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bootstrapping your business

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jeffery payne: go figure out the market

Thanks, April.  I have never been a poster boy before.  That's pretty cool.  I like it.

          It must be that we are in vogue as bootstrappers because, as Drew mentioned, bootstrapping a business wasn't something that was a hot topic over the last couple of years.  Certainly, for those of us who were doing it for the first time, which is what I'm doing, it made us all question ourselves.  There is no way you could avoid it because of all the money that was being thrown around and all the valuations you were seeing.  It really rocked my foundation and  made me question whether we were doing the right thing, but I kept coming back to the fact that I believed fundamentally in what we were.  I think Drew put it best when he talked about building a business for long-term value versus flipping or just trying to make a quick buck.  Businesses built on value propositions tend to grow and sustain, ones that don't tend to go away.

          We started Cigital back in 1992.  For those of you who don't know our business, we help companies make sure that their software works.  I always say that we make software behave.  We make sure it's reliable, safe, and secure for use.  We focus on businesses who don't necessarily produce software as a product, but build it into their products or use it in their enterprise or are transacting commerce with it because, quite frankly, software producers always mess it up. It never works right, and businesses suffer when that happens.

          I'd like to acknowledge Netpreneur and Mario, as well.  I started attending Netpreneur events back near the beginning, and it was a great forum for an entrepreneur.  Nothing like it in DC before.  When I first went to Netpreneur, the crowd was a lot different than it is today.  I see a lot of ties here.  Back in '97, '98, '99, you got carded at the door, but you weren't allowed in if you were over 25.  Back then, when I told somebody that we started Cigital in 1992, I heard, “Wow, dude, you are old, man!”  I don't know how many times I heard that, but Netpreneur was definitely something that helped us out.  The other thing that helped was MindShare, which April is intimately involved with, a program that helps CEOs learn about business.

          The idea behind Cigital goes back to grad school for me, where my partner and I met at William & Mary in computer science.  He was doing Ph.D. research in how to make software work, and I was kind of a businessy entrepreneurial dude.  Even though I was a geek in the computer science department, I was working up here in DC after grad school and looking for something new to do and learn.  I didn't know a lot about business, but I have always been kind of an entrepreneurial guy who was always selling something in school.  I'm sure a lot of you were like that, always making a buck, and figuring out an angle; trying to make myself successful at something.  He and I were talking one day about software and the fact that it didn't work very well.  Out of that came an idea that software was going to change and become the business.  It would be embedded in every product.  It would transact commerce and it would really run the enterprise.  Of course, it was 1992, so all of this was fiction, but we knew it would happen.  It was just a matter of time.

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          I would like to define a bootstrap operation as one that takes no money based on a business plan.  You decide that not raising money is the best alternative to get your business going.  We have never raised money and we have almost 100 people.  We have been at it almost 10 years now, never having raised money, but that doesn't mean that as the plan matures you are not looking to raise money.

          I separate that from today, which is the state a lot of people are in.  They can't raise money, so they consider themselves a bootstrap operation.  I think there is a big difference because one is based on the fact you just can't find anybody that wants to give you cash, and the other one is based on a belief about how bootstrapping the business and trying to fund it yourself actually helps you succeed in the long term.

          When we started the business, it was probably the worst of all situations.  It was the end of a recession.  We had no contacts; we had no business; we made no money.  We really had never run a business before.  People ask me, “Why didn't you go out and get money when you started Cigital?”  It really comes down to a couple of things.  One is that our plan said that the things we were going to do early we could fund ourselves.  We didn't need a lot of up-front capital to get them done, so we could probably get the business going, improve it first, save ourselves on valuation and get the business to the point where yes, someone will be interested and it might make sense if the market was there or not.

          The second reason is that I didn't know what the heck I was doing.  Let's be honest.  I had no clue how to run a business.  Neither of us did, so my big fear also was that if we ever took money from somebody, they would kick us out.  This was the first business we had ever started and I didn't know how to run one, even though it was my job.  My partner was this kind of wild-haired science dude, and I was the business guy, and the last thing I wanted to do was bring somebody in that would figure out that I had no clue about what I was doing.  I would be kicked out first, of course.  He would be kept because he was the technologist.  I was the business dude and I'd get kicked out to bring in a CEO.  That definitely weighed heavily on our minds when we started the business.

