Nobody wants to set their business up for failure. Although a few startups can successfully raise their outside capital, most end up bootstrapping to survive. In this episode, James Benham, author of Be Your Own VC, describes how bootstrapping principles led his tech company to a multimillion-dollar exit. He also shares some insights on the indicators that business owners should look out for to make changes in their businesses. There are so many takeaways from this conversation. Find the end of your rainbow and tune in with James Benham.
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Bootstrap! How To Generate Cash And Keep Control In Your Construction Company With James Benham
“Cash is king. Get out of debt. Stay out of debt. Build what you have to so you can build what you want to.” These are the first 3 of 10 principles that James Benham has articulated in his book, Be Your Own VC: 10 Bootstrapping Principles to Generate Cash and Keep Control. It is my pleasure to welcome James to the show.
James is a bootstrapped serial entrepreneur, corporate innovator, and investor focused on technology that transforms the world’s oldest industries. He is the Cofounder and CEO of JBKnowledge, which is a multinational technology and consulting company that develops industry-leading software for the largest insurance companies across the globe. Before he went into the insurance industry with his software, he was well-known in the construction space for SmartBid, which became the leading construction bidding software for GCs worldwide. That was something that he sold a few years ago. Some of you in the construction space who are reading may be very familiar with James.
James is a very clear thinker. He’s very straightforward. It’s great because I asked him a question that many guests would perhaps attempt to answer, but he had no real opinion or strong view on it. He didn’t answer it. I liked that in my interviewees. People who will talk about what they know and not talk about what they’re perhaps not comfortable getting into. Enjoy my interview with James. Feel free to share it with other people. Check out his book on Amazon. Thank you for reading and enjoy our conversation.
James, welcome to the show.
Thanks for having me on. It’s a pleasure.
I’m having you on because you’ve published a book. It’s called Be Your Own VC: 10 Bootstrapping Principles to Generate Cash and Keep Control. I like that title. I love the idea of generating cash and keeping control. I’d like to kick off right from the gate and ask you what do you mean by bootstrapping.
It’s something that’s not studied enough in college. I got two Business degrees. We never talked about bootstrapping a business and what it means. To me, bootstrapping is building what you have to build so you can build what you want to build and doing it with your own resources. Whether those resources are you and your cofounder pooling the money that you have, in our case, that was the case. At the end of the day, it took us about $68,000 total, roughly, to get this enterprise off the ground many years ago. They pulled some money, only consumed our own cash and generated a profit doing service activities, so we could deliver immediately. We use that profit to build the rest of our business.
How did you know what activities would generate cash for you immediately? How did you figure that out?
A lot of it is going around asking people if they’ll give you work and then finding out if they say yes. That was the case for me. I knew I could write code reasonably well. That was a skill that was in demand in 2001. I was in my dorm room at Texas A&M. I went and met some former cadets. I was in the Corps of Cadets ROTC at A&M. Aggies are loyal to each other inside the Aggie community, and ex-cadets are extremely loyal to each other. I went around and met with some other ex-cadets.
They owned businesses. I asked them if they would give me some work. They said yes. That was how I knew. Once we got engaged on the project, and started building software and delivering it, they kept having me build more. We used all the profit from those projects to build the products that eventually landed me in construction in 2006.
Why do you think people struggle so much with this whole concept of not going into debt when they start a business?
I don’t have a problem with the selective use of debt. There’s expensive debt, which is when you go raise money from investors because it’s money that you owe a lot more of later. There’s cheaper debt like you’re dealing with the SBA loans, which are non-recourse loans that people go into. This is probably some of the better debt that you can get, and often we will use debt in buying property or equipment. Debt is a very dangerous tool. There are two things that are taught in business school. They were when I went through my undergrad Master’s degree in Business. That was, “Leverage is your friend.” They renamed debt, leverage, which makes it sound more friendly. That’s what you do.
“Get a pitch deck for your idea, then you go pitch your deck to a bunch of investors. You raise a bunch of money, then sometimes you raise debt as well, then you go build your stuff.” The problem is that debt limits you and so does raising money because they both put you on an artificial timeline. They put you in the eyes of the bank’s timeline or the investors’ timeline. In both those cases, you lose an incredible amount of control over the timing that you want to build your business.
Bootstrapping is the long, slow, painful way to build a business, or to build anything because there’s a whole chapter in this book dedicated to corporate innovators. Two of them that I mentioned are in the construction space, talking about how they use bootstrapping principles to innovate and drive innovation at a larger company. The principles help regardless of whether you’re starting a business or you’re building innovation efforts inside of a large company.
Let’s explore that a little bit. It’s an interesting thing because I know that my audience is contractors, and 98% of them have established businesses, maybe a few are thinking about starting their own gig. In those established businesses that you refer to, can you give us a couple of examples of using bootstrapping principles?
I laid out ten bootstrapping principles in the back. I try to make it easy on people who want the bullet point list and their bottom line up front people. When you look at some of the examples that you’re talking about, the number one rule is to survive. You build what you have to. Second, build what you want to. There are some examples I talked about in the book and I didn’t get to put in the book because at some point you get capped on the number of words that you can publish. Rule number three is building what you have to, seek and build what you want to.
