The art of bootstrapping - Part 1
‚Bootstrapping‘ is one of the many buzzwords that flit around the startup scene. This is particularly true in times when investors in new ventures are thin on the ground and what funding there is is only being directed at businesses seen as safe bets to go public or be acquired for gazillions at the exit stage. For those entrepreneurs struggling to acquire venture capital, bootstrapping is the art of putting minimal resources to work and growing your business incrementally from the ground up. But how is it done?
Where did bootstrapping come from?
Far from being a modern invention, bootstrapping has long been the favoured (because, for many, the only) method for launching business ideas and getting companies off the ground. External financing was unheard of before the Renaissance, when in 1602 the Dutch East India Company was founded, becoming the first ever multinational corporation in history and the first to issue stock.
Those interested in economic history will find a wealth of exciting stories from the annals of bootstrapping. My favourite hardcore bootstrapper is Charles Goodyear, who died penniless: the Goodyear Tire & Rubber Company was founded only 38 years after his death.
What is bootstrapping?
„Bootstrapping in business is to start a business without external help/capital. Startups that bootstrap their business fund development of their company through internal cash flow and are cautious with their expenses.“
The bootstrapping approach is about sticking to a simple rule of thumb: keep your head above water for long enough for the business idea to begin generating cash flow, then use the cash for the further development of the company.
And the privations this engenders for a struggling start-up can actually make the difference between success and failure. As Guy Kawasaki argued in a recent lecture for Stanford University’s Entrepreneurship Corner, bootstrapping is something „that should always be in the DNA of a company, even if it has 10 million dollars in the bank.“ The point is that when resources are scarce, it is much easier to focus on the essentials, while avoiding the waste that well-funded entities are often guilty of. „Too much money,“ says Kawasaki, „is worse than too little.“
It is my belief that although it is born out of need, bootstrapping becomes a virtue when adopted as the cornerstone of a management philosophy. As a business lifestyle, bootstrapping allows the entreprenuer to break the Tyler Durden cycle – „We work jobs we hate so we can buy shit we don’t need“ – and go his own way as a self-reliant innovator.
After 20 years of more or less successful bootstrapping in a range of different industries with different business models, there are some things I encountered again and again:
- Bootstrapping only really works if you can identify fully with the idea and the company, if you belief in its future regardless of what others tell you.
- If you have a mortgage to pay or a family to support, bootstrapping may not be for you. It’s not for the risk averse.
- Collateral damage is inevitable – in the end you are always overworked, chronically short of money and your social life is likely to suffer.
- No matter how much faith you have in your business idea, the leap into the unknown will be a constant rollercoaster ride of emotions. From the nagging feeling that all the competitors are more „cutting edge“, to those moments of abject despair when you think „How could I have been so stupid to think this would ever work?“, be prepared for a rough ride.
- Bootstrappers always have the fear of being seen as a failure if things don’t work out. The important thing is to harness this fear and use it to motivate you. According to VC Paul Graham, „founders are more motivated by the fear of looking bad than by the hope of getting millions of dollars. So if you want to get millions of dollars, put yourself in a position where failure will be public and humiliating.“
- Everything takes longer than expected, with more mistakes and missteps than originally anticipated. Hold out longer – at least 24 months – and your chance of success increases.
- Buy time for your business by aiming first to be just profitable enough to survive. As a bootstrapper, cash flow always comes before growth. And growth comes before profit. Paul Graham outlines this approach in his article Ramen Profitable
- To generate a positive cash flow, we must take care to avoid the ‚zombieconomy‘ by offering customers a real benefit for which – directly or indirectly – they are willing to pay. In his presentation at the 2009 BRITE conference, Umair Haque calls it „thick value“.
- Recruiting investors costs time, money and energy and distracts from the real objectives of the startup. Distraction is the number one killer.
- Focus, focus, focus: do only what you can do well. The rest is superfluous or can be outsourced. In a bootstrapped startup, there are no priorities that are not first priorities.
- In the land of the blind, the one-eyed man is king. In other words, concentrate on your strengths, know your product and outperform other startups in your sector in the competition of ideas.
Part 2 of this series will deal with the issue of „saving money“ on the one hand, and „not spending money“ on the other. In my experience, the two are often confused.
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.