A venture capital infusion of $10 million or $20 million, during the late 1990s, served as a kind of pedigree. But today, entrepreneurs are equally proud of financing their start-up on their own, with credit cards and second mortgages.
“Having discipline is really important,” says Phil Sipowicz, chief executive of Everynetwork, an IT services firm in Waltham. “When you’re bootstrapped, you don’t have $20 million sitting in your bank account to wildly spend on office space or a Porsche that you want to give away to the next employee you hire. It forces you to produce for your customers.”
In any economic environment, some entrepreneurs opt to bootstrap, building on customer contracts, bank loans, or government grants. But two dynamics are combining to promote even more bootstrapping than usual.
First is the near-paralyzed state of many established Massachusetts venture firms.
“The whole industry seems to be licking its wounds right now,” says Sam Levine, chief executive of Intellireach, an e-mail management software firm in Dedham. “When we’d talk to venture capitalists and ask how many investments they made last year, there would usually be a long pause. They’ve been looking to shore up existing investments in their portfolio, and they’ve been concerned about the flight of their limited partners.” (Limited partners are the institutions, like pension funds, that supply venture capital firms with money to manage.)
Second: When venture capitalists do make an initial investment in a technology company, these days they prefer that the company is more mature.
“A typical start-up now may be a half-dozen people with a prototype or beta product, and even a few customers,” says Chip Hazard, a partner at IDG Ventures in Boston. “They’re much further along than they were in the boom, when it might’ve been two guys and a deck of slides.”
Entrepreneurs have a litany of reasons to explain why they’re eschewing venture capital.
For Brian McKernan, chief executive of Agencourt Bioscience Corp. in Beverly, one reason is excessive oversight. McKernan talked to one prospective investor who demanded he hold a board meeting every four weeks. “I said, `My God, I’m supposed to be running a company.’ Preparing for a monthly board meeting would’ve turned into a major chore.”
Agencourt, which sells products that help pharmaceutical companies purify DNA as part of the drug-discovery process, instead raised $5 million of individual “angel” investors and a corporate partner.
Oddly, McKernan says that many investors wanted to hand him too much money.
“Smaller deals aren’t as efficient,” for venture firms, he explains, because each portfolio company requires about the same amount of the firm’s time. “They wanted to put in 10 or 15 million, and when that kind of money’s in the bank, you tend to spend it. We just didn’t need that much.”