They
use their own
money to start businesses. They fund their growth through their
sales. They're resourceful in finding workers, customers, and
advice. And they don't want outside money.
"If
all the money you
spend is based on what you're bringing in, you very quickly focus
on the right things to spend it on," said Tripp Micou , founder and
chief executive officer of Practical Computer Applications Inc., a
closely held and profitable software company operating out of
cramped offices overlooking the Massachusetts
Turnpike.
Micou and his partner, serial entrepreneur
Kent Summers ,
may be the venture capital industry's worst nightmare. With a
roster of companies from PepsiCoto Marsh
USA lined up to buy their customized business software, they
estimate they're on course to double their annual revenue -- it was
less than $5 million in 2006 -- for each of the next several years.
And their door is closed to would-be
investors.
At
a time when
commodity computing, open source software, and viral marketing are
making it cheaper than ever to fund a start-up on a credit card or
a loan from a rich uncle, the decision to forgo venture capital is
becoming more common. Entrepreneurs and financiers agree
bootstrapping is on the rise, though there are no statistics
heralding the trend. And it's happening even as venture firms, from
Route 128 to Silicon Valley, are swimming in capital from pension
funds, university endowments, and other limited partners seeking
outsized returns.
Venture
capitalists
insist they have no shortage of companies to fund, and claim the
most ambitious start-ups still clamor for the rocket fuel of
venture capital to propel them to an initial public offering or a
sale to a deep-pocketed buyer. Still, the standoffish start-ups has
prompted some soul-searching in venture circles where industry
veterans fret that firms are under so much pressure to put money to
work that they're neglecting to play their historic mentoring
role.
"What
you're seeing
is a change in the value proposition of venture capital to
entrepreneurs," said William W. Helman , partner at Greylock
Partners in Waltham. "There are fewer venture capitalists who are
company creators, who can offer companies the expertise and
value-add that used to be the norm. For some firms, venture capital
is becoming an asset management business."
Some
venture firms
have begun reaching out to the new generation of low-cost
entrepreneurs. Charles River Ventures, with offices in Waltham and
Menlo Park, Calif., introduced a new funding program late last year
called CRV QuickStart, offering loans of up to $250,000 known as
"convertible notes," meaning they can be converted into equity if
and when the start-up raises its first round of venture
capital.
"They
want to connect
with these small companies and become their best friend early on,"
said Mark G. Heesen , president of the National Venture Capital
Association, an Arlington, Va., trade group.
Micou,
at Practical
Computer Applications, decided early on to steer away from venture
capital. A University of Michigan graduate who earned a master's
degree in engineering from the Massachusetts Institute of
Technology, he launched his business in 1992 with money he'd earned
from consulting for companies on their software and database needs.
He negotiated free rent on his first office near Boston's Downtown
Crossing in exchange for providing 20 hours a month of technology
services to the company that owned the building.
"I
didn't want to
create a marketing plan that was more than a page," Micou recalled.
"The venture firms want a 100-page business plan and a 50-slide
PowerPoint presentation with lots of hockey-stick graphics" showing
a projected upward sales trajectory.
Micou
said his
company was profitable from the start and had only one rough patch
in late 2001, when businesses began scaling back their spending
after the Sept. 11, 2001, terror attacks. About five years ago,
through the MIT Venture Mentoring Services program, he met Summers,
who had started and sold several high-technology businesses,
including some that were venture-backed. Summers, who shares
Micou's aversion to venture financing, joined the Newton company
two years ago.
"We're
a couple of
frugal Yankees who saw eye to eye about growing a great business,"
said Summers, who is spending the bulk of his time on sales while
Micou concentrates on operations.
To
accommodate their
growth, they plan to move the business into larger quarters west of
Boston later this year and to roughly double its 20-person
workforce over the next 12 months. The partners agree that the
business could grow faster with venture capital, but say they'd
have to give up control and spend more time working on their "exit
strategy" than on helping their customers or hiring the best
employees.
"Venture
capitalists
give you a big bat and tell you to hit a home run," Summers said.
"Singles, doubles, and triples don't count."
Another
entrepreneur
who's been approached by venture capitalists but hasn't been
receptive is Ali Merchant , co founder of CADNexus, a two-year-old
Medford start-up that makes software linking computer-aided design
systems to simulation tools.
"I
think it would be
too much pressure on us now," said Merchant, who hasn't ruled out
seeking venture funds in the future. "We want to build out the
product and properly focus on the customers we have. If we use
venture capital, they'll ask us to more aggressively build out the
team and sell more."
Heesen,
for his part,
agreed that venture capital isn't for everybody.
"In
the information
technology space, it's become so much cheaper to create a company
that you don't need to raise venture capital if you don't want to
go public," he conceded. "If they have management expertise, if
they know lawyers and accountants, more power to them. We certainly
don't criticize anyone who doesn't want venture
dollars."
In
the best
scenarios, however, venture investors contribute more than money,
Heesen said. "Venture capitalists bring expertise in a narrow field
and the ability to look at a business from a management
perspective, which many of the entrepreneurs can't do," he
said.
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