I recently came across a couple good articles about bootstrapping. One called the “Art of Bootstrapping” by Guy Kawasaki and the other called the “Ten Rules for Bootstrapping Your Business” by Thomas Frey. I combined the tips, rules, advice (whatever you want to call them) from these 2 articles and made it into 1 big list. Some of the info is really good…
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.
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.
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.10) 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.
And here are the Ten Rules for Bootstrapping Your Business:
- Lead the Life – Cut Your Overhead. The first rule of bootstrapping is to cut your overhead costs to the bone. To achieve the bootstrapper’s mindset, the mental tai chi of becoming singular in your business focus, you must learn to lead the life. Payments for fancy houses and cars will slowly tear away at your personal resolve. Fancy meals at restaurants and lavish parties will compromise your attention. And high-end offices with luxury furnishings will put you at a negotiator’s disadvantage.Frugality is not a skill that can be turned on and off. It’s a concept you must become married to. Every needless penny you spend will jeopardize your ability to succeed.
- Never Blame Others – Do It Yourself. As soon as you find yourself blaming other people for things not being done, just take a deep breath and do it yourself.It becomes so easy to let yourself off the hook by simply blaming someone else. But in doing so, you put your company at risk. You have to be the emotional leader driving your business forward, with an unusual level of loyalty for what you’re doing. Frustrating as it may seem, you can’t expect others to have your same level of drive and commitment. Ultimately, you are singularly accountable for your company’s success or failure.
- Don’t Plan for Failure – Remove the Guardrails at the Cliff. Planning for easy bailout options has a way of undermining your resolve. Every startup goes through tumultuous tough times testing the mettle of the entrepreneur. And the tough times are what separate the survivors from the many strewn casualties lying alongside the startup highway.Planning for failure almost invariably leads to failure. Every step that the early stage entrepreneur takes on the startup tightrope will have them looking for an easier option, a soft landing so to speak. Removing the soft landings has a way of clearing your focus and strengthening your concentration.
- Test Your Limits – Constantly. Expanding skill sets and relentless passion are two key ingredients. But blind passion without the skills can be a very destructive force. When is the last time you went outside and physically ran as fast as you possibly can? For most, this was a long time ago. But how will you know how fast you can run if you don’t test yourself. This is similar to the business world where knowing your limits is the best way to manage your options.
- The Business Plan Fallacy – In Quest of Low Hanging Fruit. Contrary to what academicians teach, successful bootstrappers seldom write business plans. I’ve not met many that have. This is a luxury few can afford. But more importantly, bootstrappers have a constant need to keep their options open. Their relentless drive for revenues forces them to keep their peripheral vision intact as they view the opportunity landscape.In the early stages of a startup, bootstrappers have little accountability for their actions. Their primary need is to prove a viable concept in a viable market. And this means revenues come before anything else.
- The Transitional Business Model – Search for Low Hanging Fruit. Potential revenue streams come in odd shapes and sizes, but you begin by selling yourself. For that matter, every transaction begins with you selling yourself as a competent, credible person with great integrity.Often times the first revenues for a fledgling startup come from individual consulting contracts. Selling your own expertise pays the bills and can set the stage for you to metamorphose into the business you wish to become. Many would-be entrepreneurs fail to think through the options of creating a transitional business model where you begin with an easy entry point and transition into the business you ultimately want to become. This approach will invariable take unexpected twists and turns along the way, so be flexible and know when to make the next turn.
- Little Things Matter – Micromanage to Your Advantage. Sometimes the littlest details will throw your startup company into a tailspin. Blind trust is a luxury that startups can ill afford. Understanding your business inside and out will give you much better operational control. In nearly every case there is a direct correlation between the decisions you make and the revenue streams you have coming in. Understanding this cause-and-effect correlation is absolutely critical for you to succeed.
- Bankers are not Your Friend – Line up Tons of Credit Before you Start. Few would-be entrepreneurs can imagine the difficulty of finding credit once they leave their steady income jobs. Credit scoring systems have a way of branding you as a terrible risk almost instantly as you enter the startup starting blocks. So plan ahead and line up credit in whatever forms you can find, and lots of it.Business never works the way you have it planned. Chaos theory is alive and well, and will be knocking at your door when you least expect it.
- Find a Mentor – Surround Yourself with People Who Look Like What You Want to Become. Entrepreneurs need to surround themselves with other entrepreneurs. And it’s even better if you can surround yourself with people who are successful in the same type of business you are entering into.Successful people often can’t tell you what it is that makes them special, but if you hang around with them, they will teach you through their actions. Sitting in on a negotiating session, or being in the same room when they deal with a personnel issue, will give you unique pieces of information that has never been captured in books.
- Reckless and Relentless – The Bootstrapping Difference. The bootstrapper business model is different than that of a “funded” company. Bootstrapping is more about drive and determination than it is about intelligence, and more about getting things done that doing things right. It’s better to get it done than to get it perfect. That’s not to say that you shouldn’t be bright and try to do things right, but successful bootstrappers tend to be more reckless and driven, and necessarily so, than their ‘funded’ entrepreneurial counterpart.
So there you have it. Some sound advice about bootstrapping your business. Do you have any other tips? Feel free to share them in the comments below…
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It’s refreshing to read an article like this. I must say, Guy sure knows how to motivate entrepreneurs and keep them going. He seems to speak the entrepreneur language whereas most articles that I read do otherwise. They talk about plan for failure, focus on profitability, etc…this is where the differentiation between entrepreneurs and businessman/woman lies. Entrepreneurship and business are two separate fields. Entrepreneurs don’t follow a blueprint, they create one themselves to fit the situation they’re in whereas businessmen like to follow a path that has already been paved for them. My business partner and I are first time entrepreneurs and I must say, it is the blind leading the blind but as long as we’re learning and we can absorb as much info as we can, we feel strongly that we can create a strong business. Check out PremierInterns.com(shameless plug) when you get a chance.
a super reading and dramatic article.I did reread this website.