[Editor's note: With the economic downturn drying up venture capital in Silicon Valley and elsewhere, more early-stage companies will be forced to bootstrap their way to profitability. But what does that actually mean for the companies who go this route? Javier Rojas, managing director of equity capital firm Kennet Partners, offers his insights.]

Times being what they are, it’s encouraging to know that some of the world’s leading public companies got to where they are without taking any early venture capital funding. That’s right, Microsoft, Dell, Cisco, Oracle, eBay — they all “bootstrapped” it.

Others, like Siebel Systems, Checkpoint Software, Broadcom and dozens of others, have followed their examples to success. The early years may have been challenging for the new execs forced to turn down paychecks. But they kept the faith that focusing more on customers and real revenues than market sizing and early valuations would someday pay off.

There are many compelling reasons for young companies seeking venture capital to turn to bootstrapping, even when they have other options. Not only might it be a safer way to go today, but it’s also a smart way to build a business.

How it works

When you decide to bootstrap, you commit to fund primary development and growth through internal cash flow from real-life customers. You — the founder — and a limited number of early employees may forgo paychecks for quite some time to make this work. But to keep that strategy to a minimum, it’s common for bootstrapping companies to turn to consulting engagements, non-recurring engineering contracts, value-added reseller agreements and projected supplier contracts. In short, “moonlighting.” These funds go toward initial growth and expansion until the company can stand on its own two feet.

A solid foundation

Opting to be self-sufficient (either voluntarily or not) and rely on real revenue means one thing: The customer is suddenly king. This focus becomes baked into the company’s DNA. Its very survival depends on developing products that its target market actually wants and likes. Customers are often involved in beta testing and are encouraged to become involved in the process. And early on is the time when you want to solidify a customer base for future sustainability.

Bootstrapping companies can also be more rational and less speculative with their allocation of resources. Because they can’t afford to throw money at problems, they have real incentive to solve potentially destabilizing conflicts and errors before they become systemic.

How much bootstrapping is enough?

Raising the right money at the right time can make or break a company’s growth, so it’s important to know when your company has outgrown its boots. Here are some indicators:

- Market growth rate is accelerating: If the market is growing faster than your internal funding, you risk losing market share (and equity) by not catching up.

- Customers are buying products and sales are predictable: You can scale your sales team, and more effectively channel the VC money you raise. As a rule of thumb, you should feel confident that you can predictably bring in at least $2 in gross profit for every $1 you spend on sales and marketing. I recommend a $3 to $1 ration as an even safer barometer.

- Complementary products or businesses have become available: It may be time to expand your offerings through an acquisition. Can you economically acquire new customers through a merger? If you are considering M & A activity and need help financing your growth, it’s time to raise capital.

- The current economic cycle favors growth: This isn’t what we’re experiencing now, of course, but hopefully it won’t be too far off. If the market seems to favor technology investment, or you see new growth areas on the horizon, it could be wise to switch.

- Your balance sheets are weak, or you want to diversify risk: Co-mingled balance sheets can be a major challenge for bootstrapping businesses. A prudent decision for