Bootstrap: Starting Your Business without Funding

bootstrapI had a meeting yesterday with an acquaintance who wanted to run a society-and-events-based business idea past me and see if I might be interested in developing it with her. We discussed it in detail for a while, and she picked my brain about how we ought to launch this business, if indeed we chose to launch it together.

This led us to discussing what’s required to launch a startup – and what isn’t. More importantly, we discussed how we’d go about raising funding for this business, or how we’d run it without funding if we were unable to get funding or chose not to pursue it – in other words, how we’d bootstrap it.

While many entrepreneurs dream of funding from investors – nearly every entrepreneur or would-be entrepreneur I encounter talks about it – to me this often seems more like a California Gold Rush than a certain, well-considered plan. “If I just move to California, and get some mining tools, and start digging, before you know it I’ll be rich!” went the thinking back in the mid-1850s. What happened though? A whole lot of people moved out to California (and other parts of the American West), but of all the new California residents, the majority of the folks making money were not the miners themselves, but the ones selling the miners their mining equipment.

Therefore, I believe whenever you sit down to build your business, you should always do it under the assumption that you’ll be bootstrapping it.

“That’s great,” you might say, “but I’m still going to get funding.” All right, you may well do just that – but before you do, let’s go over how to bootstrap right… so you don’t drain the well before those sales you’re hoping for or that funding you’re counting on can show up to save the day.

Spending Money in a Startup

I’ve heard countless stories about failed startups that close their offices and have hundreds or thousands of unused brochures, name cards, calendars, t-shirts, mugs, and other knick knacks with their names and logos emblazoned on them, signatures of a culture of wasteful spending far in excess of what was needed, and a clear sign that the business took its limited resources and put them in exactly the wrong places.

“I’ll never let a company I start end up like that,” I told myself. Yet, a few months back, when I shut down a business that had never reached profitability, I looked over what was left behind:

  • Several shelves of our company’s brochures
  • Boxes and boxes of extra name cards for laid off employees
  • A crate full of expensive custom lanyards, all but a handful unused
  • More office rolling chairs than we’d ever needed – one’d been stashed atop a closet
  • A heavy metal safe that no one ever figured out how to open, let alone put money into

I couldn’t even make myself feel better by blaming the other two cofounders – sure, I’d pushed back on some of the spending, but I hadn’t made my case very well, and towards the end I even started falling prey to it myself. When we ran out of a specific kind of brochure we were using, I had the staff run off a bunch more, despite the fact that we had other brochures that would’ve served just as well.

Generally in life, you’ll find two kinds of people:

  1. Optimists / Daydreamers
  2. Realists / Pessimists

You’ll note there’re two names for each of those. The first is what they call themselves. The second is what the other guy calls them.

To have a well-running business, you need to have a balance between these two sides. Too much optimism and you burn through capital faster than you realized you could – and before you know it, you’re going out of business. Too much realism and you never get started in the first place, or play it so safe that you never get the things you need to make it all work.

The problem with most startups is that they’re usually founded by optimists – the realists keep their day jobs, assuming their own ideas won’t pan out – and the employees who want to work for startups tend to be optimists themselves.

Another problem is that these styles tend to clash. If you’ve got an optimist running the company, realists won’t want to come work there because it seems too fast and risky. So he’ll get a team full of risk-taking optimists who move fast but can’t manage resources.

But if you’ve got a realist running the company, optimists won’t want to come work there because it seems too slow and unchallenging. So he’ll get a team full of risk-averse realists who are great at protecting the company’s downside but not so great at generating explosive growth opportunities.

Therefore, I think the best partner combinations tend to be either:

  1. An optimist CEO who genuinely takes counsel of a realist COO, or
  2. A realist CEO who genuinely takes counsel of an optimist COO

This can be difficult to put together at times because finding people who will genuinely consider others’ counsel is hard to do. Most optimists steamroll realists’ concerns with their enthusiasm for the optimistic path, and most realists reject optimists’ suggestions with their fear of the risk involved.

I’m digressing though – back to bootstrapping in a new business.

What happens in one startup after another after another after another is that money is spent too fast and too freely – and then the business folds.

I can hear all the optimists out there protesting, “You’re just stingy!”

Except I’m not going to tell you not to spend money.

You will. You’ll have to spend money. But there’s a reason you don’t want to do it all at once.

Giving Yourself Time to Learn

bootstrapLet’s say you’ve pooled your resources and those of your other partners starting a new business. You’re willing to devote a total of $30,000 to this new business venture. You’ve now got two options for spending:

  1. First Option: go all-out and get a nice office, good furniture, and a high speed Internet connection. Get a custom-built website. Get a lot of great company creative to hand out to prospective clients and investors. Now go out and recruit, recruit, recruit to put together a team of All Stars who are going to blow this business up fast. Set up costs: $12,000. Monthly costs: $9,000. Lifespan without sales or investments: 3 months.
  1. Second Option: work out of your apartment, garage, or a friend’s place. Build the website yourself using WordPress or a similar CMS and select from among the many free templates out there. Don’t worry about creative for now – direct people to your website when you talk to them. Or, get a few simple business cards run off with your name, mobile number, email address, and website. Use oDesk, eLance, or Guru.com to outsource coding, programming, or creative design work, rather than hiring employees you’ll need to pay a monthly salary to, benefits for, and provide with an office and computer and have a degree of responsibility to. Set up costs: $300. Monthly costs: $1500. Lifespan without sales or investments: 20 months.

