The Anti-Patterns of Bootstrapping

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).

About Simeon Simeonov

I'm an entrepreneur, hacker, angel investor and reformed VC. I am currently Founder & CTO of Swoop, a search advertising platform. Through FastIgnite I invest in and work with a few great startups to get more done with less. Learn more, follow @simeons on Twitter and connect with me on LinkedIn.
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7 Responses to The Anti-Patterns of Bootstrapping

  1. Rahul Pathak says:

    Your point about opportunity cost is a great one. We’re running lean at the moment given the macro environment, but fortunately, my investor and board member often reminds me that if my market is moving in the right direction, underinvesting could be a big strategic mistake.

    Thanks for a great post.

    Rahul

  2. It’s all about market timing, about the ability to execute on plan that drives measurable, sustainable, profitable revenue from volume. VC’s are not entrepreneurs customers (it’s the other way around). VC’s crystal balls are usually no better than the entrepreneurs, just look at all the “investments” they passed on (how many missed Google, Yahoo etc.)

    Bootstrapping is fine as long as it serves the correct purpose. Of course the devil is in the details. I’ve bootstrapped 4 companies, one delivered a solution in use around the globe (mod_gzip) one built a secure operating system for Intel’s Itamium chip (Secure64) and the latest solves a big problem in mobile.

    The best one is the latest one – maniacal laser like focus on the customer problem, drive to profitability, no debt, and core sustainability across a large marketplace. The only way we’d actually take outside capital is to drive to increased profitability NOT more revenues.

    Too many entrepreneurs forget the first lesson of running a business. Profits are the mothers milk, if you’ve really solved a customer problem then you should be able to get to profitability. Do that and you have a few more options that those who just have revenue.

    Cheers,

    Peter

  3. theo949 says:

    good post ! I would add that one has to be very self aware if one was to start a company. Based on what kind of person you are will determine whether bootstrapping makes sense.

    do you need to be in charge all the time ?

    how long can you wait before the liquidation event ?

    do you love the lifestyle enough that you don’t need to get big fast?

    These questions and more will determine whether to bootstrap.
    We bootstrapped because at the time no one would invest in a bunch of FOB foreigners ( one of them still in college). I had to do alot of non fun stuff by myself, anythign from assembling desks to inventory to HTML to shuttling programmers from and to LAX. Looking back I cant determine if taking on investing (had we had the choice) would have been better or worse.

    theo

  4. Vladimir Dimitroff says:

    Very good points, and they sound familiar to many of us.

    My current problem (for a long-ish while) is a venture that would be a bit steep for credit cards. First paying customer? That would take ‘just’ 10M. CFBE? That would be 30M (at least). Of investment, not revenue. No, it’s not in what would be called ‘technology’ and in the current economic climate is a ‘forget it’. (But has anyone won by forgetting?)…

    With some reluctance (after the taste of this opportunity) it has to be ‘back to earth’ – to small(er) projects involving a couple of coders and pocket money :)

    Now these rules will come handy!

  5. vuxes says:

    Check your WordPress Post Revisions (edit the post and scroll to the bottom of the screen). Copy your current content to another file (so you don’t lose this one), reactivate a Post Revision and you may still be able to recover the lost portion.

  6. Pingback: Apt response to some of the challenges raised at #leanstartup LON. The Anti-Patterns of Bootstrapping /by @simeons | Saint Sal

  7. Pingback: The Startup Holy Trinity « HighContrast

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