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Hello folks! 

Hope everyone is doing well and managed to catch a breath from the breathtaking rise, drop and rise again of GameStop shares last week. Congrats to those who managed to score big gains alongside WallStreetBets and DeepF---ingValue 🤑🎊 🎉 

Perhaps, being a day trader could be a viable alternative to building your wealth instead of following Elon Musk’s footsteps? 

Before diving in, I would like to thank readers who highlighted a few typos and broken links in my previous post. Appreciate the feedback and keep it coming 🙏

Alrighty then, let’s continue our discussion on the various ways to building a business. Just a quick recap, there are four different ways to starting a company: 

1. Ol' Skool – use your own savings or borrow from others to open up (usually) brick-and-mortar businesses; 
2. OPM a.k.a. Other People’s Money – raise money from external investors, in exchange for a percentage of your company to turn your ideas into reality; 
3. Bootstrapping Your Way to Greatness – spend the lowest amount of capital at the start to test your idea and reinvest the profits to gradually grow the business; or 
4. Buy Existing Companies – find a company with growth potential and pay for it using your own money, raise money from external investors, borrow money from banks or a combination of them. 

In last week’s post, I covered the first two methodologies – Ol' Skool and OPM. This week, I will expand on the last two approaches i.e Bootstrapping and Buy existing companies. 

Bootstrapping Your Way to Greatness 

According to the Cambridge dictionary, bootstrap means a piece of leather or other strong material at the back of a boot that you use to help you pull the boot on. 

In the entrepreneurial world, it means building a sustainable business with limited resources and/or money. Or the frugal or cheapskate way 😊 

The main idea behind this framework is that you want to minimize your upfront capital and reduce risk associated with starting a business. Once you have an idea (or better yet, multiple ideas), you methodically start testing the viability of the business. Try to define in (somewhat) granular manner what the product/service is, what benefits it will accrue to customers/clients, initial target market and the revenue model. 

The more specific each component the better. 

You then quickly test it with folks within your network – family, friends, co-workers, gym buddies and social media for example. 

The aim is to get one (or more) real customer to pay hard cold cash for your product/service. This is the signal that you are on to something. 

You serve the client as best as possible, get feedback and refine your offerings to secure the next additional clients. Each sale should be (however small) profitable for you to plow back and grow the business. Remember that you are growing the business by using the customers’ revenue, not by taking outside investors and/or loan from the bank. 

Word of caution. This approach of starting a business is common in software/services industries. However, the same principles are applicable if you’re starting a physical goods company too. 

Bootstrap often gets a bad rap especially from professional investors. “This is a lifestyle business. We want to invest in a company that can change the world, one food delivery app at a time. And return 10x on the money we put it” are the common refrain. 

Several companies have proven that they can be successful by adopting these principles. Atlassian, a SaaS company out of Australia is arguably the most successful example (although Atlassian did raise money from Accel Partners 8 years after inception and another secondaries fundraising from T. Rowe Price to allow employees to cash out just before its IPO). Others include Spanx, the footless pantyhose company, Native (sold to P&G for US100mn) and Schmidt's Naturals (acquired by Unilever for US75mn). Nick Huber of Sweaty Startup is a big fan of this model. He bootstrapped a brick & mortar business right out of college and now shares his experience on his blog and Twitter. What an unusual path for an Ivy Leaguer whose college mates typically go on to work on Wall Street or Silicon Valley. 

The main attraction for this framework is that you as the founder get to keep a lion's share of your company, instead of having to share it with outside investors. This could be important when you exit the company, either by selling it or via IPO listing. 95% of a US$100mn exit is bigger than 5% of USD1bn. 

Covid-19 also brings this model to the fore. Given the prospect of uncertain employment situation, many folks out there are adopting this model to start their solopreneur journey. A few platforms/sites out there are making it easy to become part of the ‘creator economy’ such as Patreon, Substack, Gumroad and OnlyFans. I’ve heard of one partner at A16Z is now scouring for opportunities to invest in these creators (read: bootstrappers). 

Watch out TechCrunch, the bootstrappers are coming your way. 

Buy Existing Companies 

In the world of high-finance, this is what the Private Equity (PE) and buyout fund folks at swanky offices with fat ‘carry’ do every day. They look for companies with great potential and/or those that are facing difficulties and prescribe a turnaround remedy to bring them back to their former glory (or salvage their assets once they file for bankruptcy). 

However, this opportunity is no longer confined to large PE and buyout funds. Ordinary folks can easily buy a company today and take control of the business as a full-fledged entreprenuer (or you can retain or hire a GM to run the company for your). In the US, you can check out EmpireFlippers or Flippa for a listings of companies available to buy.   

I haven’t found similar online marketplaces in South East Asia yet. In this case, you might need to call your lawyer, accountant or Company Secretary friends if they know of any businesses that are up for sale. 

Several enterpreneurs took this path to build large and successful businesses. Howard Shultz bought and scaled Starbucks to what it is today, normalizing ~US$4/SGD8/RM14 lattes. Similarly, Rac Kruoc took over from the original founders of McDonald's and transformed it into a global fast food company.

When acquiring a company, the buyer typically has to fork out the cash for the agreed purchase amount. Alternatively, you may put down a deposit and borrow some money to finance the balance.   

Or you may structure it as a ‘Search Fund.’ You ask around accredited investors (a fancy term for people with lots of money) to invest in a fund that you are managing. The pooled fund will then pay for the acquisition of the company. In return, you will charge the investors 2% fee for your hard work running the company and share 80% of any profits from the exits (sell to another party or IPO). You will keep the remaining 20% of course. 

Alternatively, you can also structure the deal via a seller financing model. This is where you negotiate a deal with the seller than you will pay the seller the purchase amount over time. And the best part is, it is possible to pay the installment using the profits from the business you’re buying. No money down and you get to keep the business. Genius! 

There are plenty of entrepreneurial paths to choose from. There is no single option to take to realizing your entrepreneurial dream. Just because one path worked for Elon Musk, doesn’t mean you should follow it. 

If the notification on your phone goes off to announce yet another startup’s latest funding round, despair not. External fundraising event is a good validation of a founder’s vision, yet it is one of the many milestones in the journey to building an impactful and sustainable company. 

Build and grow your business at your own pace, not at someone else’s timeline. 

Be great,

Reez Nordin

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