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The viability of bootstrapping a business

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shutterstock_40922218For those uninitiated, bootstrapping is the art of building a business via one’s own financial means. That is, not taking external investment, or at least not taking significant or professional external investment. (It’s still bootstrapping if you borrow $10k from mom to build your $1b web business.)

In addition to personal funds, bootstrappers aim to reach a level of cash flow profitability to reduce any personal burden and help the business grow itself. This is very much a major competitor to private equity, as I discussed in my last post, The competitor without a face.

I’m discussing this again because today I came across a few very prescient blog posts that discuss bootstrapping:

Dharmesh Shah at MIT Startup Bootcamp – this is a video of Dharmesh presenting to MIT on startup marketing. In the vid he suggests he’s not so much anti-VC, but anti-VC process. He thinks the likelihood of getting funded is relatively very low, yet the likelihood of wasting an inordinate amount of time on the process is relatively very high. Sage words.

Seth Godin on a Middle-Ground between Debt and Equity – this post discusses an angel-backed royalty scheme for funding. So, rather than complicate the funding process with term sheets, he recommends offering an investor x% of your revenue for $y capital. Sounds simple, maybe too simple, but it’s a good middle-ground nonetheless. The premise is that it not only simplifies the funding process, but also the ongoing reporting process. And while you may lose out big time if you hit the big time, you may also give up the chance to hit the big time with overly complicated funding agreements.

Jessica Mah on Raising Money – this is an absolutely fabulous post from a thoughtful young entrepreneur in the States. Jessica discusses conversations with Customer Development guru Steve Blank, and suggests that many VC-backed startups burn cash on untested and unproductive initiatives. I think she’s absolutely right; there’s often too much pressure on getting big immediately, rather than creating something worthwhile immediately. Her post discusses many other topics, so it’s worth the full read.

In addition to checking out these great posts, consider following these blogs indefinitely.

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Posted in Entrepreneur

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  • @vlade, excellent point about building communities. I'm about to give a talk on this to our investees. As you suggested, not necessarily about GTFB, but about becoming thoughtleaders in your industry by interacting with the community and raising your profile.

    @yuri, agreed, it's all relative. A lean chip manufacturer is going to be an expensive startup no matter how hard you try. But I think we're more inclined to spend too much than spend too little, hence the focus on the former. It's the same way we're inclined to eat too much rather than too little in the western world. It's insane to think our number one health issue is caused by eating too much (we should be ashamed in light of world poverty). But, it's equally insane to think a major issue for startups is raising too much money. It's not the money that's the problem, it's the mentality and discipline.

    Bootstrapping helps to instill some of that discipline that will ensure once you're offered millions by a VC, you'll make good use of it. Too many people throw good money at bad ideas.
  • Yuri Ammosov
    Steve Blank recently said that lead startup does not mean cheap startup, though.
  • vlade
    I managed to have a look at it today. It's definitely something I find interesting and something that has value. I think the most important part is really not about the google/twitter/facebook/blog whatever - which lots of people will focus on - but about building a community for your customers/users whatever.
    GTFB are tools that help you to build the community in some cases - say I think it's easier to use it in US than UK/Europe (not sure about Asia).
    Build-your-community was the most important message for me. It was sad to see the guy with the last question, who didn't seem to get it, asking which one should be prioritised - it doesn't matter, what you want is community, not the tool. To some extent, it's like going back two-three hundred years back, to having your village baker. Having your business tool provider, who knows you and your needs is where the value for you (as a customer) can very well be - even if the tool might be slightly worse than other in some other objective aspect.
  • vlade: Yes, i think you're right about Godin's suggestion. If you're really intent on succeeding, like most entrepreneurs should be, then you're playing with fire by selling a % of revenue. Novel idea nonetheless.

    Did you get a chance to watch Dharmesh's video? I've also got a link to his book in the right-hand column -->

    I'm a little besotted with this idea of inbound marketing even though it is nothing revolutionary and nothing more than common sense. Sure, you probably won't get the traction Twitter did with inbound marketing, but for those of us in specific domains with a unique product or service, I think it's worth the initial effort. Especially if you're bootstrapping.
  • vlade
    Nice entries.
    I'm not sure I'd go with Seth's suggestion, simply because I'd think it would be hard to predict what margin I'd have, or could be squeezed to. Otoh if I can predict margin reasonably, I think I'd be able to get some funding on better terms than % of revenue.
    BTW, for me personaly (and I'm a sort-of banker :) ), debt is differnt from equity only from tax perspective (and who knows how long that will last).

    Jessica post's great. I have a strong belief that limiting the amount of money (as opposed the amount of personal time) you spend on business development is much better than throwing on the money regardless.

    Not the least problem with lots of money spent on something is that people fear sunk cost, and will pretend no end that costs aren't sunk, cruising in the wrong direction.
    Spend little money and lots of time, and see whether it moves you forward, and then spend a bit more money (and yet more time).
    And I think this approach is the right one not only in startup, but in larger projects in much larger companies.
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