The three most common bootstrapping mistakes I’ve observed:
- Setting the wrong bootstrapping objectives. Prototype? First paying customer? CFBE? I often meet with startups that are bootstrapping to a particular objective with the expectation that it will allow them to achieve something. For example, get a first paying customer and raise venture capital or get to CFBE and then you can recruit an amazing team to take you to $100M in revenue. The problem is that often achieving the objective doesn’t enable the follow-on result. For example, VCs may appreciate that you have paying customers but may not be interested in investing if your market opportunity is small or if the team is not strong. One particularly common mistake is failing to build strategic value. Cash, customers and revenues are important but often it takes something else to build strategic value. It may be critical mass. It may be achieving particular positioning.
- Miscalculating the opportunity cost of bootstrapping. Every additional month of bootstrapping generates some benefits but also has an associated opportunity cost. It’s another month of selling without a sales guy. It’s another month of delaying the roadmap. It’s another month of traction for your well-funded competitors. It is very difficult to accurately estimate the cost of bootstrapping. My first startup, Allaire, bootstrapped on $18K to being funded by Polaris the following year. We got a great deal but in retrospect, we should have raised venture capital sooner. One insidious form of miscalculating the opportunity cost of bootstrapping is ignoring the market. You started bootstrapping four years ago. You are now at CFBE with $5M in revenue. How happy are you? The answer should depend on what has happened in the market you are in. Many bootstrapped companies have a very internally-oriented, sales-driven perspective. They are focused on specific customers, active deals and bringing in cash. What they don’t have is a market-oriented perspective. As a result they end up poorly positioned for growth or, in extreme cases, becoming irrelevant in the grand scheme of things, living dead despite their happy customers, revenues, etc.
- Getting the wrong type of customers. There is such a thing as bad revenue. It comes from customers and partners who you decide to deal with because you are so focused on cash. I don’t disagree with the importance of bringing in cash but there are consequences for dealing with folks who are not aligned with your long-term objectives. They can be a distraction. They cause friction. They force you to make changes to your roadmap. This is a particularly common and dangerous issue for service businesses. The best startups, bootstrapped or not, know the power of saying “no” to customers that are not a good fit. In order to do this and survive, startups need to focus on demand discovery (making it easy for the right customers to find you) more than demand generation (convincing people who you think should be your customers to buy).