There are a lot of corporate innovation groups that will start with low-hanging fruit rather than tackle the big project they want to tackle straight out of the gate because that big project may take millions of dollars to tackle. What they’ll do is they’ll pick and choose low-hanging fruit like, “We’re going to go paperless on the job site. We’re going to automate RFIs, punch lists, and plan. We’re going to take early stages steps over to BIM. We’re going to outsource the BIM work instead of doing this on 2D plans. Eventually, we’ll build our own practice and BIM.”
They use the money that they generate off of those activities. If you’re doing it right, that low-hanging fruit generates additional profit that ideally you can use to invest in some of the larger scale initiatives. That’s the very nature of bootstrapping. I’ve executed bootstrapping principles at large public entities because I was a city councilman for two terms. Now, I’m a regent at a 9,000-student public university, and in both cases, have built programs where the program itself generated a profit, and then we use the money the program generated to fund other initiatives. That’s where I’ve seen building what you have to, seeking and building what you want to. it’s also the art of targeting low-hanging fruit.
I built bidding software for construction. Some of my clients would save $100,000 a year by implementing bidding software. They didn’t have to print mail plans or deal with faxing. This is back in ‘06, ‘07 and ‘08. They can use that money to plow into maybe their ERP initiative, bigger estimating initiative or Revit implementation initiatives. That’s where I’ve seen a lot of people use that principle. I’d say another one that is important and this is the chapter it’s in. It’s chapter number eight of making innovation a habit and a process.Make innovation a habit and a process. Click To Tweet
In other words, not just innovating by the seat of my pants, most construction companies run on the seat of the pants of the owner. They don’t have a process for running the business. Even if they have a project management process and a standard set of Excel documents or a project management software, that may be a process for running that project, but they don’t have a defined playbook for running the business. That’s a big weak point.
When they start innovation or technology committees in their construction company, they end up in a lot of trouble because the meeting suck. The teams are largely rudderless. They don’t have a specific method to get together and talk about exciting ideas. Unfortunately, after about three months of that, they get tired of it and then move on.
In terms of this innovation aspect and bootstrapping, what do you find is the biggest point of resistance in an established company when they are trying to take this bootstrapping perspective? Where does the resistance come from?
It’s longer, slower and more painful because they want big wins now. You find the same thing in startup companies. They want the big win now. They view them that they have a very limited time window to take advantage of an opportunity in the market. Sometimes that’s legitimately true. If you don’t raise a bunch of money and spend a bunch of money and go all in on an idea now, you’re going to miss your window.
The reality is most times that’s not true. Most of the time, you’ve got 2 or 3 years instead of 6 or 12 months. That’s why a lot of will forego bootstrapping principles because they don’t want to go through the long, slow, painful way of innovating. They want to go to the corporate innovation committee or the corporate investment committee and raise $3 million then they want to burn that $3 million.
I went through this with a company that I know. I want to embarrass them but they went to their corporate investment committee and raised a few million dollars. They burned through it in the first eighteen months on a big innovative project and ran out of capital because they went after the big idea first, and it turns out the big idea wasn’t exactly right. They had to pivot but after they pivoted, they’d already raised and spent all the money that their corporate investment community was going to generate.
If they had broken it down into a smaller project, made their mistakes smaller, and worked on lower hanging fruit that could generate a profit for the business, they might have had a chance to go after the moonshot, but they never even proved themselves on that they went for the moonshot straight out of the gate and blew all the cash. You see startups do that all the time as well.
This longer, slower, and harder, it popped into my head that sometimes a business is like a wilderness and it’s not very exciting. As a leader, what should I be doing to keep my people’s motivation high as we’re going through those long, slow, and hard days on the road to building something that’s profitable and sustainable?
Rule number six, get out and sell. Whether you’re the CEO of a company, president of a startup, or chief innovation officer at a construction company, at the end of the day, you’ve got to be the chief evangelist. You’ve got to get out of your office and go sell. The best way to get people excited about something is to sell them on it. We see that all too often where people mandate directives, publish memos, send out a notice that something’s going to happen, or they’re going to do a new experiment.
Let’s stay in the construction world for a second. Let’s say that they’re going to run a paperless job site trial, which can be pretty traumatic for some people because you’re talking about taking away paper plans and specs, and you’re putting in devices on the job site that have large screens they can use. It’s going paperless. It is still a big challenge. Instead of spending the time to go out and sell people on it, and have one on one time and pitch them on why this is a good idea, they notify them of what’s going to happen. That’s pretty challenging. You have got to get out and sell. You got to be the chief evangelist.You have got to get out and sell. Click To Tweet
I understand the idea of going out and selling to a new client or something like that.
This is for employees.
What are some of the steps that effective CEOs take when they’re selling their employees on this journey we’re going well?
As Pat Lencioni would say, “Create organizational clarity and over-communicate organizational clarity.” A general rule of thumb is, “Say it seven times.” Selling your own people often is the toughest sale because they’re used to hearing you talk and tuning you out. You have to repeat yourself over and over to the point of almost nausea and say, “This is why we’re doing it. This is what we’re doing. This is where we’re going. Here’s the vision document. Here are the 1, 3, and 10-year plan, picture and target. Here’s what we’re going to market with and here’s why.”
You have to repeat yourself. Four months down the road, people start to become careless. They forget why they’re doing what they’re doing, what the big vision is and where they’re going, then it helps to repeat it. The big challenge internally is people think that they shouldn’t repeat themselves because they already said it once.
