The Art of Bootstrapping

(Since this is a long post I have provided a summary in the beginning)

TL;DR
Bootstrapping is a viable way to build your venture. Using strategy metaphors from the book “The Art of War” I explore various tactics for building a new business without taking external money. I illustrate the ideas with examples of different successful bootstrapped startups.

There are several examples of successfully bootstrapped companies built by entrepreneurs who created them without outside funding. It sounds an attractive proposition, to start your own company without external investment. What are the various things one needs to consider while bootstrapping the company ? In this post, I take inspiration from the ancient Chinese military strategy book The Art of War (by Sun Tzu), in order to define strategies for bootstrapping a startup.

The Calculations

Before we start any venture we need to do proper market research and assessment of the opportunity.  While bootstrapping even though we are not taking any outside funding we still need to commit ourselves for the idea. “The Calculations” refers to the process of evaluating your idea by doing online research, talking to people, reading about the industry etc.  Convincing and preparing yourself and your co-founders  for starting a venture is very important while bootstrapping a startup.

In the October of 2006 Sean Hammons and Noah Merritt came up with the idea of providing real-time analytics  for websites. In order to maintain 100% ownership of the company they decided not to take any external funding. To test the usefulness of the idea (or opportunity) they at first built an internal tool for an existing company which provided web analytics. Convinced by their initial experience they decided to launch clicky. Their software now powers real-time analytics on over 447,000 websites.

The Challenge

Starting a new venture poses challenge for the founders. Without external funding they may have to do something else in order to sustain the business during the early days. Many people opt for doing consultation or keep other part time jobs while working on the idea. Building a new idea requires focus and so doing a side project may not work for everyone.  But software engineers and developers by the nature of their job always love hacking up new software. This behavior is supported and in fact  even encouraged at many companies (Google, Facebook etc.)

Github was founded in 2008 by Chris Wanstrath, PJ Hyett and Tom Perston-Werner.  Github allows users to create public and private source code repositories using git and provides a web interface. Tom kept a full time job while building the project while PJ and Chris did consulting. Eventually they were able to manage enough revenue from Github to focus on it full time. Github now has over 100,000 users and is the destination of choice for new open source projects.

The Plan of Attack

The plan of attack for a new venture is essentially the business plan. Writing the thoughts and ideas down will help to refine and focus on the essential aspects of the plan. Since the plan will not be used to show to potential investors its purpose is to serve as a documentation and guidance for the founders. It also helps to bring everyone on the same page.

Grasshopper is a virtual phone system, it allows small businesses and other entrepreneurs to create a more professional image. It was started by two college classmates David Hauser and Siamak Taghaddos using $250,000  of personal and family savings. Even though they used their own money they took due diligence and proper planning  in spending money. They followed what is called a “negative cash converting cycle financing”. Which means they did not spend the money util they got it. In 2007, Grasshopper made $8.8 million in revenues.

Positioning and Directing

The need to position the company is very important in a bootstrapped startup. The difference between an interesting side project and a possible venture is the positioning of the solution. It is good to explore things out of curiosity but eventually we need to focus one thing to build a business. Does the idea offer a solution to a problem in an existing industry ? A bootstrapped startup is more likely to be successful if it is focused on solving a problem in an existing industry.  Even if the solution you have is new and unknown, can you direct it to be positioned against an existing idea.

Rich Webster, Jim McCarthy and Robert Graff  identified an existing problem with the ticketing business. Venues would often give away free tickets to customers for shows they couldn’t fill. They positioned Goldstar  as a solution which offered half-priced tickets to customers for undersold shows. They have over 1.5 million subscribers today.

Illusion and Reality

In a bootstrapped venture it is easy to fall into the illusion of your product and ignore the reality. While building a new idea founders often underestimate the effort it will take to create a product which can be used by others. Most interesting side projects fail short of been a successful and polished solution which customers can use.

FastSpring is a company which provides E-commerce solutions to customers that enable them to sell digital products online. The co-founder Dan Engle conceded that they initially under estimated the effort it will require to build a solution which would have the required features and be of good quality. By 2010, FastSpring had earned $45 million in revenue.

Engaging The Force

As far as possible bootstrapped startups should avoid direct confrontation with the existing competitive players. However, when forced to compete they should look for innovative and out of the box solutions for the problem.  In bootstrapping it is likely that new and novel solutions will be found to competition as the entrepreneur is hard pressed with limited resources.

Carbonmade is a service that allows users to create online portfolios without HTML knowledge. When Spencer Fry, Dave Gorum and Jason Nelson started the service in 2007 it was hard to get traction. They were not in a position to use advertising, instead they focused on blogs of various artists. The company began to grow when bloggers started sharing the site to their communities. Currently they have over 200,000 users.

