What do Private Equity Firms Look for in Bootstrapped Companies?

Bootstrapped companies have an inherent reliance on self-sufficiency and strategic resilience to spending money foolishly. Without the cushion of excessive funding, bootstrapped businesses must be lean and focused on revenue generation and customer satisfaction. These characteristics affect not only the pace and nature of growth but they deeply influences company culture, decision-making processes, and the overall relationship with risk and innovation. Private equity firms consider the strengths and weaknesses that this approach typically produces.

Many private equity firms view bootstrapped companies with a different lens. While no one would say they are all the same, they often share similar characteristics--both good and bad--that investors key on when evaluating an investment opportunity.

The positive side of bootstrapped businesses--without a bank account full of cash, most bootstrapped businesses:

• Exploit validated problems with their product/service. With little room for error, bootstrapped businesses must establish strong ties to customers. Communication with sales, support and product is strong and the company understands their customers' needs and wants. Product roadmaps tend to be much more thoroughly vetted and reliable.
• Have lean business models. Bootstrapped businesses focus on the essential features and functionality of their products or services. This keeps costs down and allows such businesses to get to market quickly. Investors love a minimum viable product (MVP) approach to launching products and services where the product ships with only the essential features and functionality.
• Have strict budgets and spend carefully. Investors know that every dollar counts when you are bootstrapping. Bootstrapped entrepreneurs are mindful of their expenses and only spend money on the essentials. These kind of companies leverage free and open-source software when possible. Investors know they also negotiate with vendors and suppliers to get the best possible deals.
• Create cost effective marketing plans. Bootstrapped businesses use social media, avoid traditional media, and tend to focus on digital marketing. They leverage targeted campaigns and establish resources to generate positive impressions through earned media.?
• Exhibit resourcefulness. Bootstrapped businesses take advantage of free and low-cost resources, such as online courses, templates, and tools. Investors adore frugal management teams who find ways to save money wherever possible.?
• Focus on generating revenue NOW. Bootstrapped businesses use new revenue to fund product development and expansion. Whether it is selling existing products or services, offering tailored products or consulting services, these companies find ways to generate revenue.
• Out of the box thinking. Investors love bootstrapped businesses because they know the market will tell them what they need to do. Creativity flourishes in such organizations and investors are well aware of its benefits.

While cash flow positive businesses are very attractive to investors, there are elements of such companies that venture capital and private equity see as downsides:

• Short term focus. Bootstrapped businesses are forced to live day-to-day. After a company takes a large investment, senior management needs to focus on strategic problems and opportunities for growth. Investors may desire to bring in new management to address such needs if the existing team cannot shift gears quickly.
• Break and fix vs. plan and upgrade. The operating environment in bootstrapped organizations is often flying the seat of its pants–by design. With the addition of new capital, investors expect the product and operations teams to make planning a priority with regular product/service upgrades and formal budgeting as non-negotiable requirements.
• Strategic vs. Tactical Sales and Marketing. When you only worry about generating cash flow for next month's payroll, strategic sales and marketing often falls by the wayside. Whether it is ignoring traditional media, not investing in sales operations, or neglecting sales training, leadership in bootstrapped companies tend to downplay the value of investment in strategic sales and marketing activities.
• Unwillingness to accept outside advice and different points of view. Leadership within bootstrapped companies tends to be younger and less experienced although they tend to be very confident that they know their customers. When a company takes outside money those investors and consultants want their advice to be considered whether the management team agrees or not.
• Leadership shortcomings in the management team. Many bootstrapped businesses have a strong leader and decisions run through that one person in a hub-and-spoke management style. In this environment, managers are rarely forced to make decisions--they are usually told what to do. There is little room for managers to learn through dealing with decisions that produce both good and bad outcomes. When a company sees an injection of cash, ineffective managers who are seen to be stifling company growth will not be tolerated. It is not unusual to see a significant number of leaders forced out.

“What do Private Equity Firms Look for in Bootstrapped Companies?” is pulled in part from the Founders Guide to Building an Empire seminars, Copyright 2024 SC Capital Partners.