Bootstrapping Your Business - Are More Companies Avoiding Investors?

For years many entrepreneurs have taking the route to quick cash through investors. But bringing in a private equity firm or venture capital can have it drawbacks and risks. Could that be why we are seeing more companies looking to avoid raising capital through these sources?

This episode will talk about the good and bad from our perspective. What we are seeing for business investment. and ways to get cash to grow.

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[00:00:10.18] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the Podcast.

[00:00:45.27] - Dan Paulson

Welcome to another exciting episode of Books in the Biz. Rich, how are you doing?

[00:00:48.29] - Rich Veltre

I'm doing great. How are you, Dan?

[00:00:50.29] - Dan Paulson

I am doing great. Happy Mayday to you. It is, as of this recording, anyway, May first, 2025. Doing anything exciting for Mayday? It's such a big holiday.

[00:01:04.14] - Rich Veltre

No.

[00:01:05.06] - Dan Paulson

No. Much the same here. It's cold and rainy as typical Wisconsin weather. But anyway, let's get on to our subject today. So This one came about because of recent conversations we've had with people. Actually, I'm hoping we maybe get some feedback in some of the chats on this. But bootstrapping. So in the old days, the way, way back, several years ago, we would see many companies that would get an idea. They do some proof of concept or proof of viability, and then they go out and raise a bunch of money. Then that would get them started on actually building the product, and they would raise a bunch more money. And then that would go on, and they would continue raising money until eventually they were bought out by somebody else. We've been talking with people that are doing a very minimalistic approach to raising capital and trying to more or less build it off of sales of product on their own. What's your experience with that?

[00:02:11.17] - Rich Veltre

Yeah, I'm seeing a little bit more of the return to the old, right? The olden days, people would start a business and run up a bunch of credit cards. I hate to say it that way. That's what they would do, right?

[00:02:25.02] - Dan Paulson

Pretty much.

[00:02:25.11] - Rich Veltre

That's why they started to use the words bootstrapping, right? Where they basically started, you just basically pulled up your boots and see if you can get something started. And when you did, you could attract people using what you had built so far. So bootstrapping was to get you to the point where you could get interest from somebody else to put a bunch of money in And now you have a viable company. We seem to go away from that a little bit, where everybody was focused on getting the money and not getting the bootstrapping done. So there was a little bit of late, I don't know, not sure the time frame, but you were able to get money a little bit cheaper for the longest time, right? When money was a little cheaper, it became, hey, we can get people to invest, and the risk is less. Now, things have changed. And I'm expecting that we're going to hear more and more now, where people have to go back to the bootstrapping. And I think that started a few years ago, when you saw the VCs were basically hoarding cash. They were pulling back their money.

[00:03:32.20] - Rich Veltre

They were not investing out. The activity was less. So the people you had to go to to get more money, they weren't around. You couldn't find them. Right.

[00:03:45.17] - Dan Paulson

So does that mean it just does lower rate of return on the present value of money? We look at it that way. If these VCs start making investments, they have to make exponentially more in order to justify the spend that they got to make due to the risks that they're taking, right?

[00:04:05.07] - Rich Veltre

Yeah. And I think a lot of the... It's funny because I never really thought about it this way. And maybe because I'm a little bit more accountant, a little less finance. I think I just thought a little bit more about the hard numbers as opposed to the pie in the sky finance numbers, the anticipated and the rates of returns and things like that. When you start to actually sit down and think about that, everything's tied to interest rates. And interest rates, my mortgage went from... It was a three % on my old house. It's a seven and a half % on my new house. It's like it basically is a big difference. The payments you have to make. So the money that you have to make to pay that bigger mortgage is different. Your focus is different. Your expectation is different. Why am I not thinking about that the same way when I think of VC funds? They're looking at it as if I go out and I have to get it, whether they get it from an investor or a bank. They have a cost of capital, and they're going to lay out that cost of capital.

[00:05:15.04] - Rich Veltre

Capital, and that means that they have to return that. And that means whatever they invest in has to give them that cost of capital. So what is the What is the effect on the people that are going to them and saying, hey, we need money. We're doing this project. They have to be evaluating it with, is it going to come back and give us a profit over what we have to pay out to get the capital?