Look at the difference between those two spending models. The second model allows for nearly 7 times the lifespan of the first one. That’s huge. And it’s huge for a couple of very, very important reasons:

  • You need time to learn the market
  • You need time to figure out the best way to sell
  • You need time to refine your product
  • You need time to refine your pitch
  • You need time to understand what type of people you really need
  • You need time to build brand awareness, buzz, and interest

The one thing that all of those points has in common is this: you need time.

And when you set yourself up in a race against the clock, you’re putting yourself in a position of instant do-or-die.

No matter who you are, how talented you are, or how well you think you know your market, unless you’ve actually been operating in that market and you’ve already got a product you know people want (because you’ve sold it before) and distribution channels set up and ready to go to help you start turning a profit right away, things never go according to plan.

For any new business that has yet to reach profitability, there are two factors:

  1. Money
  2. Time

When you bootstrap, you’re dealing with limited money. If you spend that money fast, you’re also dealing with limited time.

I’ve never met anyone, or heard of anyone, who made a business work great with limited time and limited money.

Limited time and lots of money, maybe. Limited money and lots of time, more likely. Lots of time and lots of money, also more likely.

Time is the biggest determinant in success.

I’ll reference you to a post by Paul Graham, a veritable expert on startups. He writes, here, in “What Startups are Really Like“:

“You need persistence because everything takes longer than you expect. A lot of people were surprised by that.

But I think the reason most founders are surprised by how long it takes is that they’re overconfident. They think they’re going to be an instant success, like YouTube or Facebook. You tell them only 1 out of 100 successful startups has a trajectory like that, and they all think “we’re going to be that 1.”

There is a positive side to thinking longer-term. It’s not just that you have to resign yourself to everything taking longer than it should. If you work patiently it’s less stressful, and you can do better work.”

But no matter how persistent you may be, you can’t persist when you’re out of time and out of money. You need time – and when you’re bootstrapping, you need to make your money last.

What About Funding?

Whenever I talk with people who want to start a business, one of the first things I hear is, “Do you think we can get funded?”

Here’s what I know most investors are looking for:

  • A solid product
  • A solid delivery system
  • Happy, repeat customers
  • Plenty of room to grow in the market
  • Sales and/or a giant list of interested, potential buyers

Instragram, the photo-sharing company, just sold to Facebook for $1 billion without having revenues because it has 1) a giant customer base and 2) a technology and platform that Facebook wants. This is a rare exception to the rule. You don’t normally get funded or acquired without sales.

Except in a Gold Rush – if you were, say, a DotCom company before the DotCom bubble burst in 1999, or a startup focused on doing business in China until recently – investors will tend to steer clear of you unless you can show that you’re already making money and have a working, functioning business model.

Even then, the amount of investment you’re likely to get will be directly tied to how big you already are. You’re not going to get a good deal when you’re still small.

Back to Instagram. In 2010, Andressen Horowitz and Baseline Ventures each invested $250,000 in Burbn, the predecessor to Instagram, in exchange for collectively right around 25% of the company, just after it’d been founded. That’s a pretty hefty investment for a brand new business… and it only happened because:

  1. Burbn was a mobile location-sharing app at a time when that was one of the hottest new things around, and
  1. One of its founders, Mike Krieger, was working at the well-known Internet social platform Meebo, and its other founder, Kevin Systrom, was one of the original members of what ultimately became Twitter, had worked for Google, and had previously developed a company (Nextstop) acquired by Facebook

Think those guys had a leg up over most people starting up a new business?

Sure. They’d done it before. They’d already succeeded at it before – this wasn’t their first time on the merry-go-round. Their street cred was off the charts and their niche was one of the best to be in at the time.

Furthermore, Burbn was later scrapped and re-released as Instagram when the founders noticed that their users were sharing pictures a lot more than they were sharing locations… and they followed their users.

Chances are, if you’re like the vast majority of people starting up new businesses, you aren’t in the current “it” market / bubble, and/or you don’t already have a string of successes under your belt that give you instant credibility in the VC market (for all intents and purposes, let’s consider “success” to mean an acquisition or a breakthrough product or service).

That means, if you get any funding at all early on, it’s likely to be small and not very significant. You’ll be asked to give up a good chunk of equity in exchange for only a little investment.

So even if you get early funding… it probably won’t make much of a difference.

Which brings us back to bootstrapping.

How to Bootstrap Your Startup

To be successful as a bootstrap entrepreneur, you’re going to need a few things:

  1. Discipline
  2. Perspective
  3. Agreement from your cofounders

Here’s what I mean.

