-
If you go to VCs with a concept, they will treat you as a beggar. If you bootstrap you business first and go to VCs with a validated product and clients, they will treat you as a king
-
There are three main formats of bootstrapping: with a pay check, with services and by piggybacking.
-
To be a successful as a bootstrap entrepreneur, you need to be able to wear lot of hats.
“How did we leave the Death Valley” – read more advice and case studies from business owners and investors at InnovateCEE Academy
InnovateCEE: To bootstrap or not to bootstrap?
Sramana Mitra: To bootstrap. My motto is: bootstrap first and raise money later or not at all.
Why?
If you only have a concept and you don’t bootstrap and try to go to the Venture Capitals, they will treat you like a beggar. But if you have validated your idea, if you have business with clients and then you go to the VCs, they will treat you much better.
The biggest myth in the industry is that when you decide to start a company, the first thing you do is to try to raise money. It is the wrong thing to do.
But I need money to start a company.
But no one will treat you seriously. If nobody takes you seriously, what happens is you will get rejected by the VCs. Receiving a lot of rejections is very discouraging. People don’t understand that. Often they don’t try to bootstrap but try to raise money at once. They fail and then backtrack to bootstrapping. Instead, I recommend beginning with bootstrapping and going to fundraising later.
Let’s say I decide to bootstrap. What to begin with? Should I quit my job and start working on the company immediately?
Not necessarily. I recommend three formats of bootstrapping. The first one is bootstrapping with a pay check. It means you keep your job and work on validating your idea after hours.
But it will take me much longer to build my company.
Yes, but the alternative is very tricky and it depends on your personal situation, whether you have, for example, a family to feed. You could have an idea that never turns into a business or generates revenues, and then you’ve quit your job for nothing.
I like bootstrapping with a pay check because you know that at least for some period of time when you are validating the idea and learning, you have money to pay your bills. And when you’re reasonably comfortable that your idea is legit, then you quit your job.
What is the second option?
It’s bootstrapping with services. Instead of quitting your job and spending months on developing a product with no revenue, you could start taking a services project. First you build the software and the technology, and the product a bit later.
Let’s say you have expertise in a particular area of technology and you find a client that needs your expertise. You can go to them and say “I’d like to solve your problem, build a solution for you and you’ll pay me on milestones. For example this is 100 000 euro project and you split it into 4 payments of 25 000 euro each over 6 months”. What we have is in the process you develop intellectual property, so you understand the problem and then you decide whether you want to go gradually from service to product company.
This bootstrapping method is very effective because you have clients and revenues and you’re developing a software technology that you can use in the product. It is kind of subsidising product development with a service contract.
The third method is bootstrapping with piggybacking, which is building something on the top of somebody’s platform. This is very interesting case, and lot of B2B cloud software companies were built that way.
CENTRAL EUROPEAN INNOVATION IN THE FIGHT AGAINST CORONAVIRUS
VentilAid: $200, open source ventilator for COVID-19 patients
A Polish start-up Urbicum has built VentilAid: $200, open source, 3D printed ventilator that may help half the patients hospitalized due to Covid-19
Anti-covid surface coating effective for one year
Hungary-based company Resysten has invented a hygienic coating that kills the coronavirus and other microbes. For the coating to work only light is needed
What is this?
In a software service company there is whole stack of commodity software that you have to build as a foundation to be able to create this little piece that is interesting and differentiated. My point is that is better to let somebody to do the commodity work and you just create the one differentiated piece of work. So you build your software on the top of somebody else’s commodity stack. For example Salseforce.com has a platform service stack on which you can build software and launch a product. Such a solution is a much less expensive way of building a product, and the additional advantage is that companies that are offering a platform as a service usually have an application marketplace. So they will bring you into your marketplace where you can go into a market and find clients.
Does a person who bootstraps have to have some special qualities?
A lot of resilience, lot of nerve, and lot of resourcefulness. To be a successful as a bootstrap entrepreneur, you need to be able to wear lot of hats. Every company needs to build a product, to market it and to sell it. As an entrepreneur you need people who can play these roles. It is either one person or a small team who can make it happen, or you need a co-founder. But it has to be done in a very lean mode.
