There is no doubt that turning an idea into a profitable and scalable venture is a dream come true for many passionate entrepreneurs out there. So what can possibly stop a person from living a dream? I distributed a questionnaire to 316 current and potential entrepreneurs. This is what I learned.
Interestingly, the top two reasons that obstruct execution are consistent with top factors behind startup failure. According to a research conducted by CBInsights, 42% of startups fail due to lack of market need followed by shortage in cash. How much of entrepreneurs’ time is allocated to validating the need? And are they aware that the main purpose of a business is to solve problems? How do we solve problems?
Those are some of the questions implied and asked by respondents’ open ended answers and one to one interviews.
According to our data, we can safely conclude that venture success increases with a proof of concept and sufficient funding.
Is a lot of money and some proof enough to increase venture success?
Assuming that every investment deal made by a venture capital is based on startups’ validation, potential, revenue or any other positive outcome that aims to achieve investors’ goals. The numbers don’t look very good:
The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail. If we define failure as liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, according to research by Shikhar Ghosh, a senior lecturer at Harvard Business School. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh’s research.
Therefore, the combination lots of money-little proof is not enough to build a successful company.
Today, I will be focusing on the second question: is a little bit of money and a lot more proof enough to build a successful startup? Also known as Bootstrapping your way up.
What is startup bootstrapping?
It is about utilizing existing, self-generated and acquired resources to take an idea or company from one point to the other without referring to investors or banks.
80% of startups are funded through Personal, Credit, Family & Friends.
Let’s get into the HOWs.
How can entrepreneurs Bootstrap their startup?.
For that, we will use 3 examples.
“Don’t scale your business before you’ve nailed it and gained significant traction in the marketplace.” Those are the words of Ryan Smith who turned down Inc. Magazine’s fastest growing companies list for six years in a row arguing that there is a lot of upside to making money quietly. The venture began when Ryan found out that his dad, Scott, had built the initial version of what is today called Qualtrics. Scott at that time had been diagnosed with throat cancer. He and Ryan worked on the product after returning from chemotherapy each day. By the time Scott recovered, Ryan had hustled to sign 20 customers.
Everything started in a basement, classic right? It makes you think, maybe home is the best startup hub! Ryan sold the vision to his friend who decided to join the team, turn down a $60,000 job and make $8,000 a year instead. The basement remained Qualtrics’ s office even with 20 people in the team. Ryan’s main building strategy seemed to be about building a great solution by people who truly believe in its future. With this, he built a strong foundation that grew to become a leader in the analytics space without raising a dollar for 10 years.
What do we learn from Ryan?
- A great product attracts great people.
- Customer money is the best money.
- Consider passion and perseverance your first round of financing, though, either you have it or you don’t but you can’t finance it.
- Existing resources like own’s place, car, phone, contacts, and knowledge are sufficient to make major progress.
- And in Ryan’s terms “When you run lean you force yourself to stay scrappy which I believe is a competitive advantage.”
Bryan’s first startup generated enough income for him to pay for college. His second and third ventures ended miserably leaving him with a lot of debt and even more pressure with a young family to support. He had to catch up so he took a credit card processing commission based job. He saw a lot of unmet needs so, back to his intrinsic entrepreneurial roots, he decided to test a small solution back then, Braintree. He flew back to his home state Utah and asked his 10 biggest customers, ‘If I started my own credit card processor, would you switch to me?’ six of them agreed which generated about $6,200 a month. For him to quit his job, support himself and his family, he needed at least $2,100 in monthly income. He was ready to go! Bryan financed the first hires through customers’ income and only after major customer acquisitions like Github, AdMob and Animoto that he hired the first marketing person.
What do we learn from Bryan?
- One failed startup is the beginning of a stronger one.
- The best ideas come from interacting with customers.
- Consider a customer’s money as one round of financing.
- And in Bryan’s terms, “I’m driven by value creation.”
Stanley and his co-founders were college students when they started Doordash. They had a lot of passion for building technology to solve problems faced by business owners. Stanley met with a business owner in Palo Alto to discuss her needs and qualitatively test a solution he had envisioned addressing a problem he thought existed in the small business space. His meeting with Chloe, the macaron store owner, exposed him to a different problem, delivery. A problem he didn’t know was as big as Chloe described. Since then, him and the team met with over 150 other small businesses to validate an urgent need for a delivery solution.
In an afternoon, the Doordash team put a quick landing page together that included a tagline, an image, phone number and menus of several Palo Alto restaurants. They emailed their friends in the region and called it a day. The phone rang the next day calling for food. Stanley’s approach to fulfilling the order is the best part in the story. Him and the team used Apple’s Find My Friend app to track and dispatch each other, personal emails to send clients personalized messages, Square for payment, personal cars and numbers to move around and receive orders, and the school library to create and print flyers. The Doordash team used non-scalable resources to validate the need, generate revenue, finance the next steps and attract investors.
