Perhaps something of an oddity amongst publicly traded tech companies, Ubiquiti Networks was bootstrapped with no operational funding from inception up to the IPO. For a software company, this path is challenging enough. But, Ubiquiti makes hardware. And with making hardware comes the additional financial burden of funding larger and larger manufacturing expenses as the business grows. People often ask me how we were able to pull this off. Over the course of the next several weeks, I will introduce a set of bootstrapping strategies, which I hope will give insight into things I did well and things I maybe did not do so well in leading Ubiquiti from my apartment through our IPO.
In sharp contrast to Ubiquiti’s bootstrapped beginnings, venture capital backed companies are often supported by experienced, savvy investors with operational backgrounds, strategic mindsets, and a commitment to establishing expensive, but necessary infrastructure within their companies (including forming an experience board, hiring corporate lawyers, hiring experienced management, planning a public relations campaign, and creating an IP portfolio). The assumption is this infrastructure will one day be imperative to protecting the company’s standing. And, it took my own learning experiences to realize something — they are right. VC’s are playing for tomorrow.
As a bootstrapping entrepreneur perhaps the biggest challenge is how to balance playing for today vs. playing for tomorrow. When you are starting, there is no money or time to really look at tomorrow; you can easily get caught in the moment as you are scrapping with everything you have trying to survive today.
When I left my job at Apple in 2005 to dedicate myself to Ubiquiti, my only thought was “if this doesn’t work out, I am screwed.” It was March of 2005 and my $600/month studio apartment lease down the street from Apple HQ was coming up for renewal. Instead of committing to another year, I moved my futon and my HW lab into an economical $650/month office surrounded by bail bonds shops across the street from the San Jose Courthouse where I would make my home for the next several months. Although there was sufficient capital from upfront customer down payments to fund the first manufacturing builds, I was locked in survival mode and entirely focused on how I was going to setup manufacturing, make the shipment lead-times, support initial customers, come up with new product designs, and build the Ubiquiti brand.
I had no real advisors, no board members, no corporate lawyers, no accounting, and no IP strategy. I was completely winging it and was playing to survive another day. I really did not always see the importance of living for tomorrow until much later on in the company timeline. One of the biggest regrets I have today is that I did not make the transition earlier.
But to be fair, if Ubiquiti would have ended up as a failure and shut its doors early, playing for tomorrow would have become irrelevant. Therefore, the best strategy is to incrementally increase your “insurance” as the value of your company increases and resources become more available.
Here are 3 areas of important “insurance” early-stage bootstrappers should look at:
Relationship Contracts: At this point, you just got in the game. You might have hired some contractors, partnered with another company, or signed up your first distributor. No matter what the nature of the relationship is — an employee, friend, contractor, vendor, distributor, partner, etc. – EVERY ONE should be under a contract that protects the company’s best interest. Get these signed once, filed and out of the way. It is your most critical insurance. Unfortunately, a lawyer should be engaged to create these contracts (I will talk about how to handle lawyers in a later post). For now, remember when dealing with lawyers -– they work for YOU and you should always run them “closed-loop” with a specific scope of deliverables and defined project fee determined up-front.
Initial IP (start with Trademarks): By now, you might be starting to produce product and generate some profits. In order to protect against unfair competition as your product sales grow, you should start looking at some IP investment. If funding a patent portfolio is still out of reach, start with provisional patents and trademarks. Trademarks also can provide powerful insurance against unfair competition at good economics. They are important to have in the regions where a product is sold, but also IMPERATIVE to have in the region of manufacturing. There are trademark consultants, patent agents, and online resources that can assist in economically registering trademarks and provisional patents.
Bookkeeping / Tax Accounting: As you start to file corporate tax returns, it is important that you have an expert not only making sure you stay within the law, but someone who knows how to take full advantage of tax credits and strategies. When I was starting Ubiquiti in the early years, even though it was incredibly profitable, cash flow was challenging as funds were constantly being reinvested into larger manufacturing volumes. In this case, the timing of the re-investment and the tax obligations created severe cash flow challenges. An experienced corporate tax accountant can find tax strategies that align with bootstrapping; including in this case for instance, tax payment deferral. Proper book-keeping with as much transparency as possible is also important as your company grows as it will play a major role in facilitating future funding opportunities and maximizing your company’s perceived valuation.
Keep in mind, that this is just the beginning of the infrastructure you will have to commit to as the company matures. But, hopefully by that time, you will have found a good advisor that can help to fill in the more advanced pieces.