The art of bootstrapping - part 2
In part one of his article, Stefan Wolpers provided a working definition of bootstrapping and outlined the secrets of succeeding as a bootstrapped startup. Here he goes into two of the most important: how to save money, and how to avoid spending money.
Cash is king. This is a commonplace when bootstrapping, along with the the 3F-funding model: Fools, Friends and Family. In addition, there are other factors that bootstrapped startups are likely to run into simply because, in any bootstrapped startup, cash flow is always at issue. I would like to draw a distinction between hard factors that directly impact cash flow, and softer factors that have an indirect impact which is nevertheless far from negligible.
1st Personal Life:
The good news first: If you work a lot, you have little time to spend money. Perhaps the most important point to remember as a cash-poor entrepreneur is that you have to stretch your personal finances to make ends meet. At least while the business is getting off the ground, your standard of living is bound to suffer. In fact, you should expect it to.
Holidays, new cars, expensive clothes, dining out four times a week? Forget it. However, that sounds worse than it really is. In my experience of 20 years of more or less successful bootstrapping in a range of different industries, it is astonishing how little one can get by with when one is completely focused on priorities. Also, you discover that money has a diminishing marginal utility: if you only go out once a fortnight, even a simple Margerita is again a great pleasure. This can even be calculated:
You may have to move to a cheaper apartment or even a new city to reduce your personal expenditure. In Germany, Berlin has fast developed into a hub for Internet startups and one of the primary reasons is the cheap rent, office space and standard of living, which are significantly cheaper than in other German cities such as Hamburg or Munich. It may seem fairly drastic to relocate to save money, but how much do you really want to succeed? Before opting to bootstrap, you should absolutely be prepared to go through your personal budget and cut the fat out.
Another good way for founders to minimise monthly cash outflow is to look at what you are spending on insurance. A typical founder might be paying out for:
- Health insurance
- Disability insurance
- Liability insurance
- Household insurance
Instead, I would recommend a term life insurance policy (German: Risikolebensversicherung) which can be had for less money. All other forms of insurance are, in my opinion, unnecessary when in the first phase of bootstrapping.
When running a tight budget you have to prepared to save money wherever you can. In these straitened economic times, all kinds of providers both offline and online are slashing prices and offering discounts. Be prepared to seek them out and start doing your shopping at Aldi rather than Waitrose. In this way, you will save a lot more money than you could possibly have imagined. And this is crucial for the success of your startup, because it means the business is going to be in a better position to overcome the difficult first phase until it begins generating a positive cash flow.
2. Operational expenses of the company
Savings also have to be made in the implementation phase and in the day-to-day operation of the company. The observance of some simple rules will make a lean budget stretch a lot further:
- Resources should always be distributed according to need, not according to formal functions within the company. The manager director should not get the fastest PC / laptop unless he really needs the equipment.
- Does the company initially need an office? This question is important for startups that are yet to take on employees, or where the business can still be run from a bedroom.
- If the team relocates to another city, ensure the new homes are conveniently located to the working office. For example: if you launch in Berlin consider locating to Mitte or Friedrichshain, where just about everything is on your doorstep. This not only saves you the need of a car – there are so few parking spaces anyway – but also minimises the journey time to work.
- When you finally do move into an office, never sign a long-term lease. Instead, you should always bargain for the shortest lease agreement possible, even if that requires a surcharge on the rent. There are two reasons:
- The office-cycle of a successful start-up is often as follows: it begins a bit too big and subsequently slims down, then grows once again. It is not uncommon for this cycle to rotate at 12-month intervals. A commercial five-year lease – the dream of all real estate brokers – may tie a startup in to a property that is too bog (or too small) for their needs. You need to be flexible and able to act quickly to find the smallest and cheapest office space for your requirements.
- If the startup does not fly you want to able to cast off this millstone from the neck as fast as possible. Many a startup that end up bankrupt could probably have avoided insolvency if not for their expensive, long-term lease.
- Unless absolutely necessary because of industry and / or business model, one should not spend any money on permanent fixtures – e.g. buried network cables – or costly renovations. You could be moving on after 12 months so it’s simply not worth it. By all means paint the walls white and freshen the office up, but avoid any large expenditure.
- Similarly, rather than splashing the cash on fancy furniture, look around for bargains. There are many places to find used office furniture and often this is available for free if you arrange the pick up and delivery. The visual impression of the ensemble – with the exception of, say, sales areas – is of secondary importance, so long as the equipment is functional.
