Who is more likely to produce long-term shareholder value — the entrepreneur who raises too much investment capital, or the entrepreneur who funds growth through profits alone?

First time entrepreneurs often have skewed visions of “how it all works”. Their perceptions are often shaped by the numerous successes that get touted about the media, rather than by the 1000-fold number of failures. It makes the “accidental success” of YouTube appear reachable, or at least “just as likely” as any other startup.

One of the things that entrepreneurs usually believe is that once they have an idea, they need investment — that’s just how it works, right? Once they start to talk to investors though, as well as advisors and other folks in the startup community, the questions usually come up … is this a lifestyle business or a “swing for the fences” big market opportunity? A “lifestyle business” is one which you intend to keep running for a decade or two — like my Dad’s optometry practice, for instance, or my brother’s event audio/visual recording business — typically an owner-managed business in which the profits are used solely to support the ongoing lifestyle of the proprietor.

Then there are the “swing for the fences” big market opportunities. These are the startups with big goals, where the entrepreneurs focus on a market opportunity >$100M. To get there, most companies on this track sell ownership in their company at some stage of their business to raise the capital necessary to build their company. Some companies even raise huge amounts of venture capital, at a hefty dilution mind you, before they even arguably HAVE a business. (Twitter comes to mind …) Investors are compelled by visions of a healthy return on their investment, and in the latter case also by extremely savvy entrepreneurs.

For whatever reason, I’m NOT a “lifestyle business” kinda guy. I’m only interested in building a company with a compelling market value and resulting shareholder ROI, but as a founder I’m ALSO uninterested in immediate dilution down to single digit % ownership. I want as much equity in the company as possible.

I learned long ago that the best way to build personal wealth and shareholder value is through “bootstrapping”. Bootstrapping is the art of building companies with very little outside capital/investment. I’m proud of my bootstrapping skills actually, which I’ve developed over four startups now, yet I’ve also realized that outside capital is also essential to developing/realizing a substantial market opportunity.

The reality is that there is a middle ground. Bootstrapping your way 100% to IPO, while honorable, is very difficult and uncommon. If the market opportunity is truly there, being under-capitalized will usually result in missing the market window of opportunity. Conversely, raising too much capital too early rarely results in long-term shareholder value. In other words, given a large market opportunity — a startup that raises too much investment capital is just as likely to fail (to generate shareholder value) as a startup that doesn’t take any investment capital.

I’ve been building Others Online based on what I thought to be an appropriate balance of equity financing and bootstrapping (”sweat equity” financing). Unfortunately we’re still not profitable and thus reliant on investment capital at a time when the market opportunity is large and we’re landing large customers, but market conditions are unstable and investment capital has dried up. And the other day I was talking to one of my investors, who literally wrote the book on bootstrapping, about our status as a company. He insisted that there “has to be a way” to generate more cash from our pipeline immediately. The only way I can see to do that is to shift our business model in the short-term, and I worry that doing so may negatively impact our ability to achieve the “big market opportunity”.

I keep thinking about this. Is it possible to “swing for the fences” (big market opportunity) at the same time as focusing on 1st base (getting to cash flow breakeven)? Or are the two incompatible? I suppose it depends on the market opportunity, but I’d argue most high-value windows of opportunity in the market are open for a limited period of time. Rarely do you not have competition eyeballing the same opportunity, and sufficient funding is generally a prerequisite to nailing these windows of opportunity.

Market leadership positions are always attained as a result of execution. Financing is not execution. However, financing provides the means to develop the necessary components to execution: team, timing, marketing, and product development. Since paths to success are rarely a straight line, financing also helps recovery from bad decisions (on any of the above). Under-capitalized companies are therefore at greater risk. That said, bootstrapping is also essential. It teaches you to make your mistakes quickly and therefore least costly. Bootstrapping is good execution.

2009 is going to be a difficult time for companies who are “swinging for the fences” but aren’t financed for the next 12-18 months.  If you’re one of them, like we are, it seems you can only either change your game plan and just focus on 1st base, or merge your team with a team in a far better position to hit the home run.

Jordan Mitchell, the author of this post, blogs regularly and is the CEO/Founder of Others Online (his 4th Internet startup), which provides ad networks with behavioral profiling and targeting solutions.

If there was a near-perfect analogy for all businesses, it would be the lemonade stand. Did you ever play the computer game growing up or did you ever operate a lemonade stand? It was pretty easy to get, right? Buy cups, buy lemonade, build a stand, advertise, and sell for more than it cost - make money. Shouldn’t all businesses be intuitive and easy to understand? What is your business like? A lemonade stand or Enron? I still don’t get Enron. Get back to the basics.

Let’s start with an almost-true Lemonade Stand story. Sara, a budding entrepreneur at the age of 9, started a lemonade stand just over a year ago. Each month, she runs the stand on the weekends asking everyone who was nearby to buy. It happens to be a very profitable business, making almost $40 month and going up every month.
She was able to buy herself a bike and any toy she wanted on her own. In fact, business was so strong, she decides that she wants to buy more cups and more lemonade for the month of January. However, her Dad being a wise and experienced businessman warns her daughter that the country is in recession and that less people will be buying lemonade in this environment - perhaps, she should save her money and wait to grow the business later in the year. The daughter listens, pulls the signs and lowers her inventory, sure enough her sales slow. She responds to her Dad with pride - “you were right, thanks for letting me know there was a recession!”

