Bootstrap Austin: A Brief Review

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1 Bootstrap Austin: A Brief Review Darius Mahdjoubi, Ph.D. Visiting Scholar, IC 2 Institute UT Austin, Adj. Prof., St. Edward s University <[email protected]> October 2005 Version 5 Introduction Bootstrap Austin 1 is a self-organized grassroots group of young entrepreneurs in Austin who intend to help each other by networking and sharing ideas to set up new ventures. Bootstrap Austin uses monthly meetings and Yahoo Groups for networking. Bootstrap Austin has recently expanded to become the hub of the Bootstrap Network 2 that includes other cities like Dallas, Houston, Washington D. C., Boston and Poona in India. Bootstrap Austin originated in July 2003 when the founder, Bijoy Goswami, arranged a meeting at a local pub among a group of young entrepreneurs who did not seek venture capital funds to set up new entrepreneurial ventures. The common core and integrating factor of the group is their desire to set up self-funded (bootstrap) ventures, distinct from, and to some extent opposed to, the dominant perceptions that only venture capital funded businesses can sustain and grow fast. In this respect Bootstrap Austin is a grassroots and poor man s version of the Austin Technology Council + Austin Technology Incubator! The Bootstrap Network homepage indicates: Bootstrap Austin is based on two complementary models: First, the Bio-venture (Venture Development) model developed by Darius Mahdjoubi. This model provides names for the different stages of a bootstrap venture: Ideation, Survival, and Growth. The model outlines the priorities and unique challenges of each stage of venture development. Most importantly, it is non-linear. Non-linear thinking is the bootstrapper's vital asset

2 Bootstrap Austin also uses the MRE model (from the book The Human Fabric) to help the members find co-founders, hire the right people, craft sales teams, etc. Bootstrap Austin is organized into internal groups that follow the same structure of the Bio- Venture (Venture Development) model: 1) Ideation Group, 2) Survival Group and 3) Growth Group. The Ideation group consists of people who are still in the pre-startup stage, also referred to as the Dream-land stage. The Survival Group consists of the members who have passed the threshold (point) of Startup and are actually engaged in the challenges of keeping nascent ventures afloat. Ventures in the Survival Group have not net passed the threshold (point) of Sustainable cash-flow and often face the hard aspects of venture development called the Valley of Death. The Growth Group includes the founders of companies that enjoy sustainable cashflow, also called the Promised-land, and they intend to grow based on the inflow of internal and/or external financial resources they have access to. Bootstrap Austin members are individuals, rather than companies and the group has grown to include more than 470 people. 48 of the members claim to be in the Ideation stage, and 41 in the Growth stage. About 30 members pay dues, 50 members provide negotiated services in lieu of their services, while the rest participate in an ad hoc manner. There is no exact data available about the size of the companies that are represented in the Survival and Growth stages. Paradigm Shift in the Conceptual Structures of Entrepreneurship The mainstream approach toward the study and teaching of entrepreneurship is often based on a set of linear structures which can be summarized into the following elements: 1) Linear methods of investigation and procedures for venture development manifested in sequential and predictable formal documents, such as formal business plans. 2) The development of formal documents applies the linear methodology to seek external capital, like financiers, venture capitalists and banks. 3) External sources of capital often desire fast and predictable patterns of growth, referred to as the Rocket survival strategy. 4) The Rocket survival strategy is based on a linear and predictable path of growth demonstrated, for instance, in the S models of business development. The S model consists of three main stages: Startup, Growth and Maturity. 5) The linear pattern of the Rocket survival strategy is often consistent with the linear patterns of 2

3 technology development manifested in R&D models. Mainstream academic programs often use the above linear structures without even articulating the linear pattern of the structures. The mainstream approach toward entrepreneurship is linear in, linear out. An alternative to the above linear approach to entrepreneurship is a non-linear structure which consists of the following elements: 1) Non-linear, and non-sequential methods of study and investigation: Non-linear methods for the study of entrepreneurship are not yet well structured, but there are indicators of their emergence such as George Kozmetsky s Action Research method, also named Formulation of Unstructured Problem 3, and Van de Ven s model of professional science 4. The non-linear method and linear methods of investigation are not mutually exclusive. Indeed, the linear approach is an alternative in the context of the non-linear method, 2) Action Business Planning uses the non-linear methods of investigation to explicate the process of entrepreneurship and new venture development. Unlike a formal business plan, which is mainly a communication tool to seek external capital, Action Business Planning act as guidance for the challenging process of venture development. In the context of Action Business Planning there exists a wide array of sources of capital varying from venture capital, self-funded and corporation-funded. Action Business Plans, may also be used to develop formal business plans to communicate with external sources of capital. 3) The non-linear structure of Action Business Plans makes it possible to articulate a wide range of survival strategies beyond the linear Rocket strategy. For instance, the Camel survival strategy follows non-linear approaches and may act as an alternative to the Rocket survival strategy. The two survival strategies, Rocket and Camel, are not mutually exclusive and they should be selected consistent with other elements of an Action Business Plan. There are cases where only a Rocket survival strategy can be used to lift up a new venture, such as Compaq, Lotus and Federal Express. Alternatively there have been many successful businesses that used the Camel survival strategy, including Dell, Microsoft, and DHL. 4) The Camel survival strategy is based on a non-linear path of entrepreneurship demonstrated in the Venture Development (Bio-Venture) model. The Venture Development model covers some common patterns of development in the S Model as well as complex and chaotic transition 3 George Kozmetsky s Action Research method, also named Formulation of Unstructured Problem is depicted in IC2 Institutes pamphlets. 4 Van de Ven s model of professional science is described in Engaged Scholarship: Creating Knowledge for Science and Practice, forthcoming,