- Having said that, good office chairs are extremely important – less back pain means happier people and higher productivity. But you dont need to spend 1,000 euros a pop on the fanciest swivel chairs you can find.
- Avoid laying out for expensive licensed software if you can find free equivalents in the cloud. The quality of open source software is improving all the time and for many practical applications, free web services such as Google Docs tick all the boxes.
- Business cards are still indispensable. But if we confine ourselves to the important information – such as URLs, e-mail address, Twitter name and mobile number – you can pick up 1,000 good quality cards for around €30 cover online.
- Do we need still a landline telephone and a fax? This depends very much on the target group of your service offering. If the demographic is already accustomed to e-mail or social media, then an inhouse switchboard and telephone system may be surplus to requirements. If it’s unavoidable, then I would discourage signing up with major telcos, whose leases often run for five years or more.
- What kind of consultants does a startup need to hire? Again, this depends on industry segment and business model:
Tax and the law
A tax adviser is strongly recommended. You need someone qualified to submit a monthly VAT return and current accounting, and the basic level of service from a good tax adviser can be had for little money. This means not only that you can relax – you will no longer face any nasty surprises of missed documents or payments – but it also makes a good impression on banks and potential investors.
A lawyer should be consulted for drawing up the terms of conditions outlined for your service, and for advice on online law. The idea of just copying your nearest competitor’s policies is not new – the documents are openly available and you can even apply to the courts for a printed version. It’s better than having nothing but is often problematic, because you may inadvertently copy errors into your own policies, or fail to cover important factors. Better to leave it to the lawyer, or at least get someone capable to draw up important documents and pay a lawyer to review and correct them. When it comes to trademark law, is the involvement of a qualified patent lawyer is strongly recommended – this is one area in which errors could prove very costly so you can’t take shortcuts.
If you are ever thinking of paying for consultants with shares, think again. The shares are usually the only thing available to a startup that could later be of value. If the funds are available, one should always pay for the service.
- Hosting: Without question there’s a strong case for outsourcing. These days there is hardly any reason – with a few exceptions – for a website or other application to run on its own hardware. If you have security concerns, look into VPNs (virtual private networks).
- Dedicated servers with quad-core CPUs, 8 GB main memory and storage can be found for less than €60 net a month.
Building the team
Although bootstrapping often begins with one, sooner or later the decision has to be taken to expand the team. At that point, a few aspects have to be weighed. You have to decide not just whether there is a role to be filled, but how exactly it should be filled. A few things to remember:
- Try to avoid taking on staff until it is absolutely necessary, when it is no longer feasible to operate without that person and where different skills are required which are not yet in the team.
- Wherever possible try to recruit A-people, but make sure they are going to be comfortable in the atmosphere of a bootstrapped startup where there is a tight rein on the budget, particularly if they are coming from a large successful business.
- Don’t fall into the trap of many startup entrepreneurs and avoid hiring A-grade people simply out of fear of being out of your depth.
- Interns? You have to weigh up the pros and cons in each case. How much training and supervision will the individual require, and will it be worth it for the business?
On the list of unnecessary expenses in my opinion is any sort of travel disguised as a compulsory business expense; conferences which you cannot attend for free or for which there is no direct benefit; parties – for any purpose – as well as any but the most unavoidable business lunches. When you’re bootstrapping, get down the local kebab shop.
Last but not least is cash management. The less cash is available, the more accurately you have to monitor and control your outgoings. Follow these tips and reduce the amount you are spending:
- Always take advantage of discounts from suppliers. Not to do this is the most expensive form of bridge financing.
- Always meet payment deadlines, particularly for tax and insurance, so that you are never charged penalties.
- Important business partners (such as accountants, lawyers or other key service providers) should always be paid on time, because you never know when you might later be forced to depend on their goodwill (e.g. if you’re facing insolvency).
- Have a strictly enforced policy in place for pursuing anyone who defaults on payments to you. Their willingness to pay is to some extent a matter of education. This requires discipline on the part of the startup – payment terms must be consistently implemented and followed up.
About author Stefan Wolpers:
Stefan Wolpers is an entrepreneur and consultant specialising in startups and social media. He is also wildly enthusiastic about ice cream, which he makes himself and publishes recipes for, and is a self-described lover of Mac, iPhone and Twitter.
Stefan is also the founder of Twittwoch – a Tweetup for people who deal professionally in Germany with social media in general and Twitter and microblogging in particular.