The people who do bootstrapping the best are technical founders who do the coding and build the product by themselves. Then we recommend guerrilla marketing as much as possible, meaning different online activities that don’t cost you money, like activities on social media or doing SEO instead of paid advertising on Google.
This what you are saying sounds nice, but I see a couple of problems here. First of all: time. It seems it takes much more time to develop a company with bootstrapping than with financing from VCs and investors.
It is difficult but when you’re bootstrapping you’re not under pressure from investors to grow fast, so you can grow at your own pace. You can take five years to get to a million in revenues, or ten years. The VCs are looking to go from zero to 100 million in revenues in five to seven years. If your company doesn’t fit that model or if you’re not operating on a billion-dollar market opportunity, they won’t be interested in you. In fact 99 percent of applicants to VCs are working on smaller ideas. My message is: you don’t need to fail. You can still build a successful company by bootstrapping. Maybe you are not going to build a billion dollar company, but you can still build a very successful company with 5, 10 or 20 million dollar ideas.
If you bootstrap you don’t have access to investors’ expertise, networks, mentors etc.
That’s true. Most bootstrapping entrepreneurs don’t have access to incubators, accelerators or VCs. But there is a problem. There are thousands of useless incubators and accelerators that actually created a co-working space. They subsidise the real estate sector and forget about accelerating young companies. Don’t go for a rubbish accelerator. It is not worth your time. If you want real expertise, you should work with someone who can give you real mentoring, real networking.
Another problem is the exit. If you have investors, they usually try for the biggest exit possible.
Yes, they do. They will try to get a 100 million, 500 million or even billion-dollar exit so everyone, them and you, will make lot of money. But it takes longer to get to those numbers and the probability of success is lower. Remember than when a VC has ten companies in its portfolio, it assumes that nine of them will fail and only one will succeed. As an entrepreneur you don’t have ten opportunities to make a success. For an entrepreneur it is much more important to optimise the probability of success.
And there is another interesting aspect. Let’s say the company hasn’t raised any investors’ money and gets acquired for 25 million dollars. It means that the founders made a whole 25 million dollars. 25 million dollars for one or two people, that’s a very good outcome. But if a company raised 10 million in financing and made a 25 million-dollar exit, a lot of that money won’t go to the founders but to VCs.
Are there any sectors or situations where bootstrapping cannot be done?
We need to distinguish between fat start-ups vs. lean start-ups. Fat start-ups are companies that need more money at an early stage. In that scenario we recommend bootstrapping with services. Hardware is one example of a fat start-up. Hardware is difficult to bootstrap, and especially semiconductors because they are very expensive.
And personally what is your favourite example of a bootstrapping company?
One of the really powerful examples is a company called Zoho. It has close to one billion dollars in revenues. It is still a private company, but if they wanted to go public, they’d be validated between 6 and 10 billion dollars. This company bootstrapped all the way to becoming a billion-dollar market capital company.
It’s an interesting story because they went against Salesforce.com. At the time when Salesforce.com was a dominant firm in the industry, Zoho found at a gap in the market, which was a very small businesses. Salseforce.com CRM was priced at about 60 dollars per month per user, so Zoho came up with a similar CRM product but priced it at 12 dollars per month per user and went with it to the segment of very small companies. They built whole products in India too. This could be applied to companies in Europe. You can have a small-scale operation in the US to have access to capital markets, keep all development in Europe, and still build a very large company.
About Innovator
Sramana Mitra is a serial entrepreneur, business writer and strategy consultant. She founded a One Million by One Million (1Mby1M), the world’s first and only global virtual incubator/accelerator headquartered in Silicon Valley. Its goal is to help a million entrepreneurs globally reach a million dollars in annual revenue, build a trillion dollars in global GDP, and create 10 million jobs. Her aim is to democratise entrepreneurs’ education and acceleration. 1Mby1M community is about half a million people.