10 Tips for Successful Bootstrapping
Getting venture capital should not be the end all source of financing. The key to success is bootstrapping.
Someone once told me the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.
Let's say you can't raise money for whatever reason. This doesn't mean you should give up. The key to success is bootstrapping.
- Focus on cash flow, not profitability. The theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow: a small upfront capital requirement, short sales cycles, short payment terms and recurring revenue--and pass up the big sale that takes a year to close and collect. Cash is not only king-it's queen and prince, too.
- Forecast from the bottom up. Most entrepreneurs forecast top-down: "If 1 percent of U.S. car owners install our satellite radio systems, that's 1.5 million systems." The bottom-up forecast: "We can open 10 facilities that each install 10 systems a day." Guess which forecast is more likely to happen?
- Ship, then test. How can I recommend shipping stuff that isn't perfect? "Perfect" is the enemy of "good enough." When your product is "good enough," get it out, because cash flows when you start shipping. By shipping, you also learn what customers truly want you to fix.
- Forget the "proven" team. They're overrated. Hire young, inexpensive, hun-gry people with fast chips, but not necessarily a fully functional instruction set.
- Start as a service business. Say you want to build a software company: Provide consulting and services based on your work-in-progress software. This has two advantages: immediate revenue and true customer testing. Once the software is field-tested, flip the switch and become a product company.
- Focus on function, not form. Mea culpa. I love good form: MacBooks, Audis and Breitling watches. But bootstrappers focus on function: computing, getting from Point A to Point B and knowing the time of day. All the chair has to do is hold your butt. It doesn't have to look like it belongs in the Museum of Modern Art.
- Understaff. Many entrepreneurs staff up for what could happen, best case. Bootstrappers understaff, knowing that all hell might break loose.
- Go direct. The optimal number of mouths between a bootstrapper and her customer is zero. Sure, stores provide great customer reach and wholesalers provide distribution. But e-commerce was invented so you could sell direct and reap greater margins.
- Position against the leader. Toyota introduced Lexus, claiming it's as good as a Mercedes-Benz but half the price--Toyota didn't have to explain what "good as a Mercedes-Benz" meant. How much do you think they saved? "Cheap iPod" and "poor man's Bose speakers" work, too.
Find out how deep the rabbit hole really is. The equation is simple: amount of cash divided by cash burned per month. As my friend says, "The leading cause of failure of startups is death, and death happens when you run out of money."
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