Kennet: Backing Bootstrappers

We recently spoke with Michael Elias, a founding partner at Kennet. Go to Kennet’s website and the first thing you see is:

“You’ve funded your growth the hard way: by selling real value to real customers.
You don’t need venture capital to validate your idea: the market has already done that. You need a different kind of capital.”

In other words, they are looking for entrepreneurs who have bootstrapped.

Huh? If you’ve bootstrapped, why would you need venture capital? We spoke with Michael to learn the reasoning behind this. Note, you need at least $10 million in revenue to appear on Kennet’s radar.

Listen to the Interview

Download the MP3.

Questions and MP3 Guide

Question #1: Kennet specifically targets entrepreneurs who have succeeded in bootstrapping. Can you explain the thinking behind this?

Skip to 1:05 in MP3
Summary: Michael explained that Kennet started as an early-stage fund, but after the technology crash in 2001, it shifted to a growth equity model, investing in mature but still high-growth ventures. It believed that the early-stage model of relying on a few blockbuster hits to make up for a lot of failed ventures would be difficult in a market where high-value exits via IPO were not an option.

Question #2: How much revenue does a venture need before you become interested? And how big are they typically when they exit?

Skip to 4:01 in MP3
Summary: $10 to $30 million in revenue at the time of investment, and in the $50 to $100 million revenue range when exiting.

Question #3: When you bootstrap, you trade scale for cash flow. With funding, you can go for scale and be less concerned about short-term cash flow. How do bootstrapping ventures make this transition?

Skip to 6:11 in MP3
Summary: If you are bootstrapping your business, this is well worth listening to. Michael describes four situations in which getting external capital might make sense:

Market growth has accelerated beyond your ability to keep up. Capital enables you to maintain or grow market share.
The sales model has become predictable enough that you can hire more sales people with low risk.
You have opportunities to make acquisitions.
You want to diversify and take in some cash. This is debatable in early-stage deals but makes total sense when you have taken on a lot of personal risk to build the company. That may make you too risk-averse.

Question #4: Where are most of your ventures based? Would you do deals in continental Europe? The US? Asia?

Skip to 15:50 in MP3
Summary: Two thirds in Europe, one third in the US, none in Asia.

Question #5: What market segments excite you today?

Skip to 17:20 in MP3
Summary: Michael explained that Kennet’s investments today look dramatically different than they did five years ago. In the past, it invested in enterprise software and semiconductors. By contrast, its recent deals have included such markets as:

Education, in the USA,
E-tailing, in Europe,
Online video advertising, GoViral being an example.

Most Interesting Fact

Broadcom, one of the world’s leading semiconductor manufacturers, was built on $10,000 in capital. Who would have thought that a semiconductor company could be bootstrapped.

If you are just starting your venture and plan to bootstrap, this seems like a long way away. But it can be helpful to know what your options will be when you reach that stage.