Editor Profile - Denny K Miu was the Founder and former CEO of two companies, Gigamon Systems and Integrated Micromachines (now Touchdown Technologies). Denny has extensive experience in developing technology, products and business relationships. He has been a Professor, an engineer, an entrepreneur, a team leader as well as an individual contributor.

Denny has recently published his second book entitled "Survival Guide for 'Slow Start' Entrepreneurs". Please visit here for more details.

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Back in April, there was a gathering of successful and aspiring entrepreneurs called Startup School (SUS). I didn't attend but I was able to watch it live on Justin.tv and follow up when the presentations were posted on Omnisio. I enjoyed the forum very much. I didn't learn anything particularly new, but I was extremely happy to hear the same important messages repeated by the same important people, and to the right audience.

As an entrepreneur, I felt the best presentations were those from Paul Graham, Paul Buchheit and David Heinemeier Hansson (DHH).

It is as if these three successful entrepreneurs have conspired to weave a unified tapestry for the rest of us to enjoy. And if I were to summarize their collective wisdom in three seconds, it would be the following ...

"Make something people want ... don't ignore but try to understand [people's] advise ... listen [mainly] to yourself ... the secret to making money ... is to ask for it."

I believe this event had marked the tipping point of an ongoing narrative on the need to bootstrap among Silicon Valley entrepreneurs. So much so that immediately after the event, DHH and his colleagues posted two thought-provoking articles, one on why we might not need to be in Silicon Valley anymore and another one on why we should focus on starting a business and not starting a startup, which had generated quite a bit of interests and commentaries on YCN (here and here).

My own experience with starting and running startups is that time has indeed changed. I am not saying that time has changed so completely that the old model (using VC money to start companies) does not exist, I am just saying (humbly) that a new model has emerged that allows entrepreneurs to bootstrap meaningful companies achieving sustainable revenues, starting with their own money and their sweat equity (and more precisely, avoid taking VC money).

Entrepreneurship is all about wealth creation and it should be a conscious choice. As entrepreneurs, our goal is to maximize our returns and minimize our risks, and my experience is that ultimate success has a lot to do with impedance matching. Should we match the impedance for the VC's, which means big exit, big risk, big team and big funding? Or should we try to match the impedance for the entrepreneurs, which calls for modest exit, modest risk, modest team and modest funding?

The following is my argument for seizing "a medium slice of a medium pie".

Where is the love? VC's provide capital but entrepreneurs no longer need lots of capital to build meaningful companies.

Once upon a time, it took real money to build companies. We needed substantial amount of money to pay people outside the company (i.e., vendors and partners) to help build custom hardware and to write custom software.

We also needed to pay people inside the company since we had to fully staff a team of highly paid professionals in order to complement the cave dwellers (i.e., engineers) whose job was to create, with outdoorsmen (marketers/salesmen) whose job was to "peddle".

We also needed support staff including CFO (to manage money) and HR (to manage people whom we hired with money).

In other words, we needed money because we needed people. No one took money from VC's and leave it in the bank to earn interest. Instead, we took money and put it into people's pockets to pay for their efforts (lots of people's pockets, both inside and outside the company).

And we were told by our investors to do so as quickly as we could ("Go Big or Go Home").

Much of the previous successful market opportunities were to create infrastructure technology (Ethernet, desktop computing, etc.) for improving the distribution channels in order to make them more efficient in delivering hard goods.

Building companies therefore meant realignment of molecules and photons. No one could afford to do that on the cheap, resulting in a very high upfront cost for starting companies. We never dreamed of bootstrapping. Even if we did, bootstrapping was just a tactical means to a strategic end, which was VC funding.

We lived by a single golden rule: Those Who Had The Gold Made The Rule.

So with VC's dictating the rules of the game, there were few plausible ways of building meaningful companies except to go after billion dollar market opportunities, "dynastic" opportunities as one of the SUS speakers would like to say.

Now Comes Narrowcasting ... Niche is the New Black

Today, the same opportunities still exist, but with search engines, video/audio aggregation sites and social media portals of all variety, it is now possible to deliver specialized products and services to a smaller group of customers while making money ("narrowcasting").

Billion-dollar market opportunity is no longer an absolute requirement for entrepreneurs determined to build meaningful companies.

Also, new market opportunities have emerged which focus on making distribution channels more efficient to deliver information and entertainment, not just hard goods. And we need a lot less money to reorganize packets and bytes.

Interestingly, with support from the open source community and vendor-neutral third-party web hosting facilities, we can now provide extremely customized products and services using low-cost, off-the-shelf "un-customized" building blocks (i.e., no need to spend a lot of money to pay people outside of the company to do specialized things).

