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

[Betsy Devine]

"Ship then test:" Your point #9 is what makes this work.

That, and flashing back fast to unhappy customers, whether their bug reports show up in email, IM, or (shudder) angry blogposts. At least, that's how we did it back when I was working for Feedster.

[Fine James]

And if all else fails, find a good contingency lawyer and sue the living hell out of someone, anyone.

[Guy Kawasaki]

Re: Design

I'm not saying the design of the products you sell doesn't matter. I'm saying that if you're bootstrapping, the coolness/design of the products your're buying doesn't matter.

Guy

[John Bacon]

In your post you said that, "Perfect" is the enemy of "good enough." Didn't Jim Collins have a similar statement? I think it was something like, "good enough is the enemy of great."

[theCreator]

Ship, then test?
A dangerous tactic that can backfire anytime.

[franki durbin]

Guy,
Thanks for taking time write such "meaty" posts. #1 and #5 definitely resonate with my business experience. You can have revenue coming out your eyes, but if your cash flow is off...you're sinking. Keep up the great writing. It's a great read each day.

[Kendall]

I think the idea of going from the bottom up is a really helpful idea to try and figure out cashflow and a realistic approach to forecasting. Thanks for this post. As someone who is trying to bootstrap an idea it's really helpful.

[Charlene Chong]

Absolutely. Ship then test. We didn't even know what in the world we were selling till our customers spoke. We thought we were selling A, but our customers thought we were selling B, so B we sold. The customer is KING!

Point 4 - now I'm forcing my team to read this. You guys ROCK! You are young (and gorgeous) and super hungry. That's world domination material - and nope, I haven't had my wine yet.

Thanks for the great post, Guy.

[Samir]

Hello Guy,

Another fantastic post. Thanks for this.
I only disagree on one point: design. Let's face it, design IS what will lead customers to choose your product. Functionality is important. But you said it yourself: what you expect from a chair is to hold your butt. What you expect from a car is to drive you from point A to point B. That's for the function. I want people to look at me driving my car from point A to point B and say WOW! Who is he? A movie star? A successful VC? I want my colleagues to come into my office and genuflect when they see my chair. Only design and I insist on the word "only", can really help you differentiate your product in this age of abundance. OK, if someone invents a machine that let's say can make you invisible, he doesn't have to bother on how his machine is going to look like (look at the first car...not really fancy). But as the product becomes more mainstream, the only way to differentiate and add significance to it is design.

[Gordon]

Hi Guy and fellow commentators,

First: Thank you, Guy, for the post. Those of us in the sticks (and under the radar) need just this sort of support.
I'm funding my development doing contracting work, not consulting.

Thomas Witt, I agree wholeheartedly. One needs some element of differentiation from the OSS movement and the entrenched competition. Good design always helps - think Apple ;-)

I've been planning things for a while, strategy - not formal BP, and am happy to have your confirmation of my approach.

Thanks again,
Gordon

[Dan Kravman]

This is an excellent article! I especially liked points #2 and #8 - they were very insightful.

Thank you for writing this.

I have added it to my del.icio.us bookmarks and submitted it to reddit.

Once again, thank you.

[Steve Cook]

Great article Guy. I was inspired to bootstrap my company after reading The Bootstrappers Bible from Seth Godin (http://www.changethis.com/8.BootstrappersBible).

Another reason for bootstrapping of course is to build value in a company while retaining financial control. If my idea is worth bupkiss, then if I build it myself for a year or two I may be able to then position it better on the market. Of course, we build for growth rather than for acquisition, but one can dream...

Bootstrapping is tough and unglamorous though. When I read of people getting $200 000 in their first round of funding it sounds like silly money to me. My product development is funded by working hard at consulting gigs that (just about) pay the bills.

[Dennis T Cheung]

"Ship, then test."

I believe the new trend is to call it "Beta" then test :)

[Pelle]

I'm a big believer in bootstrapping and am doing it myself.

Even if your business is VC financable, I think it's best to reach the point where you have a real (albeit small) business before you loose focus and start the search for financing.

Too many startups spend all their time on busines plans, angel investors, VC's and what have you when they would have a much better chance if they focused on their business.

On my blog I'm journaling my own experiences as a bootstrapper.

While there is a real level of frustration at times (my current source of funding is consulting, which eats up most of my time) I still have more time to do my business than if I was doing the whole bplan->VC circuit, which I have done in prior startups.

[Thomas Witt]

Guy,

thanks for this inspiring article. I would perfectly agree on all of it, except No. 6. The longer I'm into software business I'm realizing how important a great user experience is.

I'd rather ship a good enough functionality but focus on a great experience. Mainly you've only got one shot.

I agree that it's desirable but not absolutely neccessary to have star designers design your product. But the ease-of-use and the user experience is a very important point in my point of view.

[James Clark]

Guy, point one is so critical and often times entrepreneurs get caught up in the winning the business, staffing up for it and don't focus on getting paid for it.

My partner and I in my current business made a blood handshake about how we would not back down from requesting a certain level of payment upfront before we begin a project.

I found that the clients actually begin to respect us more, and for those prospects that didn't agree, well they probably wouldn't have paid us anyway.