[00:05:43.09] - Dan Paulson

Right. That is really quick, especially at today's interest rates. We see a lot of that cost affecting everything now and a lot of people pulling back on that. I'm taking a look at from the operations perspective. And I guess what I'm seeing is, in the old days, it used to be pretty darn sexy when you could get venture capital money or get people to invest in you. And you talk about cash burn, and it was almost like a badge of honor to lose money month after month, year after year, until finally either somebody bought you out or something stuck and you hit it big. But the other side I see to this is control. So me as being the operations person, if I'm the business owner, the moment I hand over equity to somebody else, especially if that person is writing a fairly large check, I lose a lot of control over how I can do things, what I can do things. And I think you've experienced this as well. The VC money or the PE guys will tell you, don't worry, you have full autonomy, this, that, the other thing. It's a lot different, though, when you're actually taking their money and now they're going, well, you need to cut things here, or you need to add things there, or we don't like that you're doing the product this way.

[00:06:59.09] - Dan Paulson

Now you to change it to something else. And it can upset your whole vision, if you will.

[00:07:07.28] - Rich Veltre

A hundred %. And I think that'll lead to something else that I'm thinking about for the conversation. But it's one thing. A long time ago, everybody was telling me about the use of a limited partnership where you had one general partner and all these other limited partners, and the limited partners I had no say in anything. Because the GP runs the show. I got news for you. I was an accountant for years, and I did tax returns for years for these LPs. If an LP puts in a lot of money, don't expect them to be quiet. Don't expect them to be silent. Don't expect them to not show up and not have some degree of influence by just showing up at the meeting. You want to the biggest influence he has? I want my money back. Okay? How about you do what I ask, or I'm going to get my money out? And so when you start to think about that, you realize how much influence the money itself has. It doesn't matter whether they have a vote. It doesn't matter whether they support what you do or not support what you do. If they want it done a certain way, the money will influence.

[00:08:27.06] - Rich Veltre

Or if you're going to get to the point where you have to ask for more, you are in the position of, did I do what he asked the first time? Because if I didn't, he's not going to give you more. So that's a huge factor in what we're talking about, it's a huge factor in, can people just go out and ask for money? It's not as free flowing and cheap as it was even five years ago.

[00:08:54.27] - Dan Paulson

Right.

[00:08:56.00] - Rich Veltre

Okay. And therefore, it's a more competitive landscape. You have to have something. So maybe you do have to go back to bootstrapping. And I feel bad for some of the people who just, I came out of school, and I'm going to go, and I'm going to go do this because everybody told me I could. Well, five years ago, when you went into school, that may have been the case. When you came out of school, the world changed, and it may change back again. It may become a little easier. There's a lot of things going on that we can talk about. But it really does become... You have to become almost a thought leader as well. It's no longer... You have to have an idea that people are interested in. And there's certain ideas that are available right now. If you're into green tech and you have something that you think can go somewhere, people will listen. If you have just normal tech that's new and fresh, AI, you show up talking AI, and people are going to come listen, whether they think you have a real idea or not. But you have a shot, because AI is the big buzzword.

[00:10:08.22] - Rich Veltre

I think the other... Health care is still a buzzword. It's still something to talk about.

[00:10:15.22] - Dan Paulson

That's a little bit harder market to hit. But yeah, there's a lot of desire in health care to improve.

[00:10:22.08] - Rich Veltre

Because everybody still remembers that tech had that boom, right? There's a chance that you could get in on something, and you build it to a certain level because somebody gave you money, and boom, it's so big that you're the next Google. Remember, Google had massive valuations, and they had no sales.

[00:10:39.08] - Dan Paulson

You go back to the beginning. That's it, Amazon.

[00:10:42.17] - Rich Veltre

Yeah. There was no profit in Amazon. It was a grow, grow, grow, grow, grow, keep going. And suddenly, they were what they said they were. So now, I think the big thing is it goes back a little bit to what do you know? And what are you trying to sell? What are you trying to do? Your product specific at this point? On top of that, who do you know? It goes back a little bit to the friends and family. But I think if you knew other people who grew something and exited at a successful rate, they've now jumped into the other side of the table. They've jumped in to be the next VCs. They've got the next funds. They've said, oh, I built LinkedIn. I don't know. That just came in. That's the one that came in my head. But if they went over and got to the other side of the table and said, I'm going to invest in these other guys that are like me, those are the guys you hope you knew. Because they've got funds now that they've gone and built something new. And then there's the sector-specific, the people who have studied green tech for however long, and you're going to go to them and pitch something, and they're going to say, We have more knowledge than you do.