Entre-sumers ... Eating Our Own Dog Food

In addition, consumer patterns have changed dramatically in recent years and a new generation of entrepreneurs is now at the best vantage point to visualize what their peers need and want. So this is not about solutions looking for problems or problems looking for solutions. It is about creators of solutions being also the consumers of solutions ("entre-sumers").

There is no need to gamble lots of money and wait to see "if the dog would eat the dog food". Entrepreneurs are the "alpha" dogs. We are our own "surrogate" customers and if we succeed in building what we need to make our own life more efficient, there would be plenty of "beta" dogs to follow.

So we don't need a lot of money to "supersize" the company anymore. Not only do we not have to subsidize the livelihood of many people outside the company, we don't even need to subsidize many people inside the company, except a few co-Founders.

In other words, even if we were to take money from VC's, it would be to fill our own pockets. But who needs that? Entrepreneurs should be in the game for long-term capital gains, not ordinary incomes (that's what ordinary jobs are for). If we don't need to get paid, then we can afford to make our own investment.

Determined entrepreneurs are those who bootstrap their companies through the R&D phase by forgoing salaries. In fact, by recruiting a small group of like-mind co-Founders to completely fill out the team, and convincing each to not take salaries, we are essentially making our own "pre-tax" investment, leveraging many-to-one.

In summary, since we don't need to put money in anyone's pocket (including our own), we don't need to raise lots of VC money. We might need a few tens of thousands of dollars (or even up to a few hundreds of thousands of dollars). But no one needs a few millions or tens of millions to build a company.

Does that mean we don't need VC's? No, not at all. We do need them. I am just arguing that we don't need them to provide initial "R&D" capital. After we have a working product and a workable revenue model, we can then go to the VC's to provide "working" capital to grow the company.

On the other hand, often we can even bootstrap the company to the point where we are generating sustainable profits. Then it is a seller's market. It is quite easy to find late-stage VC's to buy off shares from the founding team, taking money off the table but yet allowing the company to continue to grow.

I have written extensively about my own experience with VC's. I do not think of VC's as being either good or evil, just being appropriate or inappropriate. In other words, taking money from VC's should be a choice.

My own preference is to bootstrap companies in order to maximize our chance of success and to maximize our own net worth. Then when we have a viable company and we need growth capital, we don't need to find them. The VC's will find us.

My Successes in Bootstrapping

In the past fifteen years, I have started three companies. The first company was a "dynastic" play and required tremendous amount of capital. After bootstrapping for a few difficult years, I was able to secure substantial amount of VC funding. However, as with most startups in the late-90's, we "failed" to succeed before the bubble burst.

My second company is completely bootstrapped. The six co-Founders were "entre-sumers". We were building a product that we ourselves would have consumed (solving our own problem). We were the perfect "surrogate" customers. We took no VC money. We took no salary (for three years). When we were ready for product launch, we went out and secure a modest amount of working capital from a single angel investor.

We also focused on a modest opportunity with a product that addresses the needs of a well-focused segment of the high-end enterprise customers. The market size is hundreds of millions, not billions but it was more than good enough to create several multi-millionaires.

We knew exactly who need our product and we know exactly how to get to them. We didn't build a supersized sales channel. Instead, we rely on our partners to co-market our product and we create an eco-system where everyone can thrive ("narrowcasting").

My second company is now doing extremely well, profitable for nearly three years and growing in double digits. The VC's are kicking down the door wanting to buy a piece of the action. I took the opportunity to start my early retirement and I am now "on a break", having the time and space to ponder and to experiment with my third startup.

My latest opportunity is LoveMyTool which was started about a year ago. It is an online advocacy community for both open source and commercial network monitoring tools.

Obviously we are doing narrowcasting since we are focusing on a very small but active community. On the other hand, once again, we are entre-sumers meaning that we are solving a problem that we have experienced throughout our professional career (which is how to get access to enterprise customers who have substantial spending authorities but little time and bandwidth).

Today is an important day for LoveMyTool since it is the first time that we have paying sponsors. We welcome NetQoS and NetScout, both of which have felt that we have built an important enough venue for them and for others that they have committed financial supports in order to encourage original and quality contents from a growing list of authors and industry experts (Sake Blok, Tony Fortunato, Tim O'Neill, Mike Pennacchi, Scott Turkow, etc.).

This is an important beginning but obviously only the beginning.

In summary, I am a living example of how bootstrapping can and does work. My cumulated experience is that as entrepreneurs, postponing fund raising with VC's for as long as you can and minimizing R&D expenses by not taking salaries is the best way to create wealth for ourselves and our family.

Good luck to y'all.

--Denny--

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