I’m the exact opposite. You have to repeat yourself a minimum of 7 to 10 times. Every month, quarter, or annual meeting, you have to remind them, “Here’s our values. Here’s our vision. Here’s our 1-year plan, 3-year picture, and 10-year target. Here are the things that we’re going to do. We use EOS, Entrepreneurial Operating System as our planning guide. In our business methodology, we use Lean.
For software, it is Agile. We use Agile for our software manufacturing process. When we have our quarterly meetings, we over-communicate because eventually, I’ve got a critical person in my company. That person takes 4 to 5 times to get excited about something new. Once they listened to it enough, and start to buy in, they 110% it off, and then pull everybody else with them.
You got also got to know your people. I’ve got one of my leaders that when I go to talk to them, they are on board pretty much immediately. I generally say it once or twice. I get a good buy in from that. Whereas another one who’s as critical takes longer to buy into idea. I’ve got to repeat things several times, and it’s fine.
Is that more to do with their capacity to grasp a vision or is it more their personality in terms of they’re a little more stubborn or something like that?”
It is 100% their personality. If they didn’t have the mental capacity to do the job, they wouldn’t be here. We have another EOS phrase GWC. Do they get their job, want their job, and have the capacity to do their job? When we talk about capacity, we’re talking about mental physical and emotional capacity. If they didn’t have the mental, physical, or emotional capacity, they wouldn’t be in the seat in the first place. The fact that they’re there means they’ve got the capacity.
You have to deal with this fourth factor, not the mental, physical, or emotional. You deal with their personality, like the way that person is wired. Somebody will take longer to get on board with things. I misread my own personality and COVID laid it bare. I thought I was very very pro-change. The reality was I’m very pro-change. I’m very excited about change and new things when I’m the one initiating it, but when it’s being initiated upon me, I am not excited. I’m the opposite of excited. I’m angry.
Why is that?
I have tried to diagnose it. It is a default reaction to change that is forced upon me. It is within seconds.
Can I make a suggestion? I’m speaking from my own personal experience. You could explore, what does it have to do with the control aspect of it?
I’m a high-control type of person. I have a couple of coaches that work with me. I have my EOS coach and a personality-type coach. I’ve worked with him on this, like, “How do I open up more to this and not shut the idea down when it’s not my own? How do I adapt the change that’s forced upon me better?” That’s something that you have to understand about yourself, and then understand about your people because sometimes they’re excited about change when they’re the ones initiating the change, but they’re not excited about change when they’re not in control of it.
That’s something that’s important for corporate innovation committees, startups, and bootstrapping. When you’re doing bootstrapping, you’ve got very limited resources. You’ve got to maximize output for the few resources you have. Elon Musk shocked a lot of the social media world when he slashed and burned the Twitter staff by thousands, and cut the engineering team down by 60%, 70% or 80%. It was a pretty massive changes.
If you go back and watch his old interviews, where he was talking about why Tesla was going to be more successful than anyone was giving them credit for it, he ended up being right about Tesla, SpaceX, Starlink, and about a lot of things. He said, “You need a small group of dedicated engineers.” Something else to remember is that the bootstrapping mentality can force you to be capital efficient, and to have this idea of the highest and best use of every person, and to maximize the output of a very small dedicated group of people that are building something.The bootstrapping mentality can force you to be capital efficient and maximize the output of a tiny dedicated group of people building something. Click To Tweet
One of your principles is the idea of, “Survive so that you can thrive.”
The number one rule of business is to survive because if you can’t survive for good things to happen to you, then you’re not going to experience a ton of success. What happens all too often, both in startups that are getting off the ground and launching and with innovation projects inside or spin-off projects, a lot of big tool companies like Milwaukee and Stanley, BLACK+DECKER have their own innovation incubators where they will spend companies off. All too often, they don’t focus on business survival. I’m not talking about Milwaukee here.
Oftentimes, in general, companies don’t focus on survival as a key. They intentionally run themselves to the edge of the cliff. They said, “We raised enough money for us to have. We’ve got a burn rate and a runway.” That’s the phrase they use. In other words, “We’re going to run out of cash in two years.” They spend heavily until that two-year mark, then their ability to spend cash falls off a cliff, and then they have to either shut down or go raise more capital.
If they’re in a market like they are right now, and you’re going to see a lot of startups that are simply unable to support their cash burn and are having to either way back or shut down because instead of focusing on survivability like, “How do we survive a recession?” they’re focused on heavy spending growth at all costs raising the next round.
Raising the next round of investment is extremely complicated and very difficult. You’re seeing the consequences of not having a survival-based mindset. When COVID hit and 9/11 ’01, I was in business. I just started. When 9/11 and COVID hit, ‘08, and Lehman Brothers collapsed, the economy cratered, in all those cases, we went into hardcore survivor mode.
What did you do right away? Sometimes CEOs are too slow. It’s like 6 or 12 months too late, and you burn through a bunch of cash that you didn’t need to. What indicators are you looking at where you’re saying, “Now we need to make changes?”
You always have to have a simple set of numbers in your business that you’re following. My dad’s number was the UPS shipping Bill and his Teflon company. He watched the shipping bill like a hawk. Easy number, you look at it every day, no big deal. If that number started to suffer, he started questioning what was going on. You got to have some early easy indicators and EOS. We have a weekly scorecard and we identify easy-to-understand numbers that tell us how we’re doing. I’ve got one report I log in every day and look at one and it tells me about everything I need to know on one screen.
