In the age of startups and micro-enterprises, the first thing you hear about, when it comes to creating a new company, service or digital product is a whole new glossary of words starting ranging from "venture capital" to "angel investors".
Photo credit: Man climbing by Shutterstock
There's a whole universe of organizations, companies, services, magazines and events (US, Europe) devoted specifically to helping entrepreneurs prepare, plan and pitch their ideas in order to get some capital funding to realize it.
It's the idea that there already have been small startups who in a relatively short time have gained stellar evaluations and which have been bought by bigger players for truckloads of money, that drives them to pursue this path. They want to be the next Facebook, Skype or Instagram. What they build, what problems their tool will solve and who will specifically use it, are all kind of secondary issues relative to their primary focus: making money by creating a company that someone else will want to buy.
But this is not the only option in town.
Here all the details:
Value-Driven StartupsOn the opposite side of the river there is a very large number of people, and I am one of them, who have few or no sponsors, no big events and no large backings, but who pursue a rather different startup dream: they want to build something that it's useful, not to sell it others, but to create something of real value and use, that can also be sustainable and profitable economically. The focus of this second group of people is in building something useful first, and then in finding way to make it profitable. Not the other way around. The goal of this group of boostrapping startups is not to "exit" or sell out to the best bid, or to make the largest profit in the shortest possible time. Their goal is to create something that they really believe in and that they can maintain control of. The approach is very different. You don't go around pitching and trying to get more investors to finance you. You work right away at building something that, however minimal, people can use and are willing to pay something for. This self-directed, autonomous approach, is called "bootstrapping" and this mini-guide is devoted to explaining and illustrating it in more detail. If you are in creating a new service, product or tool, not just for the money returns, bootstrapping, or the art of being able to put things in motion without any external help, may be (together with crowdfunding, which can be an ideal complement to it) the best road to take.
What Is Bootstrapping? - DefinitionsLiterally, boostrapping means "pulling yourself up by your own bootstraps". In the field of digital / online business startups, bootstrapping means creating, building or activating something without the need for an external financial help, in the form of capital investment from outside investors.
"In general parlance, bootstrapping usually refers to the starting of a self-sustaining process that is supposed to proceed without external input". Source: Wikipedia
"...get (oneself or something) into or out of a situation using existing resources. "the company is bootstrapping itself out of a marred financial past"". Source: Google Definition
"[Bootstrapping means] building a business out of very little or virtually nothing. Boot strappers rely usually on personal income and savings, sweat equity, lowest possible operating costs, fast inventory turnaround, and a cash-only approach to selling". Source: Business Dictionary
"Bootstrapping in business means starting a business without external help or capital. Such startups fund the development of their company through internal cash flow and are cautious with their expenses. Generally at the start of a venture, a small amount of money will be set aside for the bootstrap process". Source: Wikipedia
"Many of today's largest corporations (such as Apple computer, Clorox Co., Coca Cola, Dell Computer, Hewlett-Packard, Microsoft) began as boot-strapped ventures. Most of world's startups still follow this road; either because there is no alternative, or because of the unmatched control and independence it offers". Source: Business Dictionary
"In small business, bootstrapping refers to the process of starting a business, marketing a business, and even growing a business by using limited resources. Entrepreneurs who bootstrap are self-sustaining, using little to no money to start their businesses. They spend only what they absolutely need to spend, and never look to external sources for financial help". Source: Bootstrapping by Alyssa Gregory, January 2012 - About
"A type of business funding that seeks to avoid relying on outside investors. By not relying on outside sources of funding, the business will not have to dilute ownership through issuing equity, and will not rely on outside banks for debt". Source: Business Dictionary
"...bootstrapping isn't limited to the startup state. It's a valid way for business owners to treat valuable resources at any stage of their business' growth". Source: Entrepreneur Encyclopedia
Why Bootstrapping Is ImportantIf you are not just after a money-making, make-as-much-as-you-can approach, bootstrapping is the best way to create a service, company or product that you can keep full control of and that you can steer to generate the kind of social and economic returns that you have chosen. The idea of building a startup by looking first for funds and venture capital is certainly not the only way one can go about it. It is likely in fact, that while they receive a lot less coverage and attention by the media, the vast majority of startups are boostrapped ventures. There also exist a long successful track record of what are now successful startups and big brands which have all started without any external financial help (check the "Success Stories" section further down in this article). Bootstrapping is important because it is the only approach to creating an organization that allows you to maintain focus and control of its direction after its initial inception. Bootstrapping is also an important alternative to getting funded because it helps create companies that are genetically lean, efficient and - by definition - living-proof of their abilities and potential. Bootstrapping companies do not risk of burning millions of dollars away, because they are built from day one to focus on tangible returns, on hard work, and on maximizing savings.
