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The Art of Bootstrapping
Guy Kawasaki of How to Change the World | November 25th, 2008 - 11:38 PM
(176) found this useful. Do you? 
In early childhood you may lay the foundation of poverty or riches, industry or idleness, good or evil, by the habits to which you train your children. Teach them right habits then, and their future life is safe.—Lydia Sigourney
Too much money is worse than too little for most organizations—not that I wouldn’t like to run a Super Bowl commercial someday. Until that day comes, the key to success for most organizations is bootstrapping. The term bootstrapping comes from the German legend of Baron von Munchhausen pulling himself out of the sea by pulling on his own bootstraps. That’s essentially what you’ll have to do, too.
- Focus on cash flow, not profitability. The theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small upfront capital requirement, short sales cycles, short receivables terms, long payables terms, and recurring revenue. It means passing up the big sale that takes twelve months to close, deliver, and collect. Cash is not only king, it’s queen and prince too for a bootstrapper.
- Forecast from the bottom up. Most entrepreneurs do a top-down forecast: There are 150 million cars in America. It sure seems reasonable that we can get a mere 1 percent of car owners to install our satellite radio systems. That’s 1.5 million systems in the first year. The bottom-up forecast goes like this: We can open up ten installation facilities in the first year. On an average day, each can install ten systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems. That’s a long way from the conservative 1.5 million systems in the top-down approach. Guess which number is more likely to happen.
- Ship, then test. Perfect is the enemy of good enough. When your product or service is good enough, get it out, because cash flows when you start shipping. Besides, unwanted features, not perfection, come with more time. By shipping, youll also learn what your customers truly want you to fix. It’s definitely a trade-off your reputation versus cash flow so you can’t ship pure crap. But you can’t wait for perfection either. (Nota bene: life-science companies should ignore this recommendation.)
- Forget the proven team. Proven teams are overrated—especially when most people define proven teams as people who worked for a billion-dollar company for the past ten years. These folks are accustomed to a certain lifestyle, and it’s not the bootstrapping lifestyle. Hire young, cheap, and hungry people—people with fast chips, but not necessarily a fully functional instruction set. Once you achieve significant cash flow, you can hire adult supervision. Until then, hire what you can afford and make them into great employees.
- Start as a service business. Let’s say that you ultimately want to be a software company: People download your software or you send them CDs, and they pay you. That’s a nice, clean business with a proven business model. However, until you finish the software, you could provide consulting and services based on your work-in-progress software. This has two advantages: immediate revenue and true customer testing of your software. Once the software is field tested and battle hardened, flip the switch and become a product company.
- Focus on function, not form. Mea culpa: I love good form. MacBooks, Audis, Graf skates, and Breitling watches. But bootstrappers focus on function, not form, when they are buying things. The function is computing, getting from point A to point B, skating, and knowing the time of day. These functions do not require the more expensive form. All the chair has to do is hold your butt. It doesn’t have to look as though it belongs in the Museum of Modern Art. Design great stuff, but buy cheap stuff.
- Pick a few battles. Bootstrappers pick their battles. They don’t fight on all fronts because they cannot aff ord to. If you are starting a new church, do you really need a $100,000 multimedia audiovisual system? Or just a great message from the pulpit? If youre creating a content Web site based on the advertising model, do you have to write your own customer ad-serving software? I don’t think so.
- Understaff. Many entrepreneurs staff up for what could happen, best case, even though they say they are being conservative. “Our conservative (albeit top-down) forecast for first-year satellite radio sales is 1.5 million units.We’d better create a 24/7 customer support center to handle this.” Guess what? You sell 15,000, but you do have 200 people hired, trained, and sitting in a 50,000-square-foot telemarketing center. Bootstrappers understaff knowing that all hell might break loose. But this would be, as we say in Silicon Valley, a high quality problem.
- Go direct. The optimal number of mouths (or hands) between a bootstrapper and her customer is zero. Sure, stores provide great customer reach, and wholesalers provide distribution. But God invented e-commerce so that you could sell direct and reap greater margins. And God was doubly smart because She knew that by going direct, you’d also learn more about your customer’s needs. Stores and wholesalers fill demand, they don’t create it. If you create enough demand, you can always get other organizations to fill it later. If you don’t create demand, all the distribution in the world will get you nothing.