My team knows that’s the report that I look at all the time. They focus on making sure it’s accurate and current because it’s the one that we’re logging in, checking out, and making decisions off of. That’s an important part of this. You said something important. Most CEOs take too long to make critical decisions. That’s 100% true. It’s paralysis by analysis. They don’t want to make the tough decision because it’s difficult when 9/11 hit, Lehman Brothers collapse, or COVID hit. In all those instances, there are a few things you can do quickly to control your cash burn.
First, you close all open positions immediately. You stop hiring immediately because your goal is to not only survive but to hold on to your staff. Secondly, ideally, if you follow the rules I laid out in the book, you keep a couple of months of cash on hand at all times. You paid your debt off. In ’08 when Lehman collapsed, we paid our debt for our business off because we had a little bit of equipment debt for servers and I had a personal debt that I had incurred to start the business. I had paid off my credit cards and cars.
Before I made any real money, I’d paid off my house because I bought a very inexpensive house for my first house. I kept it within reason and follow Dave Ramsey’s debt snowball. I followed his principles from Financial Peace University. I jettisoned my personal and corporate debt. We rolled in because ‘07 was our first moderately good year. In ‘08, the bottom dropped out at the end because of the Lehman collapse and the economy cratering.
This is when you’d pivoted to construction, right?
It was right at the same time. I was already made a decision to pivot into construction. I was nervous. I was like, “What the hell?” The construction market is going to crater a year after I put a ton of investment into SmartBid because we started SmartBid in 2006, and started selling it in January of ‘07. A year and a half later, the whole construction market tanked. I’m like, “Oh, my gosh.” What turned out is the best timing possible because my competitors had a ton of debt and were venture-backed. They were short on the runways, and they had to lay people off. They had a hard time servicing customers.
We picked up those employees. We went and sold those customers and we cleaned up. We exploded out of that ‘08 to ‘09 period. We were doubling every year in size for the next few years. It was an exciting time. It’s because we were focused on survival. We didn’t have debt. We had been focused on innovating with a small core group of people. It was an important time for us. We had focused on survivability, generating cash, and being cashflow positive, not having debt to pay back. All those things came back to help us succeed out of that instance. When we hit a downturn, every single time our playbook is closed, any open positions are immediately.
It doesn’t require us to fire anybody. The people end up quitting, which happens all the time in business. You have people that leave you. You close the position when they quit. You’re not firing people, you’re not laying them off, but you are trimming your payroll down. The other thing you do immediately is you seize all discretionary spending. Anything that’s remotely discretionary gets cut. That way you can say, “We’re not going to have as much fun this year. Some of these things we had to do in previous years we can’t do because we’re conserving cash.” That’s the playbook remarkably simple, then you focus on the 3 or 4 major activities that generate the most profit.
You use the word “we” quite a lot because you have partners. Part in your book talks about choosing partners wisely. In my experience working with contractors, partnerships can be fraught and domestic marriage is challenging. A business marriage is equally, if not more, challenging. Tell us a little bit about that choosing the partners wisely piece.
Choose as wisely as you choose a spouse because it is. Think about it this way. You’re spending probably more time with your business partner than your spouse because you’re 50 or 60 hours a week with that person. You’ll be lucky to have that much awake time with your spouse. It’s important and complicated to separate and split up. It’s painful. I’ve seen a lot of bad partnerships. I’ve been blessed. I got amazing. My dad, Sebastian, Diego, and Armand, these guys are amazing cofounders. It’s been awesome. Now we have a very clear hierarchy. I don’t believe in co-CEOs. I believe in the EOS model of a visionary and integrator, and then everybody works for the integrator. That’s what we have.
I’m the CEO. Sebastian is the COO. There’s a very clear chain of command at the end of the day. This almost never happened. Sebastian and I have been working together for many years we’ve known each other since I was 14. That’s along time. We don’t have a lot of instances where we disagree where I have to force an issue. You’ve got to make sure that you have the right personality types too. He and I took a visionary integrator test a few years ago, and we got lucky that we wanted very different things. I wanted to be CEO and visionary. He wanted to be COO and integrator.
I wanted to be externally-focused and vision-focused. He wanted to be internally and process-focused. We didn’t want each other’s jobs. We loved the jobs that we were in, and we needed each other to function. That’s a fantastic business partnership. My dad’s the same way. My dad wanted to be a limited partner advisor. He didn’t want to be active in the business. He had his own company he was running at the time I started this. It was a Teflon company. He’s the world’s best business advisor. He’s amazing. He calls twice a day and still calls me. I talk to him twice. He’s 84 and still advises me.
I love him as a dad, but I also love him as a business partner. Sebastian is amazing. I got blessed with amazing people to build this with. We’re all in, but we also didn’t covet each other’s jobs. That’s where things get dicey where I’ve seen it get dicey with a lot of my friends’ businesses when there’s not a clear definition of who has what role and what person has final say, who’s running the vision, and the integrator. I wouldn’t want to do this without my team. It’s not wouldn’t be fun to have to rebuild and find that magic again, because I feel like it’s not common to get that magic sauce.
I totally get the visionary integrator dichotomy for many construction companies. If the guy who start is a single guy, it’s a visionary person, and they have a challenge finding an integrator. I want to ask you two questions. First, on the ownership stake, what is your opinion on how ownership stakes should be divided up? If you’re going to do the visionary integrator with a final say person and yet maybe you own the same amount of the business there can be more challenging that, is it wise to have a 51/49 arrangement or something like that? What’s your take on that?