The (Nine) Variations

The importance of agility in any startup cannot be overstated. However in a bootstrapped venture the founders are likely to be attached to their initial vision. It is vital to listen to customer feedback and pivot on the product features. A different variation of the product may lead to more success in long run.

Litmus allows email marketers to preview their mail in different browsers.  When founders Paul Farnell, Matthew Brindley and David Smalley released the first version of the service in 2005 they had a coming soon section on the website. It listed all the features they had planned to include in the service. However they ended up listening to their customers and adding a completely different set of features. Today Litmus makes over 1 million in revenue.

Moving The Force

Even though the idea you have may be simple and obvious sometimes it is possible to succeed by just keeping at it. By moving the force against all obstacles you can build a successful venture. Growing a business organically can help you in balancing the scale with your own ambitions.

Starting as a virtual team Adii Pienaar, Mark Foresster and Magnus Jepson created a website WooThemes to sell WordPress themes.  By growing the company organically they were able to scale the company.  Today WooThemes generates over $2 million in revenue. Co-founder Pienaar’s advice for hopeful startups is to keep at it as long as possible.

Situational Positioning and The (Nine) Situations

Finding the right niche can be critical. If you can identify a good market segment and position yourself as a solution provider in that area it can be a good venture. Situational positioning in an existing market can be a source of new idea.

Nathan Seidle wanted to buy electronic parts online but had a lot of trouble using existing sites. He started SparkFun to provide replacements for electronic parts. The site makes $10 million in revenue today and has a large community. Nathan was able to grow the business in spite of  the presence of giants in the E-commerce business like Ebay and Amazon by positioning as a niche provider.

The Fiery Attack and The Use of Intelligence

Sometimes it is possible to just build a business out of your curious side project which really had no potential to drive any revenue. The key is to be strategic and move in quickly to capture the opportunity.  The presence of app stores and digital marketplaces today provide with many such opportunities.

In 2010 Noah Kagan observed that users were having hard time finding out interesting web applications. He created AppSumo which was initially meant to just be a directory of various web applications. After early popularity he was soon able to monetize the service  using daily deals for apps. Today AppSumo has 200,000 subscribers.

I hope this post was able to provide an alternative perspective on entrepreneurship based on bootstrapping.

P.S.
List of the ten highly successful bootstrapped startups was taken from this article.
You can read an English translation of the book The Art of War – Sun Tzu.

5 thoughts on “The Art of Bootstrapping

  1. Hi Asankhaya, I really enjoyed reading your insightful post.
    I agree that it is very important to plan for founders to be able to keep control over their companies and its fate, by relying on self-funded growth and investments. It’s definitely vital to manage initial cashflow expenditures and try to garner paying clients from the get go, to stay alive. That would be my ideal scenario for my business, as well.

    However, I think that for some start-up situations, it will be more beneficial to obtain the necessary funds to rapidly grow, in order to start out as strong as possible. This may mean securing funding from angels, VCs and others in order to move faster than would have been possible if the founders were only committed to bootstrapping their way to growth. Of course, external investments would only be preferable in business conditions where it is absolutely necessary for the start-up to grow rapidly in order to survive or capture the market in a small window of opportunity.

    Of course, as Anuj stated in his talk, it is firstly vital that the founder commits him/herself completely to the start-up (both in terms of money and effort) in order to have any chance of succeeding. I would guess that the proportion of *very* successful businesses that arose from part-time projects – that the founders were initially only working on as a side-project – would be much lower than those businesses in which the founders went all in, and were completely focused on it from day 1. Let me know your thoughts on this.

    • I agree that there will always be ideas which cannot be executed without external funding. The more ambitious and big the idea is the more likely it may be that you cannot do it alone. But I think perseverance may be a better marker of success, the reason many of the examples in the blog post talk about side projects is not because the founders were not committed to idea but they were just looking for other means to fund themselves. It is very hard for an engineer to be focused on the same idea for a reasonable long period of time (say 3-5 years). I think the ability to focus and sustain for a period of time may make the difference between success and failure.

  2. Thanks, Asankhaya.

    I have 2 recent cases where the entrepreneurs (NUS) are starting off without seeking substantial funding, and are committed to the goals of their new venture. In one case a student from the last CS4880 batch has raised $25,000 from family and friends. In another case, 3 SoC grads are deciding whether they should take a loan, and seem to be closing with an external party that will extend the loan and take a small stake in the company.

  3. I understand about the commitment aspect – but it’s also tempting to try and manage them both at once. I’m personally in favour of working while trying out your idea on a part time basis, then re-evaluating when the idea has potential (just like Facebook)

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