"The young people, the developers in open source or free software, the people who are in co-working centers, hacker spaces, maker spaces. When they are thinking of making a living, they think startups. They have been very influenced by this neoliberal atmosphere that has been dominant in their generation. They have a kind of generic reaction, "oh, let's do a startup", and then they look for venture funds. But this is a very dangerous path to take. Typically, the venture capital will ask for a controlling stake, they have the right to close down your start up whenever they feel like it, when they feel that they're not going to make enough money. They forbid you to continue to work in the same sector after your company has failed, and you have a gag order, so you don't even have free speech to talk about your negative experience. This is a very common experience. Don't forget that with venture capital, only 1 out of 10 companies will actually make it, and they may be very rich, but it's a winner-take-all system. There is a real lack of knowledge within the young generation that there are other forms of enterprise possible". Source: Excerpt from Michel Bauwens interview, Michel Bauwens On the Pitfalls of Start-up Culture by Stacco Troncoso, February 2014 - P2P Foundation's Blog
Boostrapping - Characterizing TraitsTo facilitate understanding of whether it is best for you to go looking for investment capital or to bootstrap your startup all by yourself, I have tried to gather and list here those that seem to be the key characterizing traits of boostrapped companies. Here's what I have found.
"Opting to be self-sufficient (either voluntarily or not) and rely on real revenue means one thing: The customer is suddenly king. This focus becomes baked into the company's DNA. Its very survival depends on developing products that its target market actually wants and likes. Customers are often involved in beta testing and are encouraged to become involved in the process. And early on is the time when you want to solidify a customer base for future sustainability. Bootstrapping companies can also be more rational and less speculative with their allocation of resources. Because they can't afford to throw money at problems, they have real incentive to solve potentially destabilizing conflicts and errors before they become systemic." Source: The Art of the Bootstrap by Javier Rojas, November 2008 - VentureBeat
- Focus on product value to the user Without something that users see immediately as a valuable and worth a price you may be going rounds and rounds after something that's just in your head
- Focus on customers satisfaction, not numbers The key metric for helping a new company grow is customer satisfaction, as their satisfaction translates into positive word-of-mouth spreading around at cost zero
- Focus on real market needs, not on business opportunities Successful bootstrappers start businesses that intercept a very specific problem, need or interest rather than trying to conquer the broadest possible market
- Attention to real revenues rather than market sizing or valuation Strong focus is on systematically increasing real, day-to-day revenues as they are the ones that allow the company to grow and move on
- Lean approach to development and expenses Limit expenses and unnecessary costs to the minimum while maximizing all of the actions and processes that facilitate immediate improvements
- Organic growth - Growth investment based on real returns Allow the startup to grow always relative to its profits and not to its future projections
- Low staff turnaround People who deeply share the startup goals and objectives are much less likely to leave and the first outside offer than those who have come just for the money
- Clearly stated mission and values Direction (what to do and why do it) is clearly set, publicly shared / promoted and systematically reviewed
- Community-based Strong involvement with a fast-growing passionate community of readers / fans / customers who shares the same interests and values
- Fans and clients participate in the company development Community involvement is key as it provides limitless creative, financial, logistic and marketing resources, often available at zero cost
In a boostrapped startup "...spending is more prudent, the product is designed in a focused manner, team members and resources are employed more wisely, and the business as a whole enjoys a great return on each dollar and hour spent." Source: Who Needs Investors! Why Many Startups Should Bootstrap Instead by Andrew Gazdecki, May 2013 - Gigaom
It should also be mentioned, that there are at least four obvious downsides to taking the bootstrapping route. These are:
a) "[bootstrapping] increases the level of risk for the business owner, ..." Source: Business Dictionary b) "[bootstrapping] may not provide enough investment for the company to become successful at a reasonable rate" Source: Investopedia c) growth may not be as fast as desired d) you won't be able to blame others for your own mistakes
Startup Boostrapping ProsWhich are the key benefits in creating a "bootstrapping" startup?
