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4 Rules for Bootstrapping

What is bootstrapping?

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This is the shack that Bill Hewlett moved into.

Bootstrapping usually means starting a business without external capital. No dilutive capital or issuing common or preferred shares, or convertible debt. Also for companies that are launching new products as a good way of thinking out how they can launch a new product.

Why would you want to bootstrap?

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I have lots of friends who are entrepreneurs and one day I noticed something. Most of my friends who had bootstrapped businesses and owned them all on their own were doing very well financially. On the other hand, most of my friends who had obtained venture capital funding were not doing as well financially. If you want another perspective on Venture Capital, check out my presentation on why you may not want VC funding.

Rule 1

Find a Budget Waiting to be Spent

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People will tell you that you must find a problem that you can solve but that isn’t really enough.

You must solve a recognized problem

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If you’re starting a company, everyone will ask you what problem you’re trying to solve. Well you might see a problem but if others don’t see it that way, you are not solving a recognized problem.

Someone must own the problem

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So if people recognize there is a problem, is there someone in the company who owns the problem? There are lots of problems that companies have but the way they think or strategic priorities may mean that there is no one responsible for solving the problem. If there isn’t someone responsible for solving the problem then you have no one to sell to.

The problem owner must wake up everyday trying to solve that problem

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Even with someone responsible for solving the problem, they may already have a good enough solution. It may not be as good as your solution but they may think it good enough for now. That’s why Excel is used in so many applications instead of databases. The person responsible must be waking up every day trying to solve the problem if you want to get anywhere.

They have to have a budget

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I have come to believe that the most important thing to identify in creating a company is a budget. If a company doesn’t have a budget for what you want to sell and will take a long time getting a budget then you’ll have a slow start, whether or not you get VC financing. A slow start in bootstrapping is a slow death.

There must be lots of them

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Finally, it’s no good finding a company with a budget, you better find lots of them because you’re bound to have competition.

Rule 2 Do Something Radically

Different

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Sure you can start a company where everyone is doing the same thing. To be competitive then you’ll need to be better at execution or better at selling. Those types of businesses though don’t have the same potential as ones that are doing something radically different.

Quality

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There are only three dimensions upon which you can compete. Those are Quality, Cost and Speed. The best one upon which to base your competition is Quality. Look at Apple. The highest cost products out there, no faster at delivery in fact maybe slower to get to market. But they have the best quality, bar far and as a result are the most successful tech company in existence.

Cost

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You can also compete on cost by being the lowest cost product or service. That can work when, in a Blue Ocean Strategy, you find a segment of the market who will accept a lower quality product at a much lower cost. This worked for IBM as they found a segment of the market that needed computing but couldn’t afford mini-computers Of course it worked for them until someone else decided to be even lower price. Note that Apple is still around while the IBM PC is not.

Speed

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Speed as a differentiator means time to market or customer cycle time, the amount of time from order to delivery. This can be a long term differentiator as complex distribution networks are difficult to establish. Look at Dell. They get new technology to the market faster than anyone and get you a PC exactly the way you want it. They survived when Compaq and many others didn’t.

Switching costs are high

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And why do you need to do something radically different? Well it’s because switching costs are high, people don’t like to change and they will only change how they are doing something if the alternative is really outstanding.

Rule 3

Engage customers from day one.

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I see many entrepreneurs who spend all sorts of time at the beginning of an enterprise writing a business plan, getting their website ready, creating a product but that’s the wrong way around.

The problem – Wait till the product is done and try to sell it

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I’ve met lots of companies, in fact I’m dealing with one right now, that built a product and then went looking for customers. It doesn’t work, in fact you become a product in search of a market.

Start selling on day one

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Research shows that successful software companies spend as much on sales and marketing from day one as they do on research and development. That’s not the Canadian way but it works. You need to start selling or engaging customers on day one. In fact if you read the Four Hour Work Week, you’ll see that he tests the market with fake ads well before getting down to building a product.

Business development

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Selling before you have a product finished is the role of business development. A salesperson’s job is to find a customer and sell her a product that exists. The business developer’s job is to find out the customer’s needs and figure out how the product you are thinking about can be adjusted to meet that client’s needs. This is harder to do with consumer products but in those this role is performed by market research and mocked up customer trials with prototypes.

Lean Startup

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If fact this is the whole methodology advocated in the Lean Startup and Lean methodologies in Software development. Do quick product iterations and check for market reaction before you’ve gone down an unfortunate path too long.

Rule 4 Get their money early

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You’ll notice that most of the rules are about customers and their money. That’s not a coincidence because success in business is achieved by getting a customer to part with her money. And if you’re bootstrapping, you better get their money early if you want to survive.

Consulting

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The first way you can get money from a customer is by doing consulting. This doesn’t work for consumer businesses but it works very well in B2B. The consulting should be helping them come up with solutions to the same problem you’re going to develop a product for.

Services

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Once you’ve done the consulting, you can move to the next stage and take a problem off a customer’s hands by performing a service for them. One friend of mine started in consulting by helping call centers improve their operations by making recommendations and training their staff. Eventually, one of his customers said, why don’t you just take over my call center and do it for me. This started a business that grew astronomically all over North America.

Customized software

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Now if you’re headed down a product route, many customers will pay very well for you to develop a customized solution for them. There are countless companies around that started out doing customized solutions that then then productized for a wider market. That was also the way Blackberry got going, with custom contracts

Prepay

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Of course if you can, get some if not all of your money up front. Clients will be more predisposed to this, the more value you can bring to the table. Some of them will even fund research. NASA has funded some $500 million for SpaceX to get to production.

Kickstarter

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This is a great new source of funding if you presell a product. Polar Pen, Amanda Palmer and the guy who will make a potato salad are great examples of success. There are other examples where failure to raise funds is a good indicator of poor market demand. Only 9.5 % of startups that raise money with Kickstarter go on to raise VC money. Women are successful 2/3 of time but for men it is 1/3.

Success

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Here are some great companies that built real businesses with real revenue: •  Veeva Systems •  Tableau •  Indeed •  Mojang •  Shutterstock •  Wayfair •  Mailchip

In fact, Mailchimp and Mojang were completely revenue funded.

Bootstrapping Success

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Starting Backwards

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If you look at the four rules that have been laid out, it is almost like you are starting backwards.

Find the Budget

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First, don’t look for a problem to solve but a budget waiting to be spent.

Do something different

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Do something so different that you’ll overcome the costs of switching.

Start selling now!

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Start selling from the first day you have an idea so you’ll see if you have a chance of getting some of the budget spent on you.

Use customer money to build your business

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Find a way to get customer money to finance your launch.

Once you have

• products • reference accounts • a working business model • the right people • exponential growth

You can go out and raise money

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Then you may become a rocketship

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Helping individuals, leaders, and entrepreneurs improve strategy execution.

Charles Plant 416 458 4850 cplant (at) materialminds.com

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