The Art of Bootstrapping

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.

Comments

[Bill Lennan]

Hi Guy,
great post :-)
Our founders bootstrapped for a year, trying to sell software.
They switched to a service model after a couple of friends/beta users pointed out how well the product was working for something the founders had not originally considered.
Since the switch to a service model, we have attracted VC, a couple hundred customers, and are usually well ahead of our sales goals.

[anina.net]

hi guy! i am just a little fish in this big pond of entrepenurism, but i wanted to say first, i like so much your blog. it's great for me to learn about the world of buisness. i am a fashion model and a fellow blogger.

i just wanted to add to your list, remember gorilla marketing: use all your assets. be your assets, your staff members who are well poised to speak at conferences, expo's, and more, who can be your spokes persons. be your assets your personal smile and charm coupled with goodwill. be your assets your network and connections. gorrilla marketing in stickers, fliers, and pins. gorilla marketing in terms of giving a bit of knowledge away on a blog, and saving the indepth stuff, as you said, for consulting. leveraging web 2.0 to bring your company a global visibility. forging ahead when opposed by all forces, yet yielding as water when you meet a stone. use originality, spontenaious, and surprizing elements as your hidden weapon.

the other thing is, The facilities won't be there on day one. On day one, you have zero facilities, and at the end of the year 10, so 5 on average. Adding up to 5x5x240= 6,000 that whole maths thing went over my head. my mom said i should have taken more maths, but ah well.

thank you for your blog entry. i will tack it up on my wall as the other commenter said.

[Mario]

maybe #3 ("ship, then test") could be called in some other way.

It is a known idea in software development but it's probably a lot more about thinking about ship&test as parallel, not sequential.

The old "release early, release often" sounds better to me.

"ship, test, ship, test, ship, test" may be the real thing.

Are you thinking about something different? different how?

[J. B. Rainsberger]

Normally I would be perturbed by seeing "Ship, then test", because I would never want to ship low quality products. I would like to offer an alternative interpretation to Guy's words: "Ship, then complete."

That is, ship good quality stuff with the first few important features, then fill the product out with the other features you want to ship. The iPod is a good example: I'll bet the original vision for iPod included recorded music, AM/FM tuner, video, download from the web, wireless exchange between units, tiny form factor... but the first version was a little bigger and only handled recorded music. This means market testing (right features?), rather than product testing (does it work?).

Agile software development embodies this idea of early release to create a quick revenue stream, which then subsidizes future development.

[Rishabh R. Dassani]

Interesting and very thought provoking, keep 'em coming, Guy!

[Donagh Kiernan]

Guy, my focus is on Business Development of Technology companies in Ireland...

I somewhat agree with your comments on 'Ship Then Test' - Techies in Ireland have too much focus on their product and not on their sales.

I find myself regularly saying "Sell what you can deliver,not what you have".

On this also, people dont always get it that your product doesnt have to have every feature of the competitors - look at How Palm took hold of the PDA market with a few simple but key functions.

a good practical blog at last
Donagh Kiernan

[Mukul KUmar]

Hi Guy.

Excellent article. Very good points.

There is also another good writeup on bootstrapping at the following blog:
http://emergic.org/collections/tech_talk_bootstrapping_a_business.html

Also, about point #10 - Position against the leader. About selling cheap, I met John Nesheim this Tuesday in Mumbai, and there was a discussion about - whether cheap could be a strategy. There is a thought that - somebody else (China) can always make cheaper products, therefore the day you come out with a cheaper product, somebody else will come out with a half priced product in 4 weeks. And you will loose your edge. Interesting conversation.

Thanks,
Mukul.
http://mukulblog.blogspot.com/

[Jonathan]

>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.

I like your blog postings - I can relate to a lot of what you are saying which is great! I think your buddy Craig is almost on the money, I would revise his saying by replacing money with sources of credit. I have been without money but still in the running thanks to credit, its when credit runs out that you are screwed ;-)

Jon
Founder & CEO of myfoodcount.com
Free, Anonymous and incredibly easy to use online health monitoring.

[Bob Walsh]

Great post Guy - every micro-ISV should nail this to the wall behind their monitor.

I'd suggest one other point: pick carefully your place on the Long Tail. That is, find, define and be relevant to an unmet need out there that can be googled with a few keywords.

[mitch weisburgh]

Ship then test, and you can be ..... Microsoft.

Be good enough, not great, and you can be ... Microsoft.

Good design is not critical, and you can be ... Microsoft.

Okay, lesson learned, next.

[Stan P. van de Burgt]

Good article, Guy.

#2 "We can open up ten installation facilities in the first year. On an average day, they can install five systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems." Should be 10x5x240=12,000 as noted bove, but it's even worse...

The facilities won't be there on day one. On day one, you have zero facilities, and at the end of the year 10, so 5 on average. Adding up to 5x5x240= 6,000

I've seen this 'mistake' many times in business plans, at start-up and big corporates.