What do we learn from Stanley?
- If you’re not willing to listen, you won’t know what the real problem is.
- Look around, a lot of the things you already own or have the right to use can help you initiate, validate and sometimes grow your business.
- Yes, you can initiate a technology based startup without an app!
- “…doing things that don’t scale. So at the beginning we were the delivery drivers…”
They all share one common thing:
Used available resources for venture initiation and invested in more scalable resources for growth.
The Bootstrapping Framework I introduce below, is meant to help you adopt and adapt to the bootstrapping mentality by organizing resources and venture initiation action steps.
The idea is simple, instead of spending most of your time looking for ways to raise funds to initiate the venture, spend it in thinking about the different ways you can use existing resources to initiate, validate and scale the company. Here is how it goes.
Classify resources needed into 4 groups: must have, available, affordable and expensive.
-Must have: passion for entrepreneurship, interest in the area, willingness to make time and vision are essential and non-negotiable. Passion and interest go hand in hand. For instance, you may have passion for entrepreneurship but no interest in solving problems in the oil industry.
-Available Resources: this category includes things we use and encounter every day. Keeping the problem/solution in mind, write down the resources you own or have the right to use. Include as many as you can possibly think of. This category followed by the next, should be your biggest categories. Take your time, do your research and make sure you include every possible tool, property, friend, etc. you can think of.
-Affordable Resources: this category includes things like gas, utility bills, food, public transportation, domain name, etc. Some of the resources you use in this category you use anyway but because of the venture, you are required to spend a little extra on.
-Expensive Resources: this category is for you to fill out today but only consider using when you reach the validation stage such as hiring the first member, renting an office space, advertising budget, new equipment, etc.
For prioritization purposes, include the most affordable resources on top of the list. Use the colored circles as a guide.
If you convince yourself that no matter how complex and advanced your solution is, you can always go from an idea to validation using available and affordable resources, you will always find a way to make it happen this way. Yes, the degree of bootstrapping complexity changes depending on the resources needed for different ideas. That’s the fun part! Think creatively, do your research and make sure the available resources field is maximized before moving to the next.
As a rule of thumb, use available resources to validate the need and ideally the solution. Use affordable resources to build/offer the initial version of the product or service for validation and initial scalability. Use expensive resources to scale. Finding multiple co-founders is considered an expensive resource. Thus, you may scale without committing financial resources but you are giving up equity in exchange. Customer money is your best scaling investment.
Once you fill out the first 4 categories with resources, follow the example to write your bootstrapping action steps in the middle of the sheet.
Download the Bootstrapping Template here
Let’s use the framework to help Frank and Sarah initiate their ventures.
Frank is impressed by the impact the sharing economy has had in our lives. In his frequent use of Airbnb and Uber, he learned the different aspects of the model and, influenced by his entrepreneurial nature, he was ready to increase the impact of the sharing economy by initiating a solution that matches guests with hosts for the purpose of storage and parking.
It was in college when he experienced the need for storage and parking especially during breaks and holidays. His options were limited, that is, either rent a storage space at one of the facilities, continue paying rent (summers) or ask a friend for a favor. The first option wasn’t an option because he didn’t have a car and neither did his friends so he couldn’t take his stuff to the facility, the second option is expensive, so it was the third one that satisfied his needs, though him and others were competing for a small space at two of their local friends. Few years later, Frank is eager to offer a solution. Frank’s background is in accounting and finance. He does not have the knowledge or experience to start a technology based startup. He was also not ready to spend tens of thousands of dollars in a software that may or may not prove viable. I helped Frank using the bootstrapping framework.
Must have: passion for entrepreneurship, interest in sharing economy, 2 hours a day.
Available resources: car, apartment with available indoor and outdoor space, empty garage, internet, social media accounts, phone, neighbors with empty space (some had available parking space), friends with social media accounts, family and their neighbors with available space, personal computer, word and excel installed, and printer.
Affordable resources: theme for landing page, domain, hosting.
Expensive resources: hire a part/full time programmer and designer, share equity with co-founders, acquire users through advertising campaigns.
Frank was confused when I suggested he forgets about the technology for now. How could he possibly initiate a tech venture without investing in a mobile or web app?
Looking back at the framework, Frank used his phone to take quality pictures of his house and the houses/apartments of some family members and friends (after approval), created a Facebook and Instagram accounts, uploaded the images and wrote a good description about the service, emailed all of his friends, asked his friends to email their friends and share it in social media, and called it a day.
