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Tuesday, June 8, 2010

What Entrepreneurs Should Know About Bootstrapping A Startup

The current state of the economy encourages entrepreneurs to build and launch their companies in bootstrap mode. Early stage funding is scarce and investors are looking for an example of what the company, product or service can do before they will make an investment. Essentially, investors have become risk adverse and are expecting entrepreneurs to take on the risk associated with early stage companies.

Entrepreneurs are heeding the call and jumping in with their own working capital, small staff sizes and stripped down first launch product objectives.

Many entrepreneurs are taking the bootstrapping route without fully understanding the implications and challenges associated with this approach. The learning curve and true implications of a self-funded venture do shock many entrepreneurs causing them to have to significantly change their original business plans. To avoid the shock or surprise factor that can come along with launching a business in bootstrap mode the following should be considered before going all in.

Time To Market - Inevitably it takes longer to develop and launch a business then originally expected. This can be the case even if a company has a war chest of funding. In a bootstrapped company this phenomena is exacerbated because the lack of funding has many implications including resource constraints, skill set mismatches, slower communications and lack of focus because team members are involved in a number of other non-related activities. The key to hitting target dates is to do some real planning taking into consideration the working capital at hand, the mix of people and skills in the company and the market adoption rate for lean and mean product and service offerings.

Quality - Product quality always seems to suffer in a poorly financed bootstrapped startup. Bootstrapped companies usually ignore the need for test plans, product specifications and QA resources. The responsibility for testing product is usually relegated to a part time technical person or a business partner leading to a suboptimal quality assurance environment. This can lead to continuously dealing with product and technical issues that can impact consumer adoption and the transition from beta to production. Assign someone QA responsibility from the beginning. Just giving someone this label will help to establish focus on delivering a quality product. Bring outside testers into the process and listen to what they have to say. Build, test and iterate in a small sandbox that everyone understands.

Scaled Back Functionality and Feature Set - Most entrepreneurs are excited about their business and have great ideas and want to see them implemented. Unfortunately, the clash between dreams and reality can lead to real frustration. Dreams are great but reality is more important. The key is to scale back expectations early to align with the company's resources. Starting out too ambitiously can lead to a state where nothing gets done on time or very well.

Part Time Workers And Schedules - Most bootstrapped companies use a hodgepodge of part time and temporary workers. Quite often the schedules for these workers are not in sync resulting in missed communication, partial completion of projects and inconsistent product features. Regular group meetings and emergency meetings will need to happen on a regular basis to keep the company moving. Plan ahead for this establishing a communication vehicle(Skype?), a regular time when everyone can collaborate and an emergency process just in case something really challenging occurs and someone needs to get in touch with someone to resolve it. Also, keep a stable of backup resources just in case.

Running Out Of Money Before Launch - The sad truth is that many bootstrapped companies never make it to launch because they run our of money before they are ready to launch. The previously mentioned factors have a big impact on this outcome. However, lack of budgetary planning and establishing realistic goals also has an impact. If you only have x amount of cash in the bank to invest in the venture be smart and assess what you "really" can achieve with this amount of cash. The company may only be able to create a limited web site introduction or a limited functionality product. Even if this is the case it is better to set goals based on the cash at hand and actually do something worthwhile with it. Having a partially completed product or service will cause a company to waste the little bit of capital they have. Avoid having nothing practical to show for your efforts.

Unstable Technical Platform - How many wobbly startup products and services have we seen? This is a common problem with many startups. Sometimes lack of funding is not the cause of the problem(this is a topic for another blog). Using part time and temporary developers can reek havoc on a platform. Try to use as much of the off the shelf development tools and base functionality you can. Avoid getting into a significant development effort to get to your first launch.

The Initial Beta Is Just The Beginning - Many startup's spend all of their money, energy and good will getting to the beta. The beta is really a stepping stone to get consumer feedback and to show off to potential investors. A startup will get piles of suggestions and will have to scramble to keep the pace once real customers arrive. Do not disappoint them. A startup is unlikely to get any significant funding until real numbers start showing-up.

Conclusion - We will be in an early phase startup funding drought for quite some time. It is hard to predict when funding and consumers will be in a position to hand over some significant cash. Make the most of what you have and be realistic about what you do not have. Trim up the plan and the launch expectations and keep a tight hold on those precision resources(money and human capital.


Anonymous said...

Kevin....great post, and I agree with most of it.. Before you start, do some trend and timeline analysis. Do you have enough runway for product development, sales and delivery? Really think hard on this one. runway is the hardest thing to manage, and may leave you begging in the end, or...er...running out of runway

Daniel S. Markham said...

Hi Kevin & Bootstrappers,

From my own current experience, I have found outsourcing as much as possible to be more beneficial and, in the long-run, more cost effective.

In my particular case, rather than hire a part-timer, or even a consultant, I searched for a cut'n sew manufacturer who also does fabric sourcing. The additional cost to the finished good is minimal when compared to recruiting, interviewing, hiring, training (or paying big bucks for more experience than you need at this point), associated costs such as phone and office supplies - if you have them work from their home - or the cost of providing office space with the rent, utilities, supplies, and don't forget insurance.

All-in-all, outsourcing has many advantages to hiring in the beginning; especially when bootstrapping your venture.

Of course, this is my opinion.