Bootstrap — More than just a cliché
Let’s establish a simple definition of what bootstrapping is: it’s a way of using one’s own means and revenues to grow the company before seeking any outside funding.
You know companies that did this, even if you aren’t aware of it.
GitHub, AppSumo, MailChimp, and others all developed and grew for a long time through bootstrapping. I’m not talking here about companies that developed a product while making money through consulting or that sort of thing. Rather, I’m thinking about the pure sense of developing a product and selling it to customers from day one.
That kind of bootstrapping is absolutely difficult. But as hard as it is, it’s also very rewarding, mentally and financially. There’s no pleasure for an entrepreneur like having a satisfied customer. In terms of development, having a company that shows growing revenues makes everyone happy. It gives you leverage when the day comes to fundraise, and you’ve put the power on your side.
That’s why every single article and tip about fundraising should come with a disclaimer, pointing out just how little leverage those tips will give you vs. how much leverage you’ll get by growing your revenues. There’s a reason why we say that money talks. If you’ve got money on your side, you’ve got the upper hand in a negotiation. If the other side is the only one with money, they’ve got all of the power. Whoever is more willing to walk away from the table is usually going to end up winning.
Those articles are also why we get the same question, over and over. An entrepreneur wants to come into TheFamily, and they say, “We need to fundraise, how can you help us with that?” And the response is always the same: “We can’t. We’re not a fundraiser, it’s not what we do, sorry.”
There’s two sides to that. Why do entrepreneurs ask that question? It’s because in today’s world of tech journalism and blogs, there’s a story that keeps being repeated. Someone has an idea, they fundraise, they use that money to become a successful company. Every day there’s a new article with that formula, because it’s easy to write, it gets a lot of clicks and it gets a lot of shares.
Good companies lets fundraising come to them.
TheFamily is there to help our startups grow, because that’s how they can keep getting larger and live forever. We’re not there to fundraise and then hope for the best. We know that virtually every successful company arrives at the point where fundraising makes sense. We also know that good companies raise funds with leverage on their side, leverage that comes from real growth and actual customers.
Good companies come from good entrepreneurs. Good entrepreneurs can start with nothing, and build something incredible. What can you do to be a good entrepreneur?
Be creatively cheap.
When your business is still looking for product-market fit, still looking for that tipping point that shows you that things are working, be as cheap as possible. Even if you have a little bit of money, don’t use it. Or at the very least, forget that you have it. Every young entrepreneur is going to make mistakes, and you can either pay to make mistakes, or you can make them for free.
Not having money forces you to use your imagination to solve problems. You will find hacks and tricks that, if you had money, you would not even look for. Entrepreneurs can’t have the mindset of throwing money at a problem.
No one needs money to start. Money should be a tool, not a necessity. One day you might need it to grow, or you might need it to speed up your timeline. But money shouldn’t block you from getting started.
Not having money can even help you at the beginning. When you’re trying to convince your first employees to come on board, and you have no money, you might not even be able to pay them. But those people who agree to come and help you are so convinced by you and your project that that energy brings the project forward in ways that are impossible to quantify. Once you’ve fundraised, all of a sudden you have tons of people coming around and wanting a job — and how can you quickly find the ones who are really dedicated vs. the ones who are just looking for a paycheck? That’s not to say that you can’t do it — of course you can. But it’s one of the ways in which money can be a double-edged sword, especially for a first-time entrepreneur.
So a double-edged sword, yes, but it’s also inevitably part of the equation. When you’re bootstrapping, and the revenue that you bring in what you have available for growth, financial questions are even more important than if you were to fundraise. And there are some principles of finance that can help you.
Cash now is more precious than cash later.
That being the case, pay with risk. If you can save $100 today, and that $100 today is going to cost you $1000 in five years, do it. That’s a savings that you can use to make sure that you’re still alive and growing.
