ought always be aware of their value as the talented risk-taker, for in trying to raise funds, their value will often be talked down. And that's where one has to call the bluff, and believe in teh inevitable value of one's dreams, and inherent ability to innovate and dream even greater dreams.

Throughout the course of history, true wealth came not fromVC firms, but from tireless innovators such as Einstein, the Wright Brothers, Thomas Edison, Galileo, Newton, Shockley, and the Founding Fathers.

Angel Investing dispells several misconceptions:

"Misconception Three: Venture Capital Comes from the Venture Capital Funds listed in Pratt's Gudie to Venture Capital Sources. The trurth: business angels, rather than formal venture capitalists, make the most venture capital-style investmets to young entreprneurial firms. Business angels--the invisible segment of the venture capital markets--fund thirty to forty times as many entrepreneurial ventures as do venture capitalists, the market's visible segment. Angels tend to play complementary roles in financing young firms, since they support those start-up firms that later become candidates for formal venture capital."

Angel Ivesting also states: "Misconception One: Jobs Are Created Primarily by Fortune 500 Companies. The truth: most new jobs are created by a small percentage of firms growing at a rate of at least 20 percent per year, the so-called entrepreneurial firms. Since 1979, more than 75 percent of net new jobs have been created by around 8 percent of cmall businesses. These firms are started and driven by entrepreneurs, not small businessmen or businesswomen."

Finally, the authors share this fact, calling for more equity financing: "Misconception Two: Access to Credit is the Major Financial Obstacle to Job Creation. The truth: access to equity capital, not credit, is the major financial obstacle to job creation. The business history of the United states is the history of equity financing. Entreprneurial firms, especially those in their earliest stages, need high-risk, patient, value-added equity financing to supplement internal cash flows. U.S. entrepreneurs face an annual equity shortfall of more than $45 billion. This is our nation's real capital formation challenge."

So it is that angel investing, and that far greater equity capital of blood, sweat, and tears that is paid via bootstrapping, ought be emphasized over venture capital in the course of entrepreneurship education.

For money and capital are commodities, while creativity, innovation, heart, and soul--the attributes of the rugged, entrepreneurial individual--are not.

And thus every entrepreneur ought to set out on their "Hero's Journey" with the knowledge bolstered by the likes of Mark Cuban, Shakespeare, Benjamin Franklin, and Angel Investing--sweat equity is the most valuable equity there is. Believe in yourself--hold on tight for the wild ride, and rock your dreams. You take the risks--you ought get the rewards.