- Be in Control Take all of the final decisions without needing to consult with investors and advisors
- Maintain Greater Focus Have all of the time available to focus on product development and marketing
- Keep Organic Pressure Limit stress and pressure to a more manageable dimension
- Forces you to build a good team To survive under scarce resources you need highly committed, ethical skilled partners and collaborators
- Makes you more creative Scarce resources are the bread of great artists and of useful solutions. Under restricted budgets you are forced to find workable solutions that work rapidly
"Having very limited economic resources forces you to think creatively about how to get things done. "So where many established or funded companies would tend to throw money at a problem and explore all the avenues possible, a bootstrapped company will have to find the best way, fast. This leads to a culture of problem solving that almost every successful company has, to some extent". Source: Who Needs Investors! Why Many Startups Should Bootstrap Instead by Andrew Gazdecki, May 2013 - Gigaom
- Easier to pivot When there are no third-parties controlling your startup you can change and correct direction easily and very rapidly
- Keep the Profits Revenues can be all yours as soon as they start coming in and you can get to decide how to re-invest them or use them. Unlikely situation this, if you are funded
- Focus on the Customer
"When you don't have a lot of money, you're forced to turn to the funding source that rarely tolerates mistakes: customers. Specifically, focusing on the product results in the creation of a "minimal viable product," a pared-down, core offering that delivers a clear value to customers. And if all of your efforts are focused on designing a product that customers want, enjoy, or find useful, you've got a much better chance at success than someone who's focused instead on convincing investors that the business will be viable one day" Source: Who Needs Investors! Why Many Startups Should Bootstrap Instead by Andrew Gazdecki, May 2013 - Gigaom
- Keep a day job No need to abandon your present work. You can continue your existing job until your boostrapped company makes enough money to pay your monthly salary reliably. No need to take unnecessary risks
- Forces you to make money right away Going "solo" without external funding requires you to look immediately at the bottom line. Revenues to pay your bills, and that's generally a very good thing, so that you train yourself from day one to work at finding the most effective ways to do it
- Forces you to learn immediately what really matters To make a minimum viable product (MVP) and to start selling it as soon as possible puts you in the perfect position to rapidly learn all of the basic stuff you need to know in the best possible way: by doing it
- Forces you to take action One can take lots of time in thinking and deciding what's best to do, testing and experimenting various solutions. Not so when you are bootstrapping. The need to be sustainable forces you to take immediate action and to eliminate all unnecessary activities.
With less money, you have to build less, get it out faster, and learn faster. Source: Bootstrapping a Lean Startup by Ash Maurya, March 2010 - Practice Trumps Theory
- Proactively choose your own mentors No need to depend on experts and business advisors you have never chosen. Bootstrapped companies can pursue product ideas and business models outside proven paths without having to follow mainstream strategic advice from funding advisors
- You are your own boss Decide when and how to work. Establish all the rules, break and change them anytime you want
- Urgency inspires efficiency
"When you've got money in the bank and know the bills will be paid for months to come, it's easy to spend late nights debating the company's choice of colors for the logo while more important matters tend to get left for tomorrow. The bootstrapped company, on the other hand, is grinding it out to produce a product that sells. A lack of funding has a way of making prioritizing tasks easier. A core sense of urgency usually leads to the most critical tasks being handled first, while less important matters are saved for later (as they should be anyway)" Source: Who Needs Investors! Why Many Startups Should Bootstrap Instead by Andrew Gazdecki, May 2013 - Gigaom
Cons of Getting FundedWhy to say no to possible investors, venture capital, seed accelerators, and other organizations offering to lend you money to finance, grow and market your startup.
"...when a company that can bootstrap, takes VC, it warps their values, and ultimately may lower their chances at success" Source: Hillel commnet on The Art of the Bootstrap by Javier Rojas, November 2008 - VentureBeat
Duration: 3' 58'' - Nikola Tesla Pitching Silicon Valley VCs - via Gigaom, What Nikola Tesla vs. VCs Video Says About the State of Silicon Valley
- Getting funded doesn't mean you have a winning product
"Seed stage investors are just as bad at guessing what products will succeed as you are. Without any product validation to rely on, they hedge their bets against your team's past track record and storytelling ability. So while getting funded at this stage is a testament to your team building and pitching skills, it isn't product validation". Source: Bootstrapping a Lean Startup by Ash Maurya, March 2010 - Practice Trumps Theory
- Getting funded can take a hell of a lot of time Pitching, convincing and persuading potential funders can take months and can even end up in getting nothing back. Isn't it better to invest that same time in developing a minimum viable product that your potential clients want to buy right away? Fundraising uses up a lot of time - time spent away from developing your products, finding prospective customers, and cultivating a strong community of fans...
- Only 20% or less of funded companies return a significant profit Estimates report that"40 percent of venture backed companies fail; 40 percent return moderate amounts of capital; and only 20 percent or less produce high returns". Source: National Venture Capital Association
"About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School". Source: The Venture Capital Secret: 3 Out of 4 Start-Ups Fail by Deborah Gage, September 2012 - The Wall Street Journal
- What happens if you don't get any investors? Since there is no-one that can guarantee you that you will be able to find venture capitalist who will want to invest on you, ask yourself who is going to pay back for all of the time you may have wasted if your pitching effort doesn't turn up good results.
- How do you increase revenues before you run out of money again?
