OnStartups

Bootstrap Startups: Spending Money In The Right Places

Posted by admin_bnb admin_bnb on June 15, 2006 8 Comments


For those not familiar with the term “bootstrapped startups”, it generally refers to companies that are started with minimal capital.  One of the great things about software startups is that they lend themselves well to bootstrapping because not a whole lot of money is needed to get started.  This can be contrasted to starting a traditional manufacturing firm which may take a fair amount of capital for infrastructure,  equipment and other “hard” assets.  In the software business, all you really need is a computer, a compiler and conviction.  

A lot has been written about bootstrapping, and I don’t want to repeat that here.  Instead, I’d like to first dispel a common myth in regards to bootstrapping: 

Bootstrapping does not mean being a cheapskate!
 
Even in a bootstrap startup, it is important to spend some money – just in the right places and at the right times.  Bootstrapping is not about being a cheapskate about everything, squeezing every last penny out of your vendors and partners and otherwise being the nightmare customer for every company you deal with.  At some level, you will begin to realize that markets are somewhat “efficient” and unless you have some special connections or characteristics that cause you to convince people to give up their goods and services at a price well below market rates, you’re essentially going to get what you pay for (in a macro sense).  Of course, there are definitely ways to find the best deal (in terms of value), but this can usually only be taken so far.    And, of course, there are places that you should find the least expensive option, because it doesn’t matter all that much.  More on that later.

Further, I’d like to emphasize something that too many founders forget.  Your Time Has Value!  In fact, one of the scarcest resources (next to cash) in a startup is founder time.  Don’t spend 2 hours to find the cheapest place to buy your computer monitor that costs $400.  

One of the most important skills for a bootstrap startup founder is deciding where to spend the limited resources she has.

In general, there are four things I look at when deciding where to spend money in a bootstrap:
  1. Does It Provide Direct Customer Value?  This measures how much the investment directly impacts what a customer experiences in areas that they care about.  For example, when you improve your product by adding a feature that most of your customers have asked for, this is about as direct a value as you can get.  On the other hand, when you invest in nice office space, this is indirect customer value (the argument being that the nice office space leads to productive teams, which then leads to better products, which then creates customer value).  When choosing between two areas to spend money, choose the one with the most direct value to the customer.

  1. When Will You Get The Payoff?  There are certain things that create value now and others that create value over time.  For example, when you spend money to fix a bug in your product, it creates value now.  When you attend a technical conference, it improves your education, you meet some people, keep up with trends and then someday you reap the value.  When choosing between two areas to spend money, choose the one that gives you the most immediate benefit.

  1. Is It A One Time Expense?  This one is simple.  There are certain expenses that you only incur one time, and others that you incur month after month (like rent).  When comparing two things, make sure you take this into account.  For example, when you invest $250 in getting a professional logo done, this is a one-time cost.  If you spend $100/month more in office rent, this is a recurring cost.  (Looks like my MBA is paying off, because I can now understand complicated concepts like these).  

  1. How Long Will The Payoff Last?  There are certain investments that continue to “pay off” long after you incur them, and others that pay-off only during a short period of time.  In the logo example above, you are deriving value from the logo long after the money is spent (presumably, for the life of the company or until you decide to redesign it).  On the other hand, if you invest in a tradeshow or advertising, you’re likely getting value for a shorter duration of time.


The first item will likely not generate a whole lot of controversy, but the second one, which favors short-term investments over long-term ones likely will.  What about training, and education, and software quality and all those things that we know we should invest in for the long-term health of the company?  If you follow my advice, won’t you be short-changing all of these things and overly focused on the short-term?  Doesn’t this road eventually lead to failure?  Yes, it does.  But, you’re not going to stay on that road forever.

In order to live to see the long-term you have to survive the short-term.  
 
Put simply, bootstrap startups rarely have the luxury to make long-term investments in the early stages.  The long term investments you do make (such as making sure your product is well designed, your code is maintainable, etc.) will likely not require a cash investment anyways.  These are all fine, and hopefully they’re second nature.  But, things like hiring junior employees and mentoring them, investing in employee training, investing in experimental technologies and playing around with cool stuff that might wind up in your product some day is usually not a good idea.  Of course, all this changes once you actually start making money and get to cash-flow positive.  That is the time to start being more thoughtful about long-term investments.  That’s when you start balancing your decisions, because then, you can afford to.  Until then, it’s a race to the finish line (break-even) with minimal cash.

Summary of my point:  Be a good customer.  Invest your limited resources wisely.  It’s hard to go wrong investing in things that bring immediate value to your customers in areas they care about.  It’s easy to go wrong committing to recurring expenses with long-term payoffs (like fancy office space).