          That was a factor in not going out and getting money, but really, the business plan and the fact that the market wasn't there yet is a good indication that you shouldn't raise money.  Go figure out if the market is there first, before you go get money, because if you go get money and you are wrong, you are gone, either personally or the whole organization is gone.  The closer you can get to validating that the market is there, the more success you will have in attracting capital, the more luck you will have staying there and the more likely  you will get the valuations that you are interested in.

          Drew mentioned some of the things that I can relate to about starting up a business, such as bootstrapping is very hard.  In fact, I have often asked if I would ever do this again and the answer is, “No way would I ever do it this way again.”  I would never, ever start a business where the projection is five to 10 years from now there might be a market, but this was my first and I needed practice, so that's what we did.  Next time I would try to find something a little closer on the horizon because it is very hard to bootstrap a business.  We went two years without drawing a salary.  We were paying our employees salaries, but we weren't getting anything, and that's a tough way to operate.

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          The other thing that I'm a big believer in is focus.  For those of you who have ever seen it, Focus: The Future Of Your Business Depends On It by Al Ries is an excellent book about how important it is if you are building a business to really focus in on one thing and make that successful.  Don't get yourself scatter-shot and go after any opportunity that shows up.  It's hard to stick to in any business, but, when you are not getting paid, it's really hard to stick to.  When we started out, we used to work 24x7 and we used to joke that vacations were for the weak, food was for the weak, weekends were for the weak, everything was for the weak because we were just working like mad to get this thing off the ground.  Well, one Saturday we went out to lunch, came back, and it was just the two of us.  There was a message on our machine from a sweet little old lady named Mrs. Toones.  We were in Arlington at the time and she wanted to know why we hadn't shown up to cut her grass.  She was very upset about this.

          So being entrepreneurs we said, “Let's give her a call.  Maybe there is some money in this.”  We called her up, my partner gets on the phone and he is a real riot.  He starts talking to Mrs. Toones about this issue and she is saying, “Now, you promised to cut my grass and you weren't here on time and I need this grass cut.”

          So, naturally, he says, “How much are you willing to pay to get your grass cut?”

          “Well, I promised $25.”

          We look at each other. Twenty-five dollars is pretty good, so he starts turning it and saying, “Well, we do software.  Have you heard of software?  Do you think you need software risk management?”

          “I need my grass cut.  You said you would come and cut my grass.”

          “Well, we don't cut grass.”

          Big long pause.  “Well, you don't?  You said you would.”

          “No, we do software.  Can we strike a deal where if we cut your grass you will buy some software risk management?”

          We are just having a little fun with her and I don't know if she is playing along or what, but at some point we are kind of negotiating that we might go cut her grass, figuring that it would pay for lunch and she says, “Well, I'm getting all upset over this and I'm not feeling that great.  I need to go downstairs and get my heart medicine.”

          We were like uh-oh, all right, end of call, nice talking to you, you got the wrong people, see you.  It's just an example of the lengths to which you will go to stay afloat.  Poor old lady, she was very nice to put up with us for as long as she did.  I hope someone eventually cut her grass.  I don't know who she was trying to reach, but it brings me to my point that you have to stay focused.  You can't cut grass if your business is software risk management, but you also have to stay in business.  When you are a bootstrap company, it makes the tradeoff between sticking to your focus and going out and cutting grass into a day-to-day discussion that you have to have with yourself.  As I always tell our people, if we don't stay in business, we don't succeed.

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          It seems pretty obvious to me, but it's amazing how people get caught up in the company and spending money and trying to do the things they are trying to do, but they forget that if the business doesn't succeed, none of that matters.  We are not going to do a lot of great things in the future if we go out of business, so you have to weigh that and figure out how far away from your focus do you want to let  yourself get.  That changes every day in your business.  It changes because your financial situation changes.