I don’t feel like I should comment on that because there are too many criteria that could weigh in on that decision-making. There are too many things like, “Who’s bringing what cash to the table? Who’s funding it? Who’s putting their line on the credit? Who has their name on the credit? If you’re doing credit lines, are you doing debt?” You get into some complicated messy stuff around the cap table. That stuff doesn’t matter as much if you have very clear written documented roles, expectations, job titles, and accountability chart.
If that’s cleared, agreed, and known by all and followed by all, it can eliminate a lot of that garbage. If you’re having to fall back on your cap table, and how many shares someone owns, something went wrong. That’s tough. I’ve seen people in every type of partnership dynamic where there are four partners, each one’s 25%, they’ve agreed beforehand on who the CEO is, an integrator is and who the other folks are, and no one covets each other’s jobs. That’s the big thing.
If they covet each other’s jobs, you’re going to have a battle. I’ve seen people with 50/50 and 60/40 work. I’ve seen it all work and fail. Let’s pivot for the intrapreneurs out there that are in large construction companies. The same thing applies for heads of innovation and chief innovation officers at construction companies. Do they have a clear title or set of roles that have clear authority and responsibility? They have to be paired. You can’t give someone responsibility, someone for something without the authority to go effect change.
If you pair that, then stress levels come way down, expectations are clear, you don’t end up in a turf battle. I’ve watched people set up an organization for failure, with how they set their accountability chart up because they didn’t want to hurt somebody’s feelings. They’ll assign similar and confusing titles to two different people without giving one clear authority and responsibility. Guess what happens?
All hell breaks loose, because there’s no clear idea of who’s calling the shots at the end of the day and what the chain of command is. Salesforce’s co-CEO stepped down and out because of Benioff’s the visionary man, and you bring a second chef in the kitchen, and then it didn’t work. There weren’t clear expectations in Salesforce. It’s the same thing at Blackberry two. They had a co-CEO model, no clear boss, and no clear accountability chart, huge issues. I haven’t seen a co-CEO model that worked where they were truly co-CEOs.
You mentioned this idea of the intrapreneur and the innovation officer. You have a part in your book that says innovation doesn’t happen in your spare time. Construction companies are like, “I got all these projects I’m building and I want to get them done.” Innovation is something that is super challenging because the owners don’t want to pay for it. In your experience, what is the best way to go through that process of innovation?
Innovation doesn’t occur in spare time because I’ve seen a lot of general and subcontractors get in front of their companies and annual speeches and say, “We are innovative. We’re in a digital transformation. We’re going to go innovate and transform this company,” then I’ll have their 2nd oe 3rd tier. The managers that are executing the vision right next to me will say, “He won’t even approve an iPad purchase.” There’s no muscle behind the discussion. It’s just innovation and name only.
First off, I haven’t seen people that have a lot of spare time to innovate. The reality in construction companies is they’re working 5 to 6 days a week and 60 to 70 hours a week. It’s a super high-pressure, low-margin, and high-risk environment. When would they have spare time to work on that new initiative? There are companies that I see do it well.
I talked about Rick Cohen and Travis Voss in the book and my other buddy, Todd Wynne at RO Builders in Dallas. They’re dedicated. That’s why I say, “You have to have a dedicated space, budget, and staff,” because then they have time and money people, even if it’s one person. All they think about is, “How do I change the way that we build buildings? How do I change the way we run our business?”
At our company, we’ve got dedicated people towards reforming the way we architect software. We have dedicated people that think about what features we’re building next. When we take something seriously, dedicated people get put in those seats. That’s why I say innovation doesn’t happen in your spare time.
You’re hitting a downturn. I have dedicated people. I’m looking at my overhead. These dedicated people aren’t necessarily generating the money that my superintendents are generating, or my foreman or my project managers, what do I do, then?
It’s tough because if they’re not transforming the business and generating more profits, then you might have a problem with your innovation group. it’s not going to be direct to the bottom line P&L like a project manager. You’re going to put a P&L on a project. The project’s going to generate profit. It’s going to throw cash the bottom line directly, immediately. Innovation group might have a 2, 3, or 4-year horizon. When you’re bootstrapping, in particular, you’re playing long ball. It took me twelve years to build and sell SmartBid. It has taken me 21 years to build up JBKnowledge to where it’s at nowadays.
You’re always playing long ball, which means that you’re not thinking quarterly. Public companies think quarterly. Private-funded companies think next round next round, which can be 12 to 24 months. Bootstrap companies tend to think 3, 10, to 20 years, you have a much longer time horizon. At the end of the day, if you hit a major downturn, and you’ve already cut all discretionary spending, you’ve ceased all job openings. When people leave, you don’t feel they’re backfilling their positions. All you have left is your active payroll of people who are in production capacity. You’ve cut all your discretionary expenses, and your expenses still exceed your income.
This is the other thing. I believe in driving profit all the way down to zero before you start laying people off. That’s not always the case. Big companies and corporations, cut good people all the time. They cut people that are critical to the business all the time to make profit guidance. If you’re talking to a bootstrap business, they’ll reduce their margin all the way down to zero before they start reducing staff because they know the cost of hiring and training people. It’s incredibly expensive to find, hire, and train people.
“I’d rather take margin all the way down to zero before you start cutting people.” If they’ve already done it, is the person that’s in the innovation committee going to have to go before the person who’s running the active projects? Probably but I would argue that in that case, you should do an emergency conversion of your renovation team into another project team, go out, and manage more projects. They need to be repurposed during the downturn if it’s the last case scenario.