[00:11:58.04] - Rich Veltre

Or, Wow, that's a great that's going to fit right in. So it's 50/50, right? Because they already know what you're talking about. They're already looking to invest in these things. They don't want to actually do it. They want to put their money into it because they believe it's a good idea.

[00:12:13.00] - Dan Paulson

Yeah, yeah. And then they're hoping that within the next three to five years, they'll be able to cash out and make a multiple of that cash. Most of the companies that probably listen to this or that we talk to anyway, have no desire to grow that way. They They're the manufacturing company. They're the mom and pop shop. I can't really say mom and pop shop, but they're manufacturing their construction, logistics, some medical. They're looking to just build an enterprise that will support their lifestyle and hopefully provide them with retirement. Now, as you pointed out, we're in an economy where money is expensive, a lot more expensive than it was, as you pointed out, five years ago. What are some of the suggestions from a financial guy to say, okay, here's how you bootstrap what you're doing. So let's say you started a business a couple of years ago. You're doing okay, but you want to grow. At the same point, you don't want to take up massive debt and go to a bank because banks don't understand this type of financing. If you got a building, they'll finance that. They'll give you sometimes some operating capital, maybe to buy some new equipment.

[00:13:19.19] - Dan Paulson

But when it comes to financing growth, most banks shy away from that because their underwriters can't measure it against anything, nor do they know how they're going to get their money back. So really, you do have to roll up your sleeves and figure out how you're going to do it. So what do you do on the financial end to make that go?

[00:13:38.01] - Rich Veltre

Well, I'm going to say something that no one ever allows me to say.

[00:13:41.26] - Dan Paulson

It's your show, Rich.

[00:13:44.11] - Rich Veltre

Your accounting is incredibly important. If you don't know how your business is running, then you need to dig into that first. If you haven't You haven't started yet, and you're just looking to start a business, invest something in making sure that that's set. You have no idea how many times I walk into a business and I say, show me your financials, and they hand me a profit loss statement? Okay. I went to accounting school, okay? And I would argue that there are, in an audited financial statement, there's five statements, and in any other statement, there should be at least four, okay? I can forgive you if you give me three, all right? But if you know, okay, the notes and everything that go behind the financials that explain everything, are the fourth statement. So if I come in and ask you for financials, and you don't give me a handwritten report about what's in the numbers, I can forgive that, for what I'm looking for. But if you can't give me a balance sheet, a PnL, and a cash flow for an existing operating business, go find out why you don't have those. Because every question I'm going to ask you has to do with all three, not just how you're doing.

[00:15:14.04] - Rich Veltre

And the thing that I tend to tell people is make sure you dig hard because I guarantee you you will find extra money that you can use to build the business if you just investigate what you have. This pie in the I'm going to go down the street, and I'm going to make sure that that guy knows that I'm going to build this thing, and he's going to put in millions of dollars on day one. So many companies fail at getting that funded. So all you're going to do is try to live off of whatever you have, and then pie in the sky is you get somebody to give you money. What else can you do with your existing financials? What else can you do that finds you You money. Okay? Stupid little example. Do you know how many times somebody goes in and we start to ask what's in this account? And you find out they've got nine different software subscriptions that have been on forever that are just automatically charging to their credit card, and they don't know that they never canceled it. So I know that's not going to build you a factory.

[00:16:22.05] - Rich Veltre

Okay? But what else is going on in there if you didn't know about that?

[00:16:27.29] - Dan Paulson

In some cases, that alone can still be free up $1,000 or more in cash flow each month. Yeah. He had a client that we started looking at the cash, and why was the cash going so quickly? Well, here he had all these subscriptions to stuff, including somehow he got some online games tied to it that were drawing out hundreds upon hundreds of dollars each month that he didn't know, he wasn't even playing the game. So it's just simple little stupid stuff like that that's I see to get caught up in if you're not paying attention to what's coming in and what's going out. Now, I will ask you this because I often have to ask my clients because they don't look at their financials enough to get their financial statements from their accountant or give me what the accountant gives them each month, if they're still lucky enough to have an accountant that gives them monthly financial statements without asking. Most cases, I never see a cash flow statement in there. So I would forgive them if they could provide Two, the balance sheet and the profit and loss, to me, that's impressive because a lot of them don't have the cash flow statements, and they never see them.

