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January 26, 2006

The Art of Bootstrapping

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Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.

Let's say that you can't raise money for whatever reason: You're not a “proven” team with “proven” technology in a “proven” market. Or, your company may simply not be a “VC deal”--that is, something that will go public or be acquired for a zillion dollars. Finally, your organization may be a not-for-product with a cause like the ministry or the environment. Does this mean you should give up? Not at all.

I could build a case that too much money is worse than too little for most organizations—not that I wouldn't like to run a Super Bowl commercial someday. Until that day comes, the key to success is bootstrapping. The term comes from the German legend of Baron Münchhausen pulling himself out of the sea by pulling on his own bootstraps. Here is the art of bootstrapping.

  1. Focus on cash flow, not profitability. The theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue. It means passing up the big sale that take twelve months to close, deliver, and collect. Cash is not only king, it's queen and prince too for a bootstrapper.
  2. Forecast from the bottom up. Most entrepreneurs do a top-down forecast: “There are 150 million cars in America. It sure seems reasonable that we can get a mere 1% of car owners to install our satellite radio systems. That's 1.5 million systems in the first year.” The bottom-up forecast goes like this: “We can open up ten installation facilities in the first year. On an average day, they can install ten systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems. 24,000 is a long way from the conservative 1.5 million systems in the top-down approach. Guess which number is more likely to happen.
  3. Ship, then test. I can feel the comments coming in already: How can you recommend shipping stuff that isn't perfect? Blah blah blah. ”Perfect“ is the enemy of ”good enough.“ When your product or service is ”good enough,“ get it out because cash flows when you start shipping. Besides perfection doesn't necessarily come with time--more unwanted features do. By shipping, you'll also learn what your customers truly want you to fix. It's definitely a tradeoff: your reputation versus cash flow, so you can't ship pure crap. But you can't wait for perfection either. (Nota bene: life science companies, please ignore this recommendation.)
  4. Forget the ”proven“ team. Proven teams are over-rated--especially when most people define proven teams as people who worked for a billion dollar company for the past ten years. These folks are accustomed to a certain lifestyle, and it's not the bootstrapping lifestyle. Hire young, cheap, and hungry people. People with fast chips, but not necessarily a fully functional instruction set. Once you achieve significant cash flow, you can hire adult supervision. Until then, hire what you can afford and make them into great employees.
  5. Start as a service business. Let's say that you ultimately want to be a software company: people download your software or you send them CDs, and they pay you. That's a nice, clean business with a proven business model. However, until you finish the software, you could provide consulting and services based on your work-in-process software. This has two advantages: immediate revenue and true customer testing of your software. Once the software is field-tested and battle-hardened, flip the switch and become a product company.
  6. Focus on function, not form. Mea culpa: I love good ”form.“ MacBooks. Audis. Graf skates. Bauer sticks. Breitling watches. You name it. But bootstrappers focus on function, not form, when they are buying things. The function is computing, getting from point A to point B, skating, shooting, and knowing the time of day. These functions do not require the more expensive form that I like. All the chair has to do is hold your butt. It doesn't have to look like it belongs in the Museum of Modern Art. Design great stuff, but buy cheap stuff.
  7. Pick your battles. Bootstrappers pick their battles. They don't fight on all fronts because they cannot afford to fight on all fronts. If you were starting a new church, do you really need the $100,000 multimedia audio visual system? Or just a great message from the pulpit? If you're creating a content web site based on the advertising model, do you have to write your own customer ad-serving software? I don't think so.
  8. Understaff. Many entrepreneurs staff up for what could happen, best case. ”Our conservative (albeit top-down) forecast for first year satellite radio sales is 1.5 million units. We'd better create a 24 x 7 customer support center to handle this. Guess what? You sell no where near 1.5 million units, but you do have 200 people hired, trained, and sitting in a 50,000 square foot telemarketing center. Bootstrappers understaff knowing that all hell might break loose. But this would be, as we say in Silicon Valley, a “high quality problem.” Trust me, every venture capitalist fantasizes about an entrepreneur calling up and asking for additional capital because sales are exploding. Also trust me when I tell you that fantasies are fantasies because they seldom happen.
  9. Go direct. The optimal number of mouths (or hands) between a bootstrapper and her customer is zero. Sure, stores provide great customer reach, and wholesalers provide distribution. But God invented ecommerce so that you could sell direct and reap greater margins. And God was doubly smart because She knew that by going direct, you'd also learn more about your customer's needs. Stores and wholesalers fill demand, they don't create it. If you create enough demand, you can always get other organizations to fill it later. If you don't create demand, all the distribution in the world will get you bupkis.
  10. Position against the leader. Don't have the money to explain your story starting from scratch? Then don't try. Instead position against the leader. Toyota introduced Lexus as good as a Mercedes but at half the price--Toyota didn't have to explain what “good as a Mercedes” meant. How much do you think that saved them? “Cheap iPod” and “poor man's Bose noise-cancelling headphones,” would work too.
  11. Take the “red pill.”This refers to the choice that Neo made in The Matrix. The red pill led to learning the whole truth. The blue pill meant waking up wondering if you had a bad dream. Bootstrappers don't have the luxury to take the blue pill. They take the red pill--everyday--to find out how deep the rabbit hole really is. And the deepest rabbit hole for a bootstrapper is a simple calculation: Amount of cash divided by cash burn per month because this will tell you how much longer you can live. And as my friend Craig Johnson likes to say, “The leading cause of failure of startups is death, and death happens when you run out of money.” As long as you have money, you're still in the game.