Going back to the partnership question real quick. Let’s say I wanted to start a construction company, how should I go about that process of finding a partner if I didn’t want to do it just myself?
I was fortunate that I went to high school and grew up with mine. This is a question a lot of tech companies have because they will all too often have the business idea person and salesperson. They have a hard time finding a technical cofounder. One of the chief difficulties is finding a cofounder who’s technical in nature, who can lead the engineering efforts. I would argue in construction, that’s often the case.
You have a lot of people who want to own construction companies, but who knows how to build a building? Legit, who’s framed the house, or who’s framed the commercial space? Who’s hung the drywall, done Sheet rock, taped, floated, and painted? Who’s done the electrical work and H-back and mechanical? Who’s the coordinate? I would argue that technical is one of the hardest things.
On my case, both Sebastian and I were code writers. We’ve done years of Computer Science training. We’d written a lot of software. You had two technical cofounders. My dad was not a technical cofounder, but he had business experience. Networking is critical. Rule number seven is, “Get out and sell.” You’ve got to get out in network like crazy. You got to be a voracious professional networker in business in general. You’re going to find your partners and cofounders by getting out in networking in association groups.
If you’re a mechanical contractor, you’re going to go to MCAA. If you’re a electrical, you might go to NECA. If you’re a general contractor, join AGC or ABC. If you’re in a tech company, you might go to a tech incubator group, technology conferences or YCombinator. There are a lot of different organizations where you can meet people, network of folks and find your cofounders. You’re not going to network and get out.
I’ve seen a big hesitancy of people starting or growing businesses that don’t want to get out and do the hard work of meeting people building relationships and going to conferences because they want to be home every night at 5:00. Entrepreneurship probably isn’t for you if that’s the case. When you’re looking for cofounders, that’s important. You’ve got to get out and network. There’s a startup house in Austin where people all go cohabitate for a month with a bunch of other startup folks, and they form a lot of these types of relationships. There are a lot of different ways to do it. It depends on what business you want to get into.
You have a part in your book called Finding The End Of The Rainbow. What do you mean by that?
You’ve got to have a clearer picture of what the end looks like for you and what your endgame is. I’ve got a 5, 15, and 25-year window that I’m looking at. I had a plan for the first twenty years. It was exciting and a lot of fun. Now I want a 25-year plan because I’ve got 5, 15, 20, and 25-year goals. I got this from when you’re looking at a rainbow and you look at the very end of it. It’s like, “What does that look like over there?”You have to have a clear picture of what the end game looks like for you. Click To Tweet
We all know you can’t find the end of a rainbow, but in business, you can. You get to visualize what that pot of gold looks like or what your life looks like. For me, this process has ended up looking more like, “What does my life look like? What is even retirement?” To me, retirement is doing what you want when you want with whom you want and where you want to do it. You’re controlling time test team technique, not necessarily stopping working.
I’ve watched good friends of mine who are 25 or 30 years my senior retire and be totally miserable because they never went through that process of saying, “What does the end of the rainbow look like? What does that life look like?” Not money-wise because it’s easy to run the math formula and say, “It’s going to take me this amount of money every year to live. I’ve got to have this much money to generate cash for that to work.” That’s not what I’m talking about. That’s the easy part.
The hard part is like, “What does my everyday life look like?” it’s the same thing when you’re entering a company sale. The part of the book where I talked about that was when I was talking about selling the company. There came a time with SmartBid, our construction bidding platform when it was time to sell. There was another time to go out, raise money and try and compete against all the venture-funded startups. I didn’t want to do that or exit because I was at a point where those are the two options that I had.
How did you know it was time to sell?
When you start looking at the number of potential buyers in the space, that’s an important factor. It’s like when you’re at a dance, and everyone’s dance cards are starting to fill up back when they used to have dance cards back in the day. You are like, “I don’t get on the dance card. I’m going to be dancing by myself here.” There’s generally a limited number of buyers for a specific type of company. Selling companies is challenging.
You’ve got to say, “How many have done an acquisition? How many haven’t? Who’s left? What do their capital reserves look like to go and conduct a transaction like this?” Ideally, you want to exit to a strategic rather than a private equity or money buyer because a strategic is going to have a clear picture of what they want to do with the business. They’re going to be less likely to require you to stay there like my exit was SmartBid.
I stayed with JBKnowledge, I didn’t go with SmartBid, and 95% of my staff stayed with me. We had maybe 10 or 12 people that went with SmartBid to acquire because they were strategics. They knew what to do with the product. That’s important that you’ve got to know like, “There are fewer potential buyers because they’re all doing transactions. If you don’t get in this tranche of transactions, you’re going to be in this business for another few years.
What was the gap between what you thought the company was worth and what you sold it for?
It was on spot.
In my experience, construction company owners who want to sell their business way overvalue their business in many cases. Why do you think that is?
Construction companies are a little different than tech companies. In a Software as a Service business, you’ve got recurring revenue on a product that is virtual in nature. You still have to spend a lot of money to keep it running. You’ve got a true recurring asset. The real value in all enterprises is in recurring revenue. Any business that’s a recurring revenue business is going to be worth more than a business that is a one-off project business. That impacts construction a lot.
