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
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
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
spend the limited resources she has.
In general, there are four things I look at when deciding
where to spend money in a bootstrap:
- 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.
- 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.
- 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).
- 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).