- Position against the leader. Suppose that you don’t have the money to explain your story starting from scratch. Then don’t try. Instead, position against the leader. Toyota introduced the Lexus lines of cars by positioning them as being as good as a Mercedes but half the price. Toyota didn’t have to explain what as good as a Mercedes meant. How much do you think that saved it? “Poor man’s Bose noise-canceling headphones” would work, too.
As my friend Craig Johnson, the great Silicon Valley corporate finance lawyer, likes to say, “The leading cause of failure of startups is death, and death happens when you run out of money. As long as you have money, you’re still in the game, and outlasting the competition is one of the hallmarks of bootstrapping.”
Reprinted by permission from Reality Check: The Irreverent Guide to Outsmarting, Outmanaging, and Outmarketing Your Competition. In other words, I asked myself again if this was okay. If you liked this chapter, there are ninety-three more where this came from.
In other words, I asked myself again if this was okay. If you liked this chapter, there are ninety-three more where this came from.
Joe Girard | November 26th, 2008 at 12:14 am
Great post Guy. I’ve been bootstrapping for 2 years ($2.5M). Raise, execute, ship, raise, execute, ship. Tough at first, but gets easier.
Have to admit, I’ve broken a rule or two above and have felt the consequences more than once. Thanks for the reminder.
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Deanna | November 26th, 2008 at 12:26 am
This is great information. I have been having the hardest time, finding the smallest of an investor for my web properties (www.clutchmagonline.com - Online Mag and just launched 1st blog network for African American women) so I have been bootstrapping for quite some time, but I am now at the growth stage and new that extra push, but this just lets me know that I am on the right track.
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Randy San Nicolas | November 26th, 2008 at 1:07 am
I wish I had access to this article 2 years ago. Raised the money, built the product, obtained customers then watched it all go away as a result of “death.” I’m on the path again!
Randy San Nicolas
http://www.prepaidenterprise.com
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Deepa | November 26th, 2008 at 8:05 am
FANTASTIC!! We are on way to starting a new business and with economic climate so gloomy, this read is really something i can use.
Long Live Guy!
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Jay Berkowitz | November 26th, 2008 at 10:37 am
Thanks for the list Guy, great insights. How about the next step? Maybe your next article could share how to survive at the next level - a couple years after bootstrapping. When is the right time to grow? What size company needs to start looking like a company and not a start-up? What does the current economic situation add to the thinking?
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Jonathan Lackey | November 26th, 2008 at 10:52 am
Great post and not surprising coming from Guy.
I provide service to a lot of bootstrappers and have to say, most of the time it seems you get a much more passionate product when you’re forced to bootstrap.
Not only that but the people who have the heart to bootstrap come up with amazing solutions when trying to make a product work with limited resources.
As the title says, bootstrapping is truly an art.
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Sheryl Schuff CPA | November 26th, 2008 at 11:33 am
Good enough! Long live free software and services that give leverage to bootstrappers.
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Sagar Mohan | November 26th, 2008 at 11:45 am
What an incredibly well written and thoughtful article. In reading, I could not help but evaluate my current company and former employers.
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Mario Merino | November 26th, 2008 at 3:10 pm
Hmmm. We have been following the recipe, albeit, unknowingly.
On Twitter - http://twitter.com/mrmrnm
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Brant Meyer | November 28th, 2008 at 2:03 am
Not writing about the post (though it was very good)…. I’m just writing about the exhiliration knowing that I’m not the only one who is getting hosed by the #10 on bullets in wordpress. Well, I’m assuming it’s wordpress because, everytime I do a top 10 list on my blog it goes to 7,8,9,0. Always leaves off the one. You’re not along Guy
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Kapil Karekar | November 28th, 2008 at 2:04 am
Neat post. Also, it feels really good that my baby is following each of those rules
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Björn | November 28th, 2008 at 2:50 am
I’ve worked in startups and small companies, own and others, for a decade now and I must say that this article is really good. Focus om cashflow and making smart decisions! Having cash gives you freedom.
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Sulaiman Alhasawi | November 28th, 2008 at 5:51 am
Piece of art .
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Lucas | November 28th, 2008 at 7:20 am
Excellent!
i love this posts.