#1: For B2B, don't forget that companies tend to pay only after 40-60 days (or even 90-100 in some countries), even with short payment terms on your invoices. Big companies just ignore them and state that their own terms apply...

[jcasimir]

Here's another question for the topic pool: what strategies should you use to manage charitable work, both for your individuals and your company as a whole?

I thought this argument in Wired was pretty interesting:
http://www.wired.com/news/columns/0,70072-0.html?tw=rss.technology

[Aditya]

start as a service company was a solution i didnt think of damn howcome i didnt think of that.
One good advice in return for another one dnt you think the site is too simple?ur a colorful guy we knw how abt some design stuff here

[Digger]

I learned something from this entry. God is a woman!

[bd handspicker]

Another great post. Thanks Guy!

Focus on cash flow (1), ship, the test (3), focus on function (6) and start as a service business (5) go hand-in-hand. "Short money" keeps the company going. A live company has a better chance of getting to "long money" and even better products than a dead company. It's that simple.

Ship, then test (3), true customer testing (5) and focus on function (6) is not about shipping bad products, but rather about getting useable product into the hands of your customers as soon as possible - not just to get early revenue, but also to enlist the customer in customer-centered design of your product. Your customers know you are a startup, so there is no sense blowing smoke up their nether regions by pretending to be one of the big boys that (supposedly) only release a product when it's pretty and fully tested. Instead, turn that characteristic into a strength - the ability to be infinitely responsive to your early customers. They get a product that meets their real needs. You get invaluable feedback on your products and business. Your future customers get an even better product than you could create in the lab with never-ending "just one more fix/feature" polishing.

WRT Forecast from the bottom up (2), keep in mind when budgeting that your constraint is not how much money you will have from investors or revenue, but how much time and resource bandwidth you have to dedicate to growth at any point in time. For instance, how many good engineers can you attract, manage the hiring of, and integrate into a team while at the same time continuing to produce product, service the customers and manage the organization. Corollary: hire enough managers along the way to support *future* growth - they need to be enculturated and seasoned in the company just like the individual contributors before they will be their most productive delivering results *and* growth.

The most important rule: 11. Take the “red pill. As passionate entreprenuers we get in this game for the thrill of the product, the technology, or the sale. But we don't get to have that thrill for long if we don't stay on top of financial reality.

[Christopher St. John]

In reference to point #2 "Forecast from the bottom up", it's probably good to note that just because you go with the bottom-up forecast doesn't mean you don't have to do a top-down forecast to establish some limits. If your bottom-up forecast says you can produce 10,000 widgets a day, but the global market for widgets is only 1000 total, then there's a disconnect that has to be resolved.

[M]

Guy, great advice, especially about cash flows, and buying only what is necessary in function.

In making functional purchase decisions, other factors such as the hidden costs involved.

For example, a color printer which seems like a good bargain and have the same feature set and $50 cheaper than the industry average, the purchaser might find themselves in trouble later when it comes to obtaining toner for this printer, because of the cost of the cartridges or the shipping charges associated with it amount to more than the comparisson.

You don't want to get saddled with junk, so take the time to research the options to make the decisions.

[Christopher St. John]

In reference to point #2 "Forecast from the bottom up", it's probably good to note that just because you go with the bottom-up forecast doesn't mean you don't have to do a top-down forecast to establish some limits. If your bottom-up forecast says you can produce 10,000 widgets a day, but the global market for widgets is only 1000 total, then there's a disconnect that has to be resolved.

[JeffT]

I love this post! Here's a nice quote for all my fellow "ready, fire, aim" folks out there:

"Success is going from failure to failure without a loss of enthusiasm."
Winston Churchill

Just don't run out of money.

[Matthew Price]

Shipping before testing is a good way to completely destroy your reputation and credibility.

[Eric Christiansen]

Guy,

So why not keep this mentality in an organization?

Seems like most organizations get to a point of "fat and lazy" and then the next group of lean, hungry thugs show up, take the lunch of the satisfied group and kick sand in their faces to boot as they shift the market.

[Craig S. Cottingham]

"We can open up ten installation facilities in the first year. On an average day, they can install five systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems."

Maybe this head cold is worse than I thought, but shouldn't that equation be 10 facilities x 5 systems x 240 days = 12,000 satellite radio systems?

[Stacy]

This is quite timely Guy, and, I can see where it would apply to a non-profit with some tweaks as well as a non-tech service idea that I'm developing. #3 reminds of "ready, fire, aim". You just have to take action and adjust it as you go. Gosh, if I had this much fun learning back in school, I would have graduated in my sophmore year! Thanks again for some insightful and delightful wisedom.

[Paul]

Hi Guy,
I like the post. However, I thought people might like to hear how a web 2.0 company is doing it in the trenches.

http://pauledmondson.blogspot.com/2006/01/boot-strapping-web-20-style.html

[Wezee]

Another term for bootstrapping --known to many from inner city backgrounds-- is HUSSTLING! Though,many view the term husstling as a negative thing. This post describes what it is to be a true HUSSTLER...definitely a post to be put in any entrepreneur's bible.