A concrete example: let’s say that you’re in an industry where design and branding are critical. You have $30,000 to spend, and you find one designer who is perfect. The only problem is that it’s going to cost you $75,000. You have two choices: you can take a lesser design, which won’t help your company but it fits in your budget today. Or you can get creative. What if you offer the perfect designer $30,000 now, with the promise that when you reach a certain milestone (say, 20,000 units sold), you’ll pay not the additional $45,000, but $90,000. You’re making an offer that recognizes the relative value of cash both today and into the future.
And the important thing is that in a deal like that, neither side is doing the other a favor. It’s an opportunity for each side, assuming that everyone happily agrees to the deal.
But a word of caution: don’t do this with equity. Equity is forever. Just because something isn’t in cash doesn’t mean it’s not a real price. So be generous in making a deal that is good for both sides, but don’t be an idiot, either.
In bootstrapping, managing your cash flow can become critical.
And here’s the industry standard: collect early, pay late, sell high, buy low. If you can delay paying a bill, that’s another day of cash in your pocket that you can use for growth. This may seem a bit shady, but I promise you, everyone else is going to be paying you late as well. If you pay early and collect late, you’re going to be the bank for everyone around you. You have to understand early on exactly how your cash flow management is affecting your company, not just today and tomorrow, but over the long run in terms of growth.
Of course, there are people who you need to pay on time, always. Your employees are on that list, which means that you need to be very careful about hiring. I’ve said it before, I’ll say it again: bad companies try to solve problems by hiring. Good companies recognize that making a mistake in hiring will only create more problems. You should only be hiring people you trust, and who are doing something that you understand.
Once you do hire, make sure that you’re delegating the things that you know best.
Most of the time, people do the opposite: they do what they know best, and delegate the things they don’t really know. But that’s the worst management strategy, because it’s easier to control the quality of things that you know well. If you delegate only the things that you’re good at, you’re able to dedicate your time to learning how to do other things better, you get stronger with them, and then you can delegate them as well. Don’t forget that the endgame is to delegate everything — and to do that, you need to know how to do everything within the company so that you can keep watch over it.
(And watch out for interns. Interns are great in a growing business, post-market fit. Pre-market fit, interns will kill you. Because you don’t know what you’re doing, and you’re asking someone who knows nothing to do it on your behalf. Stop having fun by interviewing interns, and start building something that actually works.)
Once you’ve installed that mindset, remember to sell it all. Your network and personal connections should be the first place that you’re selling. One of our companies, MenuNextDoor, has incredible organic growth now. They’re doing thousands of meals per week, a few months after starting. Why? Because when it was first launched, the founders sold so hard to their personal networks, they were going around, taking meals to people, collecting and distributing money directly, having customers take pictures and post them on their social networks, anything that they could personally do to increase their reach. That’s how you get traction — go strong and get your friends on board. If you can’t sell to your personal network, you’re not going to sell outside of it.
If you can put these ideas in motion, if you’re being cheap, smartly managing your company and your cash, and selling to everyone around, you’re going to have a big advantage in a toxic environment. You’ll get investors who start to chase after you, rather than the other way around. And one huge benefit that that can come of out that is the ability to skip the seed round and go directly to a Series A.
Skipping the seed has big implications over the life of your company.
By doing that you’ll have an exponentially higher level of ownership in your later funding rounds. That’s because in Europe, a seed round is going to cost you around 20–30% of your company, even occasionally upwards of 40%. And that’s for a very small amount of money, maybe up to $1M. Bootstrapping and developing revenue can get you to that point. When you then go to Series A, you give up around 20–30%, but at a much higher valuation and without the dilution of the seed round. Instead of giving up 25% twice, you only do it once. That’s a huge deal as the company keeps going.
Not only that, when you’re able to build something from nothing, your level of goodwill when you go into that Series A fundraising mode will be absolutely off the charts. Judging startups in their early days is difficult, and so people are less likely to give you any credit (remember, ideas aren’t worth anything — only businesses are worth something). But when you can show your ability to create, based solely on your own will and desire, it’s easier for people to convince themselves that investing in you will be a good deal for them. And having that in your pocket when you head to the negotiating table is worth its weight in…well, in equity and cash.