  1. Discipline: it’s very easy to spend. It’s much harder to control that spending. Start by setting a budget for yourself based on how much money you have to play with, and how long you’ll need it to last. Don’t budget based on optimistic forecasts… budget based on pessimistic ones. “Hope for the best, plan for the worst,” goes the saying. It’ll be great if sales come as soon as you hope they will, or you strike upon an investor who shares your vision – but if things don’t go exactly according to plan (and they rarely do), you’ll be thankful to still have time to work out the kinks.
  1. Perspective: for every major purchase (and you should choose a number for what’s “major” to your business based on what your total budget is and how long it needs to last you), you’ll want to stop and ask yourself: A) do we really need this? B) is this going to help us get sales? C) can we do with fewer of these items or less of this service and still have what we need? Taking the time to view your purchases from this perspective can help you make more balanced decisions.
  1. Agreement: it doesn’t matter how frugal you are, if your cofounders want to spend money and they’re dead set on it, the business is going to spend money. You need to know before you get into business with people what their feelings are on spending money. Don’t just glance over this one – really discuss it in detail. If someone doesn’t want to talk about it before you get into business, he won’t want to talk about it once you’re in business together and spending money, either. Make sure everybody agrees with the budget you set collectively, believes in it, and can pledge to uphold it.

Next, you’re going to have to be patient. Know where Apple Computer started out? Was it:

  • A) a fancy, highfalutin office,
  • B) a top-of-the-line tech center and campus, or
  • C) Steve Jobs’ garage?

If you guessed “C)”, you’re right.

How about Google? Know where that started out?

It was in Larry Page’s and Sergey Brin’s dorm rooms at school. They actually didn’t graduate to a garage – that of a woman named Susan Wojcicki – until two years later. Google finally hired its first employee to work in that garage, two years after it started running on the Internet.

Sometime back, I interviewed a potential executive for a business I was running who assured me that if I wanted my business to be successful, I was going to need a big office to impress people. At the time, we were working out of an apartment-cum-office with a neighbor’s bicycle perpetually parked outside. It was nice, but not particularly imposing. So should we have gotten a bigger, better office in an important-looking building?

My thoughts in retrospect: we shouldn’t have even had an office. We should’ve focused on building a web presence first, building our brand, and doing virtual consulting rather than in-office consulting as we tested out our product and developed it and helped people to know who we were before we started spending significant amounts of money on an office, furniture, and staff.

Presentation is key – but high capital costs are so last century.

And in any event, think Ferrari, Gucci, or Rolex started out in massive corporate luxury suites?

Nope.

bootstrapFerrari started out as a parts manufacturer, working for other automobile companies.

Gucci originated as a small shop in Florence, opened by a former hotel worker.

Rolex began as an importer of Swiss movements to England. I can’t find an answer for sure, but I’m not certain Wilsdorf and Davis (the founders of Rolex) even had an office at first.

They might just have worked out of a garage (or the 1905 equivalent).

You don’t start big – you get big, with time and success.

Therefore, important mindsets for bootstrappers include:

  1. Start small and make your resources stretch
  2. The more time you have to work with, the better you’ll learn your market
  3. The longer you’re able to make your resources last, the less likely you are to shift into “panic mode,” where you begin scrambling for short term cash any way you can and undermine what you were trying to do with your business

That last one is particularly important – because the instant it starts feeling like time is flying and you lose your cool while building a business, and you become overly focused on trying to find a way to save things (rather than build things), your goose is usually cooked.

Plan to make your resources last from the beginning, and stick to that plan.

Bootstrapping Your Way to Victory

Can you really bootstrap your way to sales and/or funding, then onto, ultimately, victory?

In fact, this is how most businesses that are big business today got started.

They didn’t start with huge investments.

And they didn’t start with rapid, explosive growth.

Often, they didn’t even start out doing what they eventually ended up doing (see: Instagram, Ferrari, Rolex).

They bootstrapped – and they stretched their money and made their business work until they reached the point where enough sales were coming in or they were attractive enough to investors that they were able to get an influx of cash.

Succeeding in business isn’t about striking gold. Instead, it’s about selling pickaxes to miners – don’t go looking to fall into a pile of money; look for how you can provide something people want, bootstrap your business long enough to establish a foothold providing it, and go get some sales.

And remember:

  1. Discipline to set a budget and keep it,
  2. Perspective to ask yourself what’s really necessary, and
  3. Agreement between the decision makers on how things will go.

Get those three running together, and you stand a good chance of taking your bootstrap funds and making your business last long enough for you to make it work – or to figure out, like Instagram, Ferrari, and Rolex did, what kind of business you should actually be in.

And once you start shaping yourself up to bootstrap your business, you really won’t want to miss all the great tips, tools, techniques, and insights on offer in my newsletter – it’s everything you’ll need to get yourself on the road to a productive, successful business and a productive, successful life. Sign up now to start getting my newsletter delivered straight to your inbox:

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Talk to you next time.

Chase Dumont

 

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