A Successful Entrepreneur Gives 5 Rules for Bootstrapping

Alykhan_KarimAlykhan Karim is the founder and CEO of Sonoma, which offers access to premium wines in Brazil.  We asked him to go over the process he took to make Sonoma successful and to share his secrets to bootstrapping.  Even though he is in Brazil, his insights are universal.

Please briefly describe Sonoma and what market opportunity you capitalized on with this venture?

Sonoma is Brazil’s foremost curated sales site for wine and gastronomy. Our team consists of some of the country’s top sommelieres, who work with over 200 importers, artisanal foods producers and boutique vineyards to source really amazing products. We highlight in daily campaigns a few select items that we really love, paired with interesting and original related content. Because we’re able to sell a large volume in a relatively short period, we can thus negotiate prices up to 50% below market for our consumers.

The market opportunity we saw was entering the untapped “discovery” space in the wine and food industry.

Wine in Brazil is growing extremely quickly, with USD $7 billion in projected sales for 2014 and a 15 -20% CAGR over the past 3 years. However, wine and gourmet food culture here is relatively new and most consumers know little about this intriguing, yet oftentimes intimidating area. Additionally, wine is extremely expensive in Brazil, due to high import and state taxes. Choosing a new bottle “blindly” in a traditional retail setting can be a perilous and disappointing endeavor, one that hurts the pocketbook a lot more than it would in the US.

We decided to create in Sonoma the ideal “discovery” environment. We aim to educate, through articles, videos and product descriptions that eschew formal “wine language.” We’ve also built our brand around the quality of our product. Because of the rigorous selection process of our curation team, we’ve created a retail experience in which our clients can confide that they are getting a top quality product for an extremely fair price. In short, we’re making discovery fun, safe and delicious.

How did you begin? Specifically, what funds did you use to get going?

I began with personal funds that I had saved from my previous occupation as an equities trader for a hedge fund in NY. After putting together the team and gaining initial traction, we did two seed rounds of investment, the first from family and friends and the second from professional angel investors.

Did you plan on eventually raising a professional round of funding or were you always intending to bootstrap?

In actuality our goal was to raise vc-funding as quickly as possible. Brazil in mid 2011` and early 2012 was a very “hot” environment and many Silicon Valley vc’s entered quickly into a host of e-commerce plays. However, the environment radically shifted over the course of 2012, as many of these funds realized that ballooning online customer acquisition costs, logistical and inventory difficulties and the improbability of quick exits made Brazil a more complicated environment than initially anticipated.

The shift in the fundraising environment forced us to change strategies and focus on building a leaner team, be extremely attentive to customer acquisition costs and LTV estimates and to pursue angel financing versus depending on a larger vc-round.

What were the trade-offs in your personal experience from taking the bootstrapping road? Would you do it the same way if you could do it over?

There are definitely pluses and minuses. The risks are certainly greater by bootstrapping, especially if you are employing personal and familiar capital. We’ve all heard horror stories of damaged relationships and personal bankruptcy from entrepreneurs who’s vision’s have not panned out. VC’s invest knowing well that many of their companies will fail and this possibility is baked into the model.

On the plus side, many entrepreneurs who start with significant “padding” have no real skin in the game and may feel like they have nothing to lose. Raising funding based on an idea can often lead to costly execution mistakes and tests that are too expensive and not as tightly monitored as they could be. In the first year most companies are still figuring out their business model and who their customers really are. This takes time for all startups, but the pressure of putting a larger vc-led round to work often leads these entrepreneurs to pay a higher price than is necessary to gain these initial learnings.

The other plus side to bootstrapping is obvious. You control more of your own equity. The average first vc-led round usually leads to 30% dilution, and each successive round results in another 10 -15% gone. The risks of bootstrapping as long as possible are great, but if you can really hit your stride and start gettign things right before raising institutional capital, the rewards can also be tremendous.

Have you been approached by VC’s? What has it been about them that has turned you off?

We have. We’ve also in turn approached them. It’s been a two way street. When we were getting started received an initial offer that was interesting but that we decided to decline, mainly because we felt that the strategy of the fund was not inline with the way that we were trying to build our company. Over time we pitched others, but as we realized that many had decided to “freeze” on investing in e-commerce in Brazil, we turned our focus towards angels.

Most likely Sonoma will raise another round of investment in the near future and we’re currently speaking with VC’s. However, our experience bootstrapping our way to significant traction has allowed us to realize the value of individual investors in an environment that still has sparse institutional money compared to the US. The VC model focuses on an ideally 5-year exit and leads to entrepreneurs focused on their top line at all costs. In a bull market with many potential acquirers this is a great strategy, as companies whom are doing well can raise round after round. However, in Latin America it is a bit more difficult (and even in the US today the Series A crunch is leading to the failure of many companies who’s DNA was built around the necessity to raise funding round after funding round). In this part of the world there has never been a Google, a Microsoft, a Square, a Dropbox. Investors are more conservative, but they also don’t have the expectations of making 100x. This is a huge advantage – it allows you to take your time, to really find out what it is that is driving your sales, who your best clients are, what they expect and how to best serve them. It allows you more leeway to focus on building an amazing product, versus just showing numbers.

If you were to come up with the “5 Rules Every Bootstrapper Should Follow,” what would they be?

1) Hire all round athletes and not superstars.

Wise words from my favorite vc/ entrepreneur blogger, Mark Suster. You can’t afford the superstars, both in terms of payroll nor in their expectations. You also don’t know if you’ll need them. All round athletes can perform in all areas. Find out which ones drive your business

2) Test cheaply.

Whether it’s creative customer acquisition or “testing phase” periods for new hires, find out the minimum spend that will give you the learning you need to make a bigger decision.

3) Don’t do things by the book.

You’ll go broke. Stave off taxes as long as you can, build good relationships with suppliers who will float you, haggle payment terms as long as you can, calculate the risk reward of being fined for not doing something the “right” way and act accordingly. Hire a good accountant who lives and knows well the “gray” area. You don’t have the $ to do everything by the books. You still don’t know if your initial value proposition works.

4) Motivation is key.

It’s key for any CEO, but a mediocre motivator can make up for it with benefits, cool “google style” office perks, free lunch … (its never really free, though, is it?).

You can’t. Have your employees backs, go out of the way for them, make them feel like they’re an essential part of the journey that you’re on. People will do far more for you out of love and respect than they will out of obligation or fear.

5) Get good at selling.

Bootstrapping doesn’t mean doing something with absolutely nothing. At some point you will need to convince potential investors to buy what you’re selling, even if they’re not VC’s. You will need to convince your employees to buy what you’re selling. You’ll need to convince your customers to buy what you’re selling.

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