Gianforte Says 'Thanks, But No Thanks' To VC



Gianforte Says 'Thanks, But No Thanks' To VC

By Michelle Tsai

12/1/2005

VentureWire

Forget venture capital. If you want to start a company, pick up the phone and call a customer, said Greg Gianforte. Then, he added, take lots of notes.

Gianforte should know. The 44-year-old software engineer built two companies on a no-frills bootstrap philosophy centered on doing as much as possible with your own resources. The self-starter approach paid off. Brightwork Development Inc., a company selling network management software that he started in 1986 on a business partner's sun porch, was acquired by McAfee Associates Inc. in 1994 for $10 million. Now Gianforte is chief executive of RightNow Technologies Inc., a Bozeman, Mont.-based customer service software maker he founded in 1997 and shepherded through a public offering and into a $62 million business.

After graduating from Stevens Institute of Technology in New Jersey, Gianforte spent three years at Bell Laboratories working on product acquisitions and getting to know people like 3Com Corp. founder Bob Metcalf and Novell Inc. founder Ray Noorda. He soon got the start-up itch himself and set up shop, discovering along the way the many advantages of bootstrapping, an approach more entrepreneurs are choosing now in order to build companies with their own funds.

A start-up should almost never raise outside funding, said Gianforte, who believed in the bootstrap model so much he wrote a book about it. Bootstrapping Your Business, a paperback published in September by Adams Media, a small press that is part of F Publications Inc., teaches entrepreneurs to focus on sales and preserve cash, debunking myths such as "I need to enter a major new market."

Bootstrapping and venture capital are not mutually exclusive, though it's very important that the entrepreneur has a single master, said Gianforte, who advises entrepreneurs to "target customers and their needs." First, entrepreneurs should test their business models - instead of raising capital only to discover a year later that the idea was flawed.

To test an idea for customer-service software - RightNow was then nothing more than a page-long description - Gianforte spent March of 1997 calling potential customers and asking whether they'd be interested in such a product. "Most people said 'no,'" he said. But more importantly, "they told me why not."

Armed with the knowledge of what customers actually did need, Gianforte holed up in a spare bedroom for a month. He developed a new product, bought a Linux box for $2,000, borrowed a T1 line from a friend and started calling those companies again. His total investment: $2,000 and hours of his time. Then he gave away the software for free to lure his first customers.

By June, Turner Broadcasting Systems Inc. had signed on as RightNow's first paying customer. By March 1998, sales hit more than $10,000 a month. Only then did Gianforte hire his first employee - a salesperson.

At typical information technology start-ups, the assumption is that handing over big chunks of equity to investors increases the chance of growing quickly into a large company. But for Gianforte, bootstrapping means that entrepreneurs keep the fruits of their hard labor - all the fruits.

Indeed, VC-backed companies must keep a tight schedule in order to make an exit in time for the venture firm's 10-year deadline for fund returns. "When you raise money from a VC you're starting the clock on a set of expectations around growth," said Venky Ganesan, managing director of Palo Alto, Calif.-based Globespan Capital Partners. Having co-founded Trigo Technologies while an associate at Globespan, Ganesan is also a VC who believes in the bootstrap model. "When those expectations don't happen something will need to give," he said. "It can be changing the management, leadership or strategies."

For Ron Higgins, taking venture capital meant giving up control of his company. Though he had founded and ran storage software company TeraCloud Corp. profitably for 12 years, he decided in 2002 to recruit a new CEO to raise venture capital for growth. But the new management and investors, including Boulder Ventures, Northwest Venture Associates and others, changed TeraCloud's business in favor of a Web-enabled model. Soon, said Higgins, the company started burning $550,000 instead of $200,000 a month - while sales stayed flat.

"The VCs were people who never had experience starting a company. They had their own agenda of how a company should be managed and they were only willing to listen to a single source - the president," said Higgins, who left the company in 2002 over a fight with the board.

Peter Roshko, a partner at Boulder Ventures who is on TeraCloud's board, disagreed with Higgins' portrayal of events. Roshko, who joined the board in late 2003 after Higgins' departure, said VCs had invested in the strategy that Higgins and then-CEO Doug Ebstyne set forth. Investors made necessary changes to the management and strategy that positioned the company well, said Roshko.

After the Series A round, investors owned 51% of the company and Higgins' stake went from 49% to 12%, according to Higgins. Eventually the company raised a B round that gave outside investors 70% ownership.

"That's a fundamental mistake I'm never going to make again. The only time we're ever going to expand our company is if sales generate it," said Higgins, whose new e-mail management company, Estorian, will now only consider outside funding if investors hold minority stakes.

Gianforte, who sees a bootstrapper's lack of money as a major advantage, agreed that a thrifty company will grow without taking on huge risks.

"Venture money removes spending discipline," said Gianforte. "When you get funding it's easy to rent an office, buy furniture and build a marketing staff, but ultimately you're not accountable to your customer." Gianforte did eventually raise venture capital for RightNow to expand, but only because the company had such a high valuation that Gianforte's stake grew more valuable even as it shrank.

Without extra cash at their disposal, bootstrappers can find new ways to accomplish their goals. Back at Gianforte's first start-up in 1986, for example, the fledgling Brightwork and its staff of two couldn't sign on any customers. Gianforte concluded that the young company lacked credibility. His only hope, he decided, was an endorsement from Novell.

But how could the tiny start-up attract the international networking giant's attention? Brightwork rented a $200-per-month billboard across from Novell's headquarters along I-15 in Provo, Utah. The 48-foot-long sign said, "Don't Just Network, Brightwork."

The next day an executive from Novell called. Gianforte posed as the public relations department and wrangled an invitation for Brightwork to visit the company's distribution center. Spending the last of his cash, Gianforte bought a plane ticket to Kansas, where Novell placed a $50,000 order that kick-started Brightwork.

Even now - as a public company with a $453 million market cap - Gianforte's current venture RightNow still takes the bootstrap route occasionally. For European expansion, for example, Gianforte got things started with local partnerships five years ago and only started hiring full-time staff two years ago. The results surprised Gianforte: Germany developed more slowly than expected, while several customers from Finland quickly signed on. Because of his conservative approach, RightNow avoided risking a lot of capital and manpower. By comparison, a typical international strategy entails spending $1 million a year to staff a local office with a country manager, sales engineers and sales and marketing staff, Gianforte said.

Bootstrapping does have limits, though, said Globespan's Ganesan. The model works best for companies in software, Internet and other sectors without high capital costs. But businesses in chip or system design, for example, would be hard pressed to get by without venture capital, as well as those targeting fast-moving markets.

And while Gianforte views bootstrapping as a low-risk strategy that will never face big losses, investors argue that sometimes companies need to gamble big.

As the land grab on the Internet got underway in 1995, Netscape put the destinations for two buttons on its Web browser up for sale. Excite Inc., then a start-up with less than $1 million in the bank, decided to bid $3 million for a button, expecting to easily raise venture capital based on the success. That deal, a bet that a bootstrapped company wouldn't have been able to afford, said Ganesan, made Excite one of the top portals during the dot-com era.

According to Ganesan, "When time to market is critical, and when marketshare is critical, bootstrapping hurts you."

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