[00:17:38.26] - Rich Veltre

If you can give me a comparative balance sheet and a PnL, I can make my own cash flow statement. I can do it back of the envelope. I can come up with a reasonable idea of why the cash is one way and why the profit is another, because they're not the same number. And funny part is, When you think about it, if you have an existing business, I realized the startup people just checked out on me 10 minutes ago.

[00:18:08.02] - Dan Paulson

This isn't sexy enough for them.

[00:18:09.28] - Rich Veltre

Yeah. The existing business people, if you're telling me I can find a few hundred Right? Per month. Bank loan, what's a bank loan going to cost you? Because it's over time. So if you needed funds and you couldn't get it from a VC, can you get a decent rate and get something else started? Is there a way that you can get a prototype without having to bring in hundreds of thousands, if not millions of dollars to get a proof of concept? I mean, that's the biggest risk I could ever think about. That you're getting We see money to do a proof of concept, and most of the times, they want you to have the proof of concept before they even invest. So how can I get you a proof of concept so maybe you can get to phase two without already having the risk of I somebody's money? Okay. So when I look at this, I'm looking at, what else can I find in your financials? Can you cut down the point to the point where you have funds coming in that you can use to go ahead and pursue the idea that you have?

[00:19:19.23] - Rich Veltre

And that's the part that I think is important for people to understand. Understand where your real starting point is. And that way, you can decide if it's worth going after the VC money, do I have enough of an up-ramp, or am I so emotionally invested? I just think I do. I think that's why I'm jumping into, look at your accounting. Make sure you understand the numbers that you actually have. Make sure that this is a smart move for you. Are you killing your old business because the new business sounds like it's something that's sexier than the old business? The old business is paying So don't kill it to go find something that you're not 100 % sure about.

[00:20:05.24] - Dan Paulson

Exactly. Well, another point to this that should be right up your alley, too, is budgeting. How many businesses do you know that perform a budget every fall or before they're at least rolling into their new financial cycle, whatever that is? Most of them run calendar year. But there's a lot of companies, a lot of businesses I walk through when we're explaining the financial It's like, okay, let's do a budget. Well, how do you do that? Okay.

[00:20:35.12] - Rich Veltre

Well, I know where we stand.

[00:20:36.24] - Dan Paulson

Let's figure that out. Let's get together a spreadsheet. I've even gone through and created a spreadsheet that will do some automatic calculations for them. Just enter these sales numbers, and based off of what you've done in the past, it will automatically fill out. Now, let's look at those numbers individually. Is that what you think you should be spending there, or is that too much? Is that too little? What if you change this? So then I give them a second column where then they can change the dollar amount to see how that impacts the overall percentage is off their revenue. So it doesn't have to be complicated, but it is something that if you take them through that exercise, they start getting more conscious about what they're spending their money on and where they're spending their money. And now they start asking questions, should I be spending my money on this? Or if I want to grow that, where can I take from elsewhere? What pots can I lower to get the money I need to get? That just doesn't happen that I'm willing to bet you don't see a lot of budgeting or forecasting like that either.

[00:21:35.13] - Rich Veltre

No. The smaller the company, I think the fewer budgets that I see. Some of the owners have something in their head. They know they want to see 5 or 10 % growth on the top line. It's rare that I get people who really understand the rest of the lines They're very much on, I'm growing if my revenue is growing. I'm growing if my profit should be growing. They muddle that should be My profit is growing because my revenue is growing. And mechanically and mathematically, they should be right as long as nothing's changed in their expenses. So that's why I still challenge people all the time to do something as far as a budgeting goes, but go past the revenue. What do your expenses look like? Did you just go buy a bunch of equipment and suddenly your interest expense out of the window? And did you forget about that when you got it in your head that you should be growing, and you bought this equipment because that should help you grow? I get it. But now your cash flow is to pay back the payments on that equipment, And you've got interest that's affecting your bottom line.