That’s why I’ve recommended to every construction company owner I know to have a healthy service business because they can sign recurring revenue service contracts to maintain buildings. In those recurring revenue service contracts, when the economy dries up, people have to maintain their buildings more because they can’t afford to build new ones. One of the chief things I’ve seen in construction around M&A activity is that they overvalue a project organization. “We did $300 million.” Yeah, but that was all one-time money. What does your backlog look like? Backlogs aren’t guaranteed or they evaporate all the time.
Especially in the economy that we’re in at the moment.
Especially in construction, backlogs tend to evaporate like Keyser Söze in the wind. That’s something you got to be careful of. First off, people get real emotional about their businesses. They assign an abnormally high value to part with them. I was reading a book that talked about people assigning more value to things that they already own than something they don’t own, even though it’s the same thing. There’s a natural human tendency to assign an abnormally high value to something you already have rather than if you were buying that thing. They’re two very different price points because you’re emotionally attached to them.
There’s that but there’s also this misunderstanding and that’s what you saw with Katerra. Katerra raised billions of dollars from Masayoshi Son. They acquired a bunch of traditional mainline construction, architecture, engineering companies, and prefab facilities and smashed it all together. The whole thing blew up, went bankrupt, and they sold off the pieces. A lot of people benefited because they sold off these big facilities at pennies on the dollar. That was nice for them. When you look at some of the core failings, they were trying to make the sum more expensive as an enterprise than the whole more expensive than the sum of the parts.
They also tried to pitch Katerra as a technology company because they wanted SaaS valuations for the project business. Software as a Service is a recurring revenue business, like the magazine business, the newspaper business, and the subscription anything business like the media and Netflix, you name it. If people pay or recurring subscription, that company’s worth more because you have a more predictable future cashflow stream. Construction is the most unpredictable future cashflow stream where the backlog can evaporate overnight. That’s where the chief mistake is. They think past performance is a predictor of future results and construction ain’t because the economy hits you like a freight train.
That whole piece that you went into there about developing a service business. That’s why I like the HVAC businesses. A lot of is mouthwatering to think about how you can build this killer business with a nice healthy service portion to it that adds that extra value to it that’s tremendous. You mentioned this end of the rainbow. What’s your end of the rainbow personally? What do you want your legacy to be? You’re out of the business at 68? What do you want your legacy to be?
I would have liked to have built things that mattered. I talk about that a lot with my team, “I don’t want to build stuff that doesn’t matter.” I felt that SmartBid, Terra, and Smart Compliance matter. We solve real-world problems that make our customers’ lives better.
Why is it that you want to build things that matter as opposed to making a boatload of moneyBuild things that matter. Click To Tweet
It’s a human desire to build stuff that matters. One thing I loved about building construction software is that I could go to any city in the United States and see a whole bunch of buildings that have been through my software and I knew I had a little part in it. We had 1/3 of all construction bids through our platform. The year we sold it, it was crazy. I could go to any city in North America and see stuff that was bidding through my platform and was like, “That’s cool. I helped contribute to civilization.”
Men and women, all people seek meaning and seek to do things with meaning because if it’s about money, there’s not a lot of meaning behind that. It feels like a trivial pursuit. Secondly, when it has meaning, it’s more exciting. It’s more fun. What does it look like for me 25 years from now? I have done and built things that mattered and built up future leaders. I have 270 employees. I’ve got a whole cadre of the late 20s, mid-30s, and late-30s managers that are starting to kick butt. I’m excited to build something that they can survive first and then thrive and be excited to come to work.
One thing I talk about with my team a lot is building a workplace where we can be excited to come to work every day and work with other people. We’re not always successful with that. Sometimes we fail at that. Sometimes I fail at that. That’s something that we want to do. If you’re asking what my retirement activity is, that’s a different question. I love to fly airplanes. If it’s not involving airplanes, I’m going to be a little sad. I also love to sail. I enjoy Bernoulli’s Principles like sailing and flying planes, which same principle and vertical versus horizontal wing. I love it. I enjoy it.
The other thing I love doing is teaching. I did five years as an Adjunct Professor in Construction Science at Texas A&M, which is the largest construction program in the whole country. I resigned from that position because the Governor of Texas asked me to be on the governing board of a public university in Houston called Texas Southern University. I would love to either continue public service, serving a university in a board capacity like I’m doing now or serve in a teaching capacity as I did for five years.
There’s very little greater meeting than training up the next generation of leaders, entrepreneurs, business people and builders. That, to me, is what the end of the rainbow looks like, It is having the time and freedom to teach and pour into students to travel and fly. It’s a lot of fun. It’d be super exciting. But the reality is that window for me is a long way away because I’m having fun doing what we’re doing now.
You mentioned that you have a bunch of leaders that are in their 20s and 30s. What is the biggest misconception that the Boomers or the late Gen X-ers have about some of these young folks?
Generational stereotypes are BS. They’re absolute garbage. The Greek philosopher Heraclitus said thousands of years ago that it was the avarice of youth. He was talking about how the next generation was entitled, self-centered, self-focused, lazy, mean, and all the things that you hear people say about the next generation, and then I saw an article from the 1960s talking about the exact same thing and they were describing Boomers.
The reality is that throughout all of human history, we’re humans. Young people behave in a very similar way because they don’t have a perspective yet. They don’t have enough scar tissue and experience. I detest generational stereotypes because you’re lumping people in by saying by your birth year. It means about as much as a horoscope. The date you’re born has no impact on you. This is garbage. The year you’re born doesn’t because I’ve got 23-year-olds that work for me right now that are some of the most amazing human beings you’ve ever met. They give back. They work hard and build awesome stuff.