Written at: Atherton, California.

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Comments

All Hail the bootstrapped business, welcome to the world of high tech business :)

A great post which inspired not just me but also one of my friend. After reading your post i felt like he just got an idea of winning the business

After reading your post every one would like to read your book. Its intresting

Nice post

Guy:

This post is exactly what I look for in information and knowledge that the target audience of my blog would like to read. I liked Number 11 on your list of bootstrapper keys to success ("Take the Red Pill") so much that I cross-linked to your post, along with some comments, at http://blog.innovators-network.org which is a non-profit dedicated to bringing technology to small businesses, intellectual property experts, entrepreneurs, and venture capitalists. Please visit us and help grow our community!

Best wishes for every future success.

Anthony Kuhn
Innovators Network

The first statement is undeniably true. Most successful entrepreneurs focus on "circulating" their money thru the cycle of investment and sales, rather than focusing on the profit they'll get. This is really a good post.

We went for venture financing and got turned down, now we have to bootstrap by being a service provider. Frankly I'm overjoyed.

Take the "red Pill" :) This point is so hardly true. We are working everyday close to financial death but dying is no choice when u got a vision you trust in. There is allways a way to make money and to cut down the monthley bills. Everyone i our team still has his job as an employee in other firms so we dont need to pay them. Its hard but we are shure it will pay out later.

Yes, The comments on the Bootstrapping reflects the same.

Yours was an interesting read....Sramana Mitra in her piece, http://sramanamitra.com/blog/655">Is Bootstrapping Becoming Sexy Again? has explored the phenomenon that today, companies can be built quickly bootstrapping and bring success. Entrepreneurs are perfectly happy bootstrapping their companies.

I believe there is BIG cultural divide between the USA and Europe (it may apply to other areas but thats my 'knowledge base').

Startups in the US are more likely (IMHO) 2b more adventurous and just go and do it (after having read your 'words of wisdom' etc..) whereas in Ireland/UK the stars have 2b aligned and a blue moon showing ... u get the idea.

Lack of support is also a big issue unless u have the balls 2 go 4 it (like Carson http://www.carsonified.com/about/).

Failures (and the experience that brings) across the waters are not seen as 'extra credits' for your next gig. Some of that appears 2b slooooowly changing (but only in the myopic startup arena).

Lal
PS I enjoyed Guy's "The Art of the Start" seminar in Denver and his personality has a large part 2 play in the game (as u can c from his blog).

Brilliant post, good advice for those embarking on a startup, it really should be required reading for all!

young

Looking for a coach/mentor.