4 periods between the main stages. The early stages of venture development are classified into Ideation, Survival and Growth. The Survival stage happens between two thresholds: Startup and Sustainable Cash-flow. The Survival stage is not articulated in the S model. 5) The non-linear structure of the Camel survival strategy is consistent with non-linear patterns of innovation commercialization beyond the linear methods of technology development such as R-&-D. In this context innovation is organized into four groups that have dynamic, interactive and non-linear relationships with each other: 1) Technology Development and Innovation, 2) Customer/Market Development, 3) Human Resources Development, and 4) Organizational Development. The conceptual structure of the non-linear approach toward entrepreneurship is gradually emerging, but this new structure has not yet become a dominant paradigm in the study and education of entrepreneurship. Organic Pace Strategies/ Intentions (Camels) (Cash Flow) Ideation Startup Survival Growth Time Major Investment Fast Pace Strategies/ Intentions (Rockets) (Cash Flow) Ideation Survival Growth Time Venture Mortality Deadline for First Major External Investment Darius Mahdjoubi, 2005 Two Survival Strategies in the Early Stages of Business Development: Camels versus Rockets Non-linear Approach toward Entrepreneurship in Crossing the Chasm Diffusion of Innovations 5, by Everett Rogers, classifies the adopters of new ideas into five main groups: 1) Innovators, 2) Early adopters, 3) Early majority, 4) Late majority and 5) 5 Robegers, Everette. (1995). Diffusion of Innovations. New York: Free Press 4

5 Laggards. Geoffrey Moore in Crossing the Chasm 6 extended the Diffusion of Innovation model and argues transitions from one group to the next do not happen in a smooth pattern. For instance, there exists a Chasm between Visionaries (the Early Adopters) and Pragmatists (the Early Majority). Moore argues that this is because visionaries and pragmatists have very different expectations. Using the above terminology, the Bootstrap Group acts like the Innovators-enthusiasts for the new non-linear approach toward entrepreneurship, described before. Along the same line of thinking, a new educational program on Innovation and Entrepreneurship at The Innovation School of HSH University in Norway 7, acts like the Visionaries group for the new non-linear approach toward entrepreneurship. The Innovation School has incorporated two new courses in the curriculum of the Innovation and Entrepreneurship program: Innovation Commercialization and Action Business Planning. The two courses explicate in detail the nonlinear processes of innovation commercialization, venture development, and entrepreneurship. A self-funded (bootstrap) approach toward entrepreneurship often does not fit in the linear structure of the mainstream view of entrepreneurship and venture development, which is often based on linear patterns of development (for both technology and entrepreneurship). Linear entrepreneurship development usually requires excessive amounts of external capital. Amar Bhide 8 and Darius Mahdjoubi 9 have reviewed the patterns of development of self-funded (bootstrap) ventures. 6 Moore, Goeffry. (1995). Crossing the Chasm and Beyond. New York: Harper Business

6 Changing Patterns of Venture Capital Investment For a long time the attention of entrepreneurship studies has been focused on new businesses that venture capitalists invest in the very initial stages of development. A study of the patterns of VC investment since 1995 demonstrates that between 1995 and 2004 the first round of VC investment (seed and start up stage) has continuously decreased from 18% of total VC investments to less than 1.5%. During the same period of time (1995 to 2004), 4 th stage cases of venture capital investment have significantly increased from 15% to 35%. See Diagram 3. It appears that non-vc sources of capital play a more prominent role in initiating new ventures. 60% 50% 40% 30% 20% 10% 0% Venture Capital - VC Investements, Initial Stage verus Later Stage Total VC Investment, B % Investment - Initial % of Deals - Initial % Investment - Later % Deals - Later Total VC Invst. B The change in the pattern of VC investment underlines the key role of self-funded ventures that relies on the traditional sources of capital such as bootstrapping, individual investors (angels), commercial banks, and personal lines of credit to launch new ventures. If capital speaks in this way, self-funded ventures are more receptive to the non-linear approach toward entrepreneurship. The non-linear processes of venture development, such as the Camel survival strategy makes it possible for new ventures to prepare themselves for the turbulent stages that face all new ventures. The paradigm shift in capital and method may indeed impact the patterns of development at both levels of business (firm) and region. It may, however, take a while for academy to notice the impact due to changes in the patterns of VC investment and non-linear methods of entrepreneurship, as academy often enjoys safety nets of its own. 6