For a week, he actively shared quality content in social media aimed to help students safely and efficiently move and store their bags, equipment, books, cars and others before and after long breaks. Few days later, he gets the first call. He volunteered to pick up the bags of the first guest and also take him to the airport to learn more about his needs on the way. That was the beginning of a tech venture without even a landing page. Frank later purchased a theme and customized it for a bigger online reach and to convey safety and trust. He eventually attracted a co-founder and an investor.
Sarah is a high school teacher. Ever since she was 10, baking delicious cakes is what she enjoyed the most. She dreams of pursuing her passion full time but cannot afford giving up a steady job and even if she does, she’d have 3 months before running out of cash, she said.
I met Sarah at a local event with no plan to formally discuss her entrepreneurial career. We exchanged cards and it seemed like the contact ended there. On my way home, I started thinking about the different things Sarah could do to initiate, validate and scale her passion through the resources she already owned and use almost on a daily basis. Here is Sarah’s framework:
Must have: passion for baking cakes, bakes good/excellent cake, 2-4 hours a day.
Available resources: kitchen, car, recipes, internet, social media accounts, phone, neighbors, friends with social media accounts, family and their neighbors, personal computer, word and excel installed, printer, and two best friends available to help in case help is needed.
Affordable resources: shopping first and second batch ingredients, gas to distribute samples to friends and family, and few extra dollars in the utility bill.
Expensive resources: hire a part/full time person, get a bigger kitchen, buy a van for safer and larger cake distributions.
The good news is that Sarah baked delicious cakes and business execution is all she needed to take her passion to another level. Sarah mastered 5 flavors but wasn’t sure which will have the highest demand. On a Saturday, she went shopping in the morning, used her kitchen to bake the samples in the afternoon, distributed slices to 50 different houses, had prepared flyers and contact information for future orders, took nice pictures of the cakes, shared them in her different social media accounts, sent them to her friends and family for social sharing, and called it a day.
Sarah received 5 orders the next day and the number kept growing week after week. She reinvested some of her income to hire a part time cook and ended up hiring a new person each month until, she said, something great happened. Instead of buying a commercial kitchen, she bought a bigger house with two kitchens.
My experience with Sarah is an inspiration for this article and framework.
For 5 more startup stories about a social school app, phone repair store turned startup, a hardware to track tennis players’ moves, a marketing project in a company, and a fine-artist turned millionaire with no code, download here.
Often, I get asked, can we use the bootstrapping framework to build enterprise solutions?
Absolutely, however, your minimum set of features that will allow you to offer your solution will depend on the nature and complexity of the product and the target user. Take the example of Ryan with Qualtrics above, if we were to fill the framework with his available, affordable and expensive resources, we would find that the founders, him and his father, fall under available resources which allowed them to create the initial version of the product and attract few customers for validation. Furthermore, solutions built for small businesses can require less resources and time-to-sale than it would take for large corporations. Therefore, depending on the target and the nature of the solution, it is a matter of taking the time to fill the available and affordable fields with the needed resources to go from an observation to validation. In the case of Ryan, his father’s involvement cannot be considered an expensive resource since the venture started by both of them unlike Frank who sought a co-founder to grow his startup.
We are funded, can we go faster?
Funding helps with growth but not necessarily with initiation and validation. Many of the steps an entrepreneur takes initially can be accomplished under limited financial resources. Ryan learned that “you will be considerably further ahead if you nail the business first and then scale with 100% conviction. It’s not hard to go fast if you know exactly where you are headed.” Furthermore, one of the main objectives of bootstrapping is to reduce risk by taking careful and measurable steps. With funding, Sarah could have quit her job sooner, hire faster, market better, and invest in a bigger kitchen while Frank could have built an advanced platform for automation and efficiency sooner. If just like with any new venture, risk, uncertainty and validation are your main concerns, then “you will be considerably further ahead if you nail the business first and then scale with 100% conviction.”
I distributed this post to a sample from the 316 survey respondents, took the time to present it to them, offered to help each and every one of them, then distributed the survey again but this time I added a new category: lack of passion/interest. Originally, 41.2% suggested that lack of knowledge is what stops them from executing on their ideas, 32.3% due to lack of funding, 12.3% due to lack of time, 8.2% because of fear of failure and 6% due to other reasons. Following my educational and mentoring efforts, the numbers changed. Lack of passion/interest took over 15 percentage points mostly from the lack of knowledge and funding factors. Surprisingly, percentage points for time, fear of failure and others did notchange much.
- A bootstrapper is not cheap. Bootstrapping a business is a smart way to build a strong foundation by taking measurable steps while learning the different aspects of the business.
- The bootstrapping framework is a simple and clear way to categorize the needed resources and organize the different steps.
- This framework can be applied to many concepts and business models as long as entrepreneurs take the time to fill in the available and affordable fields with all the existing and attainable resources.
I am now eager to hear your stories, thoughts and questions in the comments section below.
Yes, there is a SlideShare presentation for this post. Here it is.
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