3. Bootstrapping

In the previous article we examined the importance of focusing on the customer in the early stages of any startup. Whether or not you are expecting to raise financing, or are self-funding, the chances are that you will be able to benefit from being able to bootstrap. In this article, we’ll talk about what it means to be good at bootstrapping.

Securing Funding is Increasingly Elusive

Less than 1% of startups get funded, but you wouldn’t necessarily know that if you just looked at the Startup Scene. In the UK alone there are literally dozens and dozens of Accelerators who will help entrepreneurial teams get funding. There are numerous Angel investor clubs, and Venture Capitalist firms. On top of that, there are government grant schemes, bank loan schemes, university programs, and industry-backed innovation initiatives. All this, and yet only 1% of startups get funded. What is going on here?

Accelerators Are Difficult to Get Into

A common route to funding is through an Accelerator. However, when I talk with people who run Accelerators, they tell me that over 90% of applicants are rejected out of hand -they just haven’t got their idea developed enough. And when you look at what Accelerators do nowadays, it isn’t hard to see why they think this. Think about it – an Accelerator program is often only three months. Three months to take a company from where it is, through a series of learning paths and mentorships, to a point where they can give a successful pitch to a curated group of Angels or Venture Capitalists. They have to be really picky in who they accept in order to maintain their track record.

One of the problems is sheer volume. Ten years ago there were maye only 50 Accelerators around the World. Now there are over 5,000 and counting (the Startup Circle is one such). There are also way more startups – last year there were over 100 million startups – that’s 3 per second and this year that is likely to increase dramatically as COVID continues to take its toll on traditional employment.

Startups Need to Demonstrate Traction

The VC business hasn’t really changed that much in the last 20 or 30 years. In order to make a reasonable return, VC firms look for 10x payback in under five years. Because only a small percentage of companies they back will really make it, they have to be picky. Great ideas are a dime a dozen, so what investors are looking for is traction. Traction is evidence that the market wants your product and is willing to pay for it. Whether this is the number of paying customers, or the number of market-place transactions, or the number of active users – or some other metric – will differ depending on the type of business. However it is measured, traction is really the only thing that investors are looking for.

So you can see the problem. If you are trying to build a product by relying on funding, you will find yourself in a Catch 22 situation. You need to get funding to build a product that you can sell to demonstrate traction – but you need traction first in order to get the funding. With only three months to get companies ‘VC Ready’, you can see why Accelerators try to find applicants that either have traction already, or where there is an easy path to traction.

Funding Isn't a Gurantee of Success

It’s also a fact that funding isn’t a guarantee of success even once you get it. We have spoken to many founders who did manage to get funding – sometimes millions and millions of pounds – but when the money ran out, so did the business. Getting funding too early on in the startup cycle can hide warning signs that indicate your business model is flawed. My own personal example was where I excessively self-funded. Slightly different situation – same end result.

You need funding before you can get customers, but you need customers before you can get funding. How do you get around this chicken-and-egg, Catch 22 situation? There are two common solutions – most founders look for ways to either self-fund, or to bootstrap their idea.

Bootstrapping is (Often) the Better Answer

For many, if not the vast majority of startups. bootstrapping is the best, if not the only, answer to the funding dilemma. Bootstrapping is the process whereby your first customers pay for your subsequent growth. Although it is a type of self-funding, it is important to note that Bootstrapping is not the same as being self-funded out of your savings or alternative income. When done properly, bootstrapping helps founders avoid the pitfalls of falling in love with their own product, and building something that no-one wants (to pay for, anyway).

Whereas bootstrapping is a common approach used by many startups (especially those following a Lean Startup model), it is actually more difficult to do than it sounds. A traditional (Lean Startup) view of growth is to 10x at each iteration. In other words, to go from one customer to ten customers, to a hundred, then a thousand, and so on. Each iteration of your business is a ten-fold growth. Another way of looking at 10x is” doubling three times” (2x2x2 = 8x, which is close enough!). At each order of magnitude, the business evolves to serve a different version of its product. Perhaps a different audience is served, in a different way. The key point, though, is that each stage funds the next stage.

In order for this 10x bootstrapping strategy to work, care is required to select products or services with the right characteristics for bootstrapping. Namely, the products or services you are selling should be:

1. Profitable: High profit margin (cheap to produce, expensive to buy), with a low customer acquisition cost (cheap to sell). Ideally the product/service is cash-flow positive (as cash is precious, if you need to pay out a lot before you get the revenue in, you will run out of money as you try to 10x)
2. Buildable: Easy and quick produce, and, as the company grows, with increasingly lower marginal costs (scalable)
3. Sellable: Easy to sell and quick to sell. As you are doubling multiple times, a strong growth loop is needed so that the more you DO sell, the more you CAN sell. Targeting your final customer is also critical so you are not having to reinvent the business at every iteration.

Strategies to Control Costs

From a financial perspective, when bootstrapping you are worrying about three different buckets of expenditure: (1) marginal unit cost, or cash flow, (2) fixed assets/infrastructure costs, and (3) upfront product development costs. The canny bootstrapper will naturally be looking at ways to minimize each of these.

Each 10x stage will employ its own, different, combination of these three factors as the business grows and the need to scale increases. The bootstrapper should start with a roadmap for each stage, and then adapt as their customer base grows.

For reducing marginal costs, there are strategies such as building-on-demand, standardization, and automation. For reducing fixed asset/infrastructure costs you might consider pre-selling, renting or fractionally purchasing assets, miniaturizing, or piggy-backing on existing products or services already out there. Some strategies for reducing upfront development costs include hollow MVP, “man behind the curtain” (artificial AI), mashing, and outsourcing.

Desirable Skills and Attributes

Bootstrappers get good at leveraging technology, at vendor Management, at outsourcing and contracting, at taking advantage of grant financing, and crowdfunding, and (judiciously) getting people to work for free – except friends and relatives.

Successful bootstrappers contrive to avoid overly customizing or concierging their product or service (except at the start where it is part of the strategy), to avoid self-funding or bank loan financing, of giving equity away to anyone, and in abusing/using family and friends (who will soon tire of the favors and requests).

Some principles bootstrappers naturally evolve to include becoming expert in scarce resource allocation – and as a corollary, developing their core product as one that they can directly contribute to. An overriding principle is to be intensely customer-focused – to care about every potential customer, and to always ask “will spending this money help me acquire or keep a customer?”