[00:23:02.24] - Rich Veltre

So if you didn't think about that, that's the challenge we should go through. What else changed in your expenses? And the fastest way to do that is really set up a budget, which is an advanced look at what you think you're going to come out with at the end of the next year. So I've been even challenging some of the smaller guys to at least put down a revenue and an expense number and say, here's what I expect my profit to be next year. Yeah And if you can get that part, that's phase one. Then we can expand on that as we move to phase two. Because realistically, you take that phase one number, you get to the end of your first year, and you compare to how you actually did. And suddenly, you've got a barometer for, oh, wow, I was really far off, wasn't I? Or, okay, I was spot on. My head's working just great. So which one was it? Or your Are the numbers in your head good or are they bad? I would say it's probably more than 50 %, where people say, Oh, my thought was off. And so you start to get people really to buy into the fact that, Okay, I need to start planning for this a little bit because I can't fly by the seat of my pants.

[00:24:20.05] - Rich Veltre

I really have to have some degree of control over what I'm spending, which is the easier one to deal than controlling who's going to buy from you next year.

[00:24:34.04] - Dan Paulson

Right. Exactly. Yeah, it's crazy. And a lot of this comes down to also maybe a little bit more patience, too. We are in a habit now as a society, which is what I think made getting the VC capital and stuff like that sexier because you could get that money right now. And again, it made you out to be maybe bigger than you appeared to be. I I don't think there's anything wrong with unless, again, you're probably in technology or something where the change is so rapid, you almost have to seek that investment to stay on top of it. But let's face it, most of us don't do that. We're in companies that are a little bit more steady, changes a little bit slower. We can take the time if we need to. We can't take a ton of time, but as long as you're working and staying ahead of the curve, you don't need to solve the problem tomorrow. I think that patience can go a long ways, because if you can be more resourceful on how you spend money, how you retain money, and you're not looking to borrow money, because any time you borrow money is expensive, whether you borrow it from a bank or whether you borrow it from another person.

[00:25:41.14] - Dan Paulson

Not only do you have to pay back what you borrowed, you have to pay back that and then some interest over time. So to me, if we can figure out how to minimize certain costs and get that work done, then that's going to be a lot better than just jumping in and finding the easy way out, which almost never when you need money, is there an easy way out?

[00:26:02.20] - Rich Veltre

Exactly. I think the other thing is to understand what business you want to go into. Is there a big CapEx here that is your barrier to entry? But once you have that, you've got an idea that nobody else has. That's the stuff that's interesting. But I always laughed because I watched a lot of Shark Tank. And you always knew when somebody came in and said, I'm raising all this money, and it's this crazy amount of money that I'm trying to actually raise. And then, what are you going to do with the money? And they say, marketing. And you lose the investment almost immediately because these guys are like, well, that's just basically asking me to put money in to just light it on fire. And it's not always that way, right? Marketing could be a very important part of what you're trying to do. But do you have a thought in your head on what else can you do to market these products, or whatever it is that you're trying to get the investment for. Very rare does somebody say, I need to expand my factory, right? Or I need to expand into, I need this other technology.

[00:27:17.27] - Rich Veltre

I need this investment because it's going to buy me this software or hardware that's going to actually do things 10 times faster and get more product out It's rare that you would hear that. And when you do, usually there's people that their ears perk up because they're like, okay, this has a real need. The money will go into something that's actually physically going to be there. Not just a year from now we spent it and it's gone.

[00:27:49.23] - Dan Paulson

And they're asking for more.

[00:27:51.01] - Rich Veltre

And they're asking for more.

[00:27:52.15] - Dan Paulson

Yeah, because the marketing machine is a never-ending funnel of cash. That's for sure. Right. Yeah. Well, this has been good discussion. No problem, Rich. I hope somebody takes something away from this that you don't need to borrow a ton of money. In fact, you probably should avoid it in most cases. A little patience will go a long way, but this has been a good chat. So Until next time. We'll let Bob take us out, and we will talk to you next week, all right?

[00:28:20.00] - Rich Veltre

All right. Sounds good. Talk to you later, Dan.

[00:28:21.18] - Bob

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