Investors’ money solves one problem: you have funds to run the business and you’re expected to invest it wisely. When you’re bootstrapped, you have to worry about two things: 1) finding a way to overcome lack of funding so you can run the business, and 2) securing enough funding to maintain yourself and likely your family.
When you’re bootstrapped, more things are at stake and yet, you’re expected to take risks by investing time and money in creating solutions that don’t guarantee demand or revenue.
So how do you take healthy risks with higher chances of a positive outcome?
First, the must knows and haves.
1) Believe it or not, it’s much riskier to quit your job than to not give full attention to your startup. Keep your job and work on your venture after hours and on the weekends.
2) If you find an underserved need in a market completely different from what you specialize in and know about, keep in mind that you’re going to triple your work, to say the least. In other words, focus on what you specialize in because not only will you have to be involved in it for a long time but also you’ll be able to solve problems that you can contribute directly to without outside help.
3) Do not use your credit cards or bank loans yet. Yes, you can use them under one condition: to double or triple down on the winners. Let’s get into the details.
Smart Risk Taking At The Idea Stage
Assuming you are starting your startup venture with zero dollars and do not want to invest your savings until you reach some level of validation to justify the risk.
Luckily, if you follow the idea validation stages, you’d be starting by getting your hands dirty and not your wallet dry. Namely, 1) meet with your potential buyers, 2) learn about their needs and expectations, and 3) pre-sell them on your upcoming product.
What you’re doing is: finding the winners: whatever (feature(s)) people need and are willing to pay for.
The idea is, if customers are willing to risk their money on an upcoming product, so should you. However, now, you’re reducing your risk by leveraging buyers’ money with your money to create the product.
Next comes the costly part: hiring for product development and then marketing.
Assuming the estimate from the person or team that will help you create the product and fulfill buyers’ orders is $10,000. But you don’t have that amount and you still don’t want to risk your own savings or use debt yet.
So, what do you do?
The approach I took to build my first startup as a Junior in college was one I never thought I could use but turned out to be a success for both parties (myself and the team I hired).
Assuming that after several interviews, you found 4 individuals or teams that would be great to work with.
Negotiate as follows:
“I have X amount of dollars worth of pre-orders. We took X, Y Z steps of customer development and learned A, B and C. People are eager to use the product and the proof is that they pre-paid for a solution that doesn’t exist yet.
Do you believe in the product?
If we work together, I won’t pay you $10,000, I will pay you $20,000 conditioned on the product satisfying user needs. However, if x number of months from now, we’re not achieving the expected results, we will both move on to other ventures.
From now until we exceed $20,000 in revenue, 70% of every dollar we make will be added to your payment until you get your money. After that, we’ll make new estimations for further product development work and I will make sure I refer you to X number of people such as Y and Z.
Do we have a deal?”
P.S. This strategy also works very well with hardware or any type of tangible products that require manufacturing and distribution.
Most importantly, it will force you to do your homework to build your case: pre-selling, patenting, key partnerships, etc.
Smart Risk Taking In Growth Stages
Simply put, because you don’t know what works, you want to start by
1) diversifying your investments, then
2) evaluating the results on each investment, and finally
3) doubling down or even focusing entirely on what works by investing most of your money on the thing(s) that work.
Let’s use an example.
Example 1: There are several mediums through which you can reach your customers: Google, social media, blog, direct ads, content marketing, etc. but you’re still not sure what yields the best results: increase in sales, subscriptions, etc.
Start by investing a little bit of money on each for a predetermined period of time and then measure the results. If one or two channels yield much better results than the rest, you can safely take the risk of investing most of your budget on these channels.
Example 2: If you have several feature requests and you are not sure which one will contribute directly to the goal and vision of the company. Include those features in your web or mobile app however when someone attempts to use or buy the feature(s), show a message stating that they’ll be live soon. The same logic applies to e-commerce products, mention they’re sold out. With the data, you’ll know which features or products you can risk on even if you don’t have the money in hand.
In a company with a demanded product, these approaches to smart risk taking will not last long until revenue takes off and funding becomes available to run the business without worry about whether you could maintain paying your team without having to negotiate a deal every single time.
Always be negotiating. You need an analytics, marketing, blogging, hosting or project management tools to run your startup? find the email of the company and ask for discounts. All of these established companies once were early stage startups and understand what it means to be a bootstrapped one. Most of the time, they’ll extend your trial or offer discounts. You can use companies like EntrePerks to find all the deals in one place.
While simple requests can save you a few thousand dollars in subscriptions, creating win-win scenarios with key parties can enable you to start and build a company with limited to no funds. Ask: what could be an offer that would make it hard for the other person or team to resist and yet would benefit them, me and my startup? If it doesn’t work with one party, replicate with another. Definitely a much better approach to entrepreneurship than just going from one investor to the other seeking their money to essentially run experiments especially at the beginning.
Always be looking for the winners then double down on them. As much as you’ll be trying to avoid creating good to have products, you’ll end up squeezing a few features that don’t necessarily make a different in users’ experience. Test what works, eliminate what doesn’t and double down on the winners.
Let’s remember that you’re doing all of this while keeping your day job. So, when is it safe to quit? When you reach your target “quit my job or go part-time” number for three to six consecutive months depending on your risk aversion. Say your target is $2,000 a month. With your family, you all agree that if you generate at least $2,000 a month from your venture, it would be worth it to give up your job and fully focus on the company. For extra safety, you’d be better off quitting if you meet this goal 3-6 consecutive times signaling consistency in the company while creating a safety net for when things don’t go well.
I used these strategies and more for all of my ventures but used a slightly different approach for. When you download the story below, you’ll also be receiving other actionable strategies that I only share within our group of entrepreneurs.