Still looking for a mentor/coach/someone to help me continue growing in the future!!!

Here are a few questions I would have for the person I will be working with;

• What steps do I need to take to start a business of my own?
• How do I find and hire the correct employees for the business?
• How do I contact someone else like Harv to get his products at wholesale value and then sell them at my seminar?
• How do I get the correct sound equipment, microphones, and sound speakers for the event/seminar?
• How do I find my target market?
• How do I find the correct people who want to attend my energy training seminars?
• What advertising steps do I need to go through to get people to come to the Energy Trainings/Evenings?
• How do I put on a tele-seminar?
o Got Alex Mandosians course and that isn’t helping me.
• How do I find the correct places to put on the tele-seminar?
• How would I go about putting employees on a payroll?
• How would I attain money to pay these employees?
• How would I go about finding other speakers to come to my seminars?
• How would I go about putting together and forming a core team to assist me?
• How would I go about setting up the hotel where the event will be taking place?
• How do I make sure I have people to fill the hotel rooms I have booked?
o I don’t want to be charged money b/c I couldn’t get anyone to show up.
• How do I get a good website started?
o Should I use a website yet?
o What all should be included on the site?
o What company should I use?
o How would I go about attracting people to the site?
• What forms of advertising should I use?
• Do I want to use media/TV?
• When do I want to create my own audio products?
o How would I go about creating these audio products?
• How would I develop my own courses and decide what goes on at the courses?
o I have to get my participants in the funnel.
• How would I go about writing notes for the presentation and how it’s going to take place?
o I have a presentation template, what could, and has been said, although I haven’t memorized it.

o Would I want to memorize it or how would/could I do it spontaneously?
• I want to be the promoter of a motivational/inspirational/educational seminar.
o How would I go about putting everything in place for that?
• How do I form my seminars so I can teach in all three ways; auditory, visual, and kinesthetic?
o What all needs to be included (props)?
o How should I speak?
o How should I move?
o What are all the signs when I should be aware that I am losing my audience?
• What do I need to do to start a small passive income coming in and growing each and everyday?
• How would I go about staying in touch with my participants?
• How would I attain my target markets e mail name, number, fax, and address?
• How would I go about putting together a business plan?


These are all questions I thought of while I was on vacation in Chicago for Christmas 2006. On the way home from Chicago my father was talking to me about the business and when I am going to start bringing in some income. He recommended getting started working a J.O.B. with someone in your own field. That may be YOU!!! If you do work in some type of motivational, inspirational, or energy healing, transformation business please respond back ASAP so we can talk more about how we’re going to help each other grow. Thank you for taking the time to read this post.

Timothy Patton
energytomoney@yahoo.com

Ship then test - I note that there are two arguments here. Shipping before testing can get cashflow going, but it can lead to a loss of reputation, which can lead to cashflow stopping. Really, it comes down to "Know your customer". I am involved in two companies, one which follows the ship then test philosophy to a certain degree, because the customers are used to that sort of approach. The second company is in an industry this is used to turnkey solutions, and "ship then test" would be disaster. In this case, we talked to the target customers and key industry bodies prior to beginning development.

That's an interesting idea that a) God exists b) she is a woman. Proof?

wow... I killed my business idea 3 years ago when I failed to raise capital; bootstrapping was considered but not given due consideration.

Guess its time to get back to the drawing board, but this time armed with these really insightful suggestions.

PS: Great blog...

When to Stop Bootstrapping It

please comment this

http://www.inc.com/resources/inc500/2006/articles/20060801/fitzgerald.html

Hi Guy,

I don't quite agree with point number 10 - if you're a small bootstrapped organisation acting in a niche market you don't really have the power of "big competitor" (with known flaws) behind you to position against.

And if you're young you can expect few percent of your leads to turn to your competitor you position against for the sake of dealing with an "established organisation".

Also, I cannot stress enough how points 1&11 are important, as long as the cash flows - everything else can be sorted out and optimised.