          So we got the business going and one of the things that helped us a lot in our strategy was that we believed that we really needed a strong research component to build intellectual property.  We didn't have the cash to fund that, so we decided to leverage the federal government¾you know, those people we pay taxes to in order to fund research in software areas.  We put together a plan early to get research money from the government for things we planned to commercialize and sell.  It seemed radical at the time, but that's really the way we got the business off the ground without ever putting any money into it other than a lot of sweat equity.  We successfully went out and found people who were interested in the same types of things that we were around making software behave, and we got them to fund some of our early growth and provide us some stability while we worked on the real market for our business, which was Fortune 1000 companies who deal with software that had to work.

          There is risk in doing what we did.  One is that working with the government can be difficult, but it seemed like a great way to get our tax money back, right?  Two is that you get stuck in the government.  From the beginning our market was never the government.  Back in '92, that was really odd because most companies here in DC sold to the government; there weren’t a lot of software companies here going after the commercial market.  A lot of companies get stuck in the government side, however, and can't make the transition to the commercial side.  I'll give you some advice if you want to leverage our model of getting the government to fund some of your R&D¾it's a great approach, but you have to continually think of your business as a commercial business, operated like a commercial business, managing cash like a commercial business, and focusing on the commercial side of things.  Look at the government as just a vehicle.  We got the government to bootstrap our business, but that's the only way that model ever works.

          One of the pros of bootstrapping a business is that it teaches you fiscal responsibility.  If every nickel that you have comes out of cash flow, you have to make more money than you spend.  It seems like a simple equation to me, but it was really out of vogue for a while here.  When you bootstrap a business, you don't have a choice.  Bankers, of course, love us because they always say, “How do you make yourself profitable?”  I say, “How do you make yourself profitable?  If you are not profitable, you go out of business.”  So you have to be profitable every month, or, at least, every quarter because if you are not, you go out of business.  Going forward, that rigor and fiscal responsibility that we have learned from bootstrapping will help the business as we take money, as we look at an IPO and things like that because it's going to mean that when we have the cash, we are going to spend it the right way, no advertising on the Super Bowl.

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Ms. Young:  Thank you, Jeff.  That's great.  I found a number of things that Jeff said resonated with me.  I have an academic background, and it's always very interesting to see the conflict between the ideal, as presented by Steven Covey or Peter Drucker, and any number of other wonderful people in the reality of paying the mortgage and keeping people online.

          I am reminded of Steven Covey's first book which has a wonderful matrix in it about important, unimportant, urgent and not urgent.  It's a very useful thing to go back periodically and see where you are, because one of the real costs in bootstrapping in any entrepreneurial organization is this “tyranny of the urgent.”  There are so many things that want doing that you forget the not-urgent but important stuff, like the planning, the decision making, the fact that you sit down and have a discussion about whether or not you are going to cut the grass.  Maybe $25 is important that day.

          I think there is a second thing that comes through in Jeff's comments, which is the incredible role of humor and having colleagues that you really enjoy.  I'm going to ask Lynne specifically to hit on that because her business is one which she built with a very close friend and colleague.  I think one of the things that has pervaded this whole panel is finding people as Mario used to say, whom you want to be with in the foxhole.

          The last thing I want to underline is these sorts of unexplored opportunities.  I think that's what's fascinating.  We know that the government is huge.  Until there was venture capital in this region, the federal government was typically the source of venture capital, SBIRs, research grants, consulting and a whole lot of things.  I really like Jeff's point that the thing you have to remember is that it's not the endgame.  It's very easy to get swept up in that end of town.

          Our next speaker, Lynne Revo-Cohen, is not exactly a poster child, but she is someone I look up to.  Lynne and her partner started a company in 1984 focused on the issue of cultural diversity, sexual harassment and other issues in the workplace that, believe me, nobody wanted to hear about in 1984.  It wasn't leaping into the Web world in what was then a tide of great fashion, and very successfully building a business that not only, does well, it does a lot of good in terms of building healthy organizations.  Do you want to tell us about SCENDIS, Lynne?

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