"If you do succeed at raising capital, the next trick is to figure out how to start generating enough revenues to cover your costs before you run out of money. If you thought raising capital was tough, you're in for a surprise". Source: What Kills Startups? by Akira Hirai April 2009 - Cayenne Consulting
- Returns may not be super
"...your company may not see a significant return for many years (especially for certain industries and/or products) and your VC firm could fail before you achieve your goal return". Source: How to Successfully Fund a Startup Without Venture Capital by David Ehrenberg, March 2014 - We Work
- Testing is always better than pitching funds If you spend a great deal of time after investors and not after effectively testing your product with real potential users while developing the story behind it, you may end up having the money but not a successful product.
- Too much money can actually hurt you
"Money is an accelerant, not a silver bullet. It lets you do more of what you're currently doing but not necessarily better. For instance, if you're building an MVP, more money might tempt you to hire more people and wait to build more features both which can actually hurt you and definitely slow you down". Source: Bootstrapping a Lean Startup by Ash Maurya, March 2010 - Practice Trumps Theory
Examples of Boostrapped StartupsThere are many successful companies that have "made it" to the top in their sectors, by fully bootstrapping their venture from day one. Among them you can find big brand names as Microsoft, Dell, Cisco, Oracle, eBay as well as lesser known ones. Here is a short list of the ones who have set out to bootstrap from the start, have avoided the need for investment, have been successful at doing it and which I actually use (or have used), like, and know of:
- Mailchimp send better email
- Zoho online collaboration apps
- Basecamp best project management tool
- Campaign Monitor send beautiful email newsletters
- Admoda the mobile ad network for affiliate and performance marketers
- Uncover reward your employees
- WooThemes premium themes, plugins & ecommerce for wordpress
- Techsmith screen capture and recording software
- Carbonmade your online portfolio
- Squarespace a better web starts for your web site
- Lynda what do you want to learn today
- Braintree accepts payments in your app or website
- Github build software better, together
- Litmus test and track your emails
- Grasshopper virtual phone system
- Clicky web analyitics in real-time
- AppSumo the store for entrepreneurs
- Behance online portfolios
- Balsamiq rapid, effective and fun wireframing
- Themeforest wordpress themes and templates
- Mashable News, resources and fun for the connected generation
See also: Bootstrapped: How 75 Entrepreneurs Successfully Bootstrapped Their Startups and How You Can Too
- Ten Highly Successful Bootstrapped Startups
- Analysis of 20 Bootstrapped Startup Landing Pages
- Now-Massive Companies That Didn't Need Venture Capital To Get Off The Ground
ConclusionsDepending on what are your inner reasons, objective and goals for building a startup the ways to go about the financing part of it are essentially three:
a) Venture Capital Funding - you go looking for possible investors willing to put money into your idea b) Bootstrapping - you finance the company yourself c) Crowdfunding - you invite the community of people interested in your future product / service to fund it themselves by contributing a small amount.
"There are dozens of crowd funding opportunities, specialized groups that help fund projects with very little corporate involvement, or interest. Combine this with your bootstrapping and you have more marketing power". Source: Bryana Jordan comment on Why Bootstrapping Is the Best Thing an Early Stage Startup Can Do by Massimiliano Caruso, March 2014 - LinkedIn
Bootstrapping and crowdfunding, which can also work together, are the two approaches that allow an entrepreneur who is more focused on value creation than profit-making to achieve his goals without needing to accept too many compromises. So it all comes down to how much control you want to keep over your startup company and what is the ultimate reason for which you are building it. If you are in this game to make money, and possibly loads of it, venture capital funding may be indeed a very good option to consider. If you are in to drive your own ship to discover new lands, you are probably better off bootstrapping and / or crowdfunding it. Bootstrapping has evident advantages as it offers you full control of your destiny, while giving you the best possible opportunity to learn fast and on the ground. On the other hand being funded can be a long and expensive process, which takes away lots of resources, time and attention from what should be your primary focus.
"First priority of a business is not to have a lot of money; it is to have products or services valued by society" Source: Massimiliano Caruso comment on Why Bootstrapping Is the Best Thing an Early Stage Startup Can Do by Massimiliano Caruso, March 2014 - LinkedIn
Originally written and curated by Robin Good and first published on MasterNewMedia on Tuesday April 8th 2014 as Boostrapping Startups: The Good Guide.
Photo credits: Value-Driven Startups - Tire by Shutterstock What Is Bootstrapping - Microscope by Shutterstock Why Bootstrapping Is Important - Pythagorean theorem by Shutterstock Characterizing Traits - Qr code by Shutterstock Startup Boostrapping Pros - Green traffic light by Shutterstock Cons of Getting Funded - Red traffic light by Shutterstock Examples of Boostrapped Startups - Ant holding a stone by Shutterstock