I’ve got 70-year-olds that work for me that give back and work hard. They’re amazing. I’ve got 50-somethings. I’ve got every age spectrum. Like all businesses, we have to part ways with people. Either they’re not a match for our values, or we’re not a match for theirs, 1 of the 2, or they find a better opportunity. Whatever it is, it happens. All organizations have organizational turnover. When we have to part ways with people, it is not because of what year they were born. It is much more about, “Do they meet our values? Do we meet theirs? Is there alignment here or do we need to part ways?”
I’ve seen the same selfless behavior and hard-working behavior out of all generations, and selfish and self-centered behavior out of all generations. I don’t think it factors in. I don’t buy it. I do what Heraclitus says. There is this thing of the avarice of youth. Young people need mentors, guidance, and some tough love to adjust to the work environment.” They’ve always needed that for thousands of years. They still need it now.
It doesn’t mean they’re going to be bad forever because eventually, they’re going to get married, have children, and bad things are going to happen. Life is going to wear all those edges down and polish them up like it did with us. It’s inevitable. It’s our job to ride through that with them as much as we can. There are some that they need to learn the hard way, which means they need to be separated organization to learn the answer.
Tell us a little bit more about your book, Be Your Own VC: 10 Bootstrapping Principles to Generate Cash and Keep Control.
It’s available on Amazon, paperback, hardcover, and on Kindle. I’m working on the audiobook. I’m a longtime podcaster. I have a construction podcast called the ConTechCrew. I handed it over to a co-host of mine. I have one podcast called InsureTech Geek. I wrote this book to be a manual on how to be capital efficient, generate cash, and keep control of your efforts, whether you’re an entrepreneur or an investor. Those are the audiences of the book. It’s the principles my dad taught me and that I learned over the last few years. It’s the playbook that we operate with here.
That’s what it’s about. It is grouped into 10 chapters and 10 principles. It’s 50,000 words, and they’ll probably take you six hours to read. It’s not a difficult read to get through. It’s all based on stories of me, my father, and my business partner. We talk about the integrators a lot. We talk about the people that you need to surround yourself with. We talked about different phases of our business.
There’s a section in here on my general rules on selling, where we talk about the three questions you should always ask when you go to talk to a prospect. “Can I work for you? Do you know anyone else I can work for? Should I be part of any associations you’re part of?” Those are three questions you should always ask prospects. It’s a playbook on how to get things done. That’s why I put it together.
I want to give a big shout-out to my editor who worked for me for many years as my marketing chief. She has her own marketing agency now. I asked her to come back with me and edit this. She helped turn the pile of words into a book with the world’s best publicist, Katie Zeppieri, who’s helped push this. This is all about helping people learn the same principles we did. It was supposed to be released in 2021. Through a random set of circumstances, we delayed it until 2022. I’m glad we did because there’s no more timely topic right now than being capital efficient, surviving, and living within your means. It’s interesting.
Where can people get the book? Is their website for the book?
Tell us a little bit more about your business because I know you do work with contractors.
I have 270 employees. The products that we do interact with contractors on is Smart Compliance. That’s a certificate of insurance collection and tracking tool largely used by general contractors to collect certificates of insurance from their subs. We collect and analyze their insurance and we integrate with Procore you can manage all the insurance on your subcontractors. We do have subs that use it as well to collect it from their suppliers and vendors. We also have a product called Terra.Insure. It was called a RMIS, a risk management information system.
Large self-insured companies like general contractors, subs, and construction companies are part of Captive. Self-insured groups like home builder associations use our software to manage their claims, policies, incidents, and risks so that they can manage their claims to completion. Especially if they’re self-insured, they have to manage the claim to pay out the claims and deal with work comp claims and slip trip falls. Smart Compliance is for claim subrogation certificate of insurance collection. Terra is if you’re self-insured or you’re part of Captive. We help you manage all that risk data that SmartCompliance.co and Terra.Insure are the two products and the 270-plus person team at JBKnowledge would love to help you out.
I appreciate your generosity. Good luck with the book. Thank you for coming on the show.
Thanks for having me on. I appreciate it. It’s super nice to meet you. I’m excited to be on the show.
- James Benham
- Be Your Own VC: 10 Bootstrapping Principles to Generate Cash and Keep Control
- MCAA – Mechanical Contractors Association of America
- NECA – National Electrical Contractors Association
- AGC – Associated General Contractors of America
- ABC – Associated Builders and Contractors
- InsureTech Geek
About James Benham
James Benham is a bootstrapped serial entrepreneur, corporate innovator and investor focused on technology that transforms the world’s oldest industries. He is the Co-Founder and CEO of JBKnowledge, a multinational technology and consulting company that develops industry-leading software for the largest insurance companies across the globe. He is also the Co-Founder of two insurance tech products: SmartCompliance and Terra.
Prior to insurance, James built multiple technology products for the construction industry. His most successful, SmartBid, became the leading construction bidding software for general contractors worldwide, culminating in a multi-million dollar acquisition. With over 9,500 followers on LinkedIn, James is a sought after consultant and speaker at the forefront of innovation, sales and business leadership. He is the host of The InsureTech Geek Podcast and has spoken at over 400 conferences in the last 15 years. His first book, “Be Your Own VC: 10 Bootstrapping Principles to Generate Cash and Keep Control”, is now available on Amazon.