Sorry for such a tad posting... but this sentence is a bit misleading:

"" could build a case that too much money is worse too little ""

I think you mean Worth, not worse, correct?

I love this article, it explains me perfectly. I worked for a large Fortune 500, got tired of trying to get ideas to fly with the big shots. So I left. I went and traveled the world for 4 months, love travel so much I started Boomtrek.com (shameless plug) and I hired 4 people (top down approach) instead of bottoms-up (at the pub after making some money haha) I ran out of money so fast it wasn't even funny... people thought I gave up, so they lost enthusiasm. Well, I wasn't done... I am stubborn (more professionally... determined) to get this sucker to fly. Version 2 is out and working on R3 which will have the ability to download travel places/points to your Pocket PC (e-mail me to get on the beta-list of this free software for your PDA)

Anyways back to my story, I'm $25,000 in debt + $10,000 in credit cards, completely maxed out... collectors calling me, it is so horrible you almost want to cry. I hate being in debt, it sucks so bad!! So I bootstrap, I've been on a wicked contract for the past 4 months now, doing my stuff in between. I've paid off my credit cards completely, cut them in half (boy did that feel great! you should try it sometime)

My personal mottos and lessons for other entrepreneurs:
- be stubborn (determined)
- 3-foot rule (goto friends/family for bootstrapping jobs)
- selling a service (yourself/consulting) is instantaneous but you'll work forever, if you're selling a product... it takes 10x longer... not for the weak
- someone told me "do what you love, the money will follow" best advice ever! dont listen to the noise around you, listen to your heart
- networking meetings for entrepreneurs are no good, you meet people exactly like you and not the "right" people, talk to the speakers with a successful business... they'll also tell you "I remember when I had maxed out credit cards" now I know.

Great post. I do suggest for the other readers to read your book for more clarification on the points, as much of what they are arguing over is covered.

The points on bootstrapping reminded me of hearing a couple of visiting VC's speak in my entrepreneurial finance class. They told us "You don't want our money if you can avoid taking it, because when you do we own you and your company." Followed by a half joking analogy of taking VC money is like selling your soul to, maybe not quite the devil himself, but atleast a bunch of demons. This, in combination with your other post on the top ten lies of VC's, where you talk about greed being a significant driver of the VC game, reiterates how bootstrapping may not be just a necessary evil to the budding, or experienced entrepreneur for that matter, but it may be literally the most rewarding experience of his or her life. Google, although not the common startup, is a great example to look at because Larry & Sergi avoided diluting themselves very well.

Good strategies not only to bootstrapers but to all companies.
It is also true that Bootstrapping by nature doesn't allow you to make many mistakes you could have made.
I regard bootstrappers highly, they usually have a much complete vision on running a propper business compared to entrepreneurs of funded companies.

Guy,
A great post which inspired not one but two of my own. I gave you you're propers, of course. Thanks, again.

asbestos underpants on/

hey asshole...

for a start, I've blocked all 11 of the active java scripts/tickers/pageviewer miners on your blog...

Secondly, your unvarnished lofty arrogance and wall street pulpit crap has stirred me to typing, which is a hard thing to do of late...

I've met quite a few _____wads like you. Most of the time I'll walk within the first few minutes of meeting them. I get very tired of the sanctimonious superior airs from people like you.

I don't particularly care whom, or how successful you may be.. that doesn't stop really hoping you walk under a truck whilst in the middle of one of your diatribes.

I only wish I hadn't stumbled upon you geekmine/blog.

the short version :

sod off smart ass.

/asbestos off

Pills, battles and cash flow. Yep, that about covers it.

I learned "3.) Ship then test" years ago when I was launching an engineering design firm. For Detroit we had a revolutionary concept. We were going to use degreed mechanical engineers to design automotive components. ( Even today that is not how it works. The engineers shuffle paperwork, draftsmen on CAD stations design the products. Before even investing in software and and workstations I went to a major automotive supplier and sold them on hiring us. We had a $25K Purchase order in hand before we spent a dollar!

As far as I know Virtual Engineering is still in operation. www.veng.com

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