I love this story for a few reasons - I love the fact that she was an entrepreneur, she was able to build a profitable business when so many big businesses are unable to, and that she was ambitious. What do you think would have happened had Sara ignored her Dad’s advice and went ahead and invested more into the business? What if instead of pulling back, she built more signs and spoke louder on her corner to anyone who was within shouting distance? I don’t think there is a wrong answer, but I would have pushed her to be more aggressive with signs and pounding the pavement and speaking with potential customers farther away. I’m sure other lemonade stands were facing the same issues. She just may have seen her business grow instead of contract.

I took away some key learnings and great reminders:

1) Resist Knee-Jerk Reactions. Sure, we are in recession. That doesn’t mean you should pull back everything. Think strategically, you just might want to increase inventory if your competitors are going out of business. You might want to advertise, you might want to increase your hours and get in front of more customers.

2) Make your Business Simple. The lemonade stand business is great - it’s an easy to understand business. Take complexity out of your business - collect cash upfront, advertise, sell, make sure there is profit, optimize. Get back to the basics. Revenues minus expenses equals profit. Which part of the equation are you working on today?

3) What are you spending time on? How much time do you think Sara spent on the phone and responding to email? None. She knew what she had to accomplish and she did it. Stay focused, set specific times to answer voicemail and email - stick to it. Get back to work on the basics.

4) Start. I’ve mentioned this on my blog before, start the business, get in the game. If a 9-year old can do it, you can too. Not only that, she’s profitable. If you’ve already started a business, start getting profitable immediately, if you’re profitable, start getting more profitable. Pretty basic stuff.

5) Consistency. Sara built her business over months and stayed consistent. Entrepreneurs are generally impatient (including me), and often quit too soon. We can all learn a lesson from her to stay consistent and build a long-lasting sustainable business.

Our businesses would be so much easier to run and we would be less stressed if we would just get back to the basics and focus on those things that directly impact profit. Sure, there are times to be creative and do biz dev deals, but be judicious especially in these times. If it doesn’t directly impact profit immediately, should there be something else you could be working on that would?

What would your advice be to Sara? How would you take Dad’s advice? How are you getting back to the basics?

This post was written by Andy Liu, a serial entrepreneur and angel investor. Andy currently runs BuddyTV, sits on several boards, and blogs at InspiredStartup about staring and growing successful businesses.

Striving for excellence in your business is absolutely critical in this environment. There are too many average companies out there. They are struggling. Excellence is hard to execute, but if you do execute - it becomes a huge competitive advantage. Here are some of my thoughts for creating and sustaining an excellent company:

1) Operational Excellence. Transparency is key. Do you have a dashboard? Do you know what’s going on in your business day-to-day, each hour? Do you know your key performance indicators? What constitutes success this year, this quarter, this month, today? You can’t improve what you can’t measure. Get that dashboard built and automate it so you know what’s going on and act on the data. For our business we track uniques, pageviews, repeat visits, registered users, popular pages, revenue, and other key metrics everyday. Whatever your business is, don’t fly blind.

2) Service Excellence. How do you measure customer satisfaction? Is it improving? What is your process for training customer service personnel? How do you build-in service that is cost-effective, that’s wanted by the customer, and exceeds their expectations? What is your customer retention plan? In this environment, we can ill-afford to lose any customers because of service.

3) HR/Cultural Excellence. What is the culture of your company? Are people hungry? Are they willing to go above and beyond the call of duty for the company’s success? Do they feel passionate about your vision and mission? Are you setting the tempo and serving your staff? Are you enabling your people to succeed? Servant-leadership is key. Company vision and mission where everyone is pointed in the same direction is also critical for success. If you asked every person on your staff what the company’s mission is, do you think you’ll get the same answer? You should.

4) Product Excellence. Does your product really stand out from the crowd? Is it really easy to use? It’s easy to get lazy and not put in the extra time to get the product right for the customer. We’ve been working on a new product for BuddyTV for what seems to be a terribly long time, but we’re committed to making sure that it is excellent product launch with minimal bugs (we can’t squash all of them) and that it can be easily used.

5) Communication Excellence. One of the most underestimated centers of excellence a company must have is communication. I’m personally working hard at this as it’s not easy to maintain a rhythm of communicating when you’re very busy. Are you communicating well with your employees especially in these turbulent times? Are you communicating with your clients, investors, your board? I’m not surprised to learn that most companies struggle with this, it takes time and effort. Transparency garners respect and generates more energy as people understand the rationale behind decisions. Generally, people don’t like surprises, so keep the communication lines very open and you’ll be rewarded for doing so.

What are your centers of excellence? How do you ensure that everyone on your team is bought into excellence?

This post was written by Andy Liu, a serial entrepreneur and angel investor. Andy currently runs BuddyTV, sits on several boards, and blogs at InspiredStartup about staring and growing successful businesses.