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Steven Milstein | November 28th, 2008 at 3:06 pm
I wish I knew this a few years ago. Next time will be different! Thanks for the tips & I’ll be getting Reality Check just to make sure I don’t miss a thing.
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Ed Haghighat | November 28th, 2008 at 6:46 pm
The first rule is backed by statistics. The number one killer of start-ups — at least in Canada — was cash flow dry up.
You can be very profitable, but if you can not collect on time, and can not pay your bills, you can go out of business a flying success!
Incidentally, what guy talks about here is taught in any half decent MBA.
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Lisa | November 28th, 2008 at 8:16 pm
Great post. I admit I haven’t always followed those rules — had to learn the hard way. Cash is king. Thanks, Guy.
http://www.resumepie.com
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Bhalchander Vishwanath | November 29th, 2008 at 12:28 am
Great post !! How long should an organization bootstrap? Or to restate, should an organization never stop ‘bootstrapping’ even after it has raised adequate funds?
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Balakrishnan | November 29th, 2008 at 1:08 am
Execellent post. I really like points 1,2,4,5 and 8. Its so informative and should define the strategies accordingly.
on twitter: http://www.twitter.com/cogzidel
Bala
http://www.cogzidel.in
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Michael Altendorf | November 30th, 2008 at 6:04 am
Always are pleasure to get reminded..
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Peter Kamau | November 30th, 2008 at 12:10 pm
Very sensible and practical advice,frankly the next step is just to buy the book !! Very clever of you Guy.
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Bruno Collet | November 30th, 2008 at 12:47 pm
Great summary, thanks Guy!
I would like to add that point 5 “Start as a service business” often results in killing the original idea. Indeed, most companies that go into consulting to support in-house software development end up doing… just consulting! (It’s hard to beat 500$/person/day)
Successful strategy is a trade-off between focus and opportunistic behavior.
Bruno Collet
http://www.brunocollet.com/blog
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Stephen Bibby | November 30th, 2008 at 8:07 pm
Good simple advice.
However I note the following:
- Point 2 implies just one form of forcast. Why wouldnt/shouldnt you do multiple forcasts using multiple types of forcast? Then compare and contrast the differences between these forcasts,
- Point 3. An alternate way to put this would be build your product/market incrementally (software equivalent would be Scurm/Agile),
- Point 8. US Cartoonist said it best “I just need enough to tide me over until I need more.”
- Point 10. This is slipstream marketing 101. Base your marketing position on the big guys, let them spend the $ to set the context for advertising, and simply leverage their investment. Ref: Microsoft vs Mac (I’m a PC/I’m a Mac) vs the new Microsoft ads (”Hello, I’m a PC, and I’ve been made into a stereotype”).
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Deborah Madey | December 1st, 2008 at 12:26 am
I have placed the quote, “Perfect is the enemy of good enough.” in my office, with credit to you. Thank you. I shall read this often.
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Timothy | December 1st, 2008 at 8:02 am
Wow! Very, very useful information. I’m actually starting up a new company in Jan ‘09. Wasn’t aware of the term ‘bootstrapping,’ but that’s exactly what I am planning to do.
The best advice I read on here was to forecast from the bottom up. Which is logical.
Thanks for the info!
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Marita | December 2nd, 2008 at 1:46 pm
Just recently discovered your small business advice. Your articles are so helpful! Looks like bootstrapping means to focus on what’s absolutely necessary to keep the business going and disregard the frills. This is great advice for anyone in fundraising - no penny can be wasted! Great article! From http://twitter.com/FundraisingIP
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Tech-PR | December 15th, 2008 at 6:01 am
this is a great advice for entrepreneurs during this recession time
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Jason Sjöbeck | December 21st, 2008 at 5:34 pm
After ten years in business (of a very very small telephony consulting firm, http://www.sjobeck.com/) these lessons are so hard-won. So hard-won. It would be so great if you could learn these lessons faster & earlier, but, c’est la vie. It gets a little bit better every week.
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Udit Hooda | December 24th, 2008 at 7:04 am
Great stuff and at just the write time for my venture, although I can say innately I have been following 50% of these rules already, but not all and have learnt the hard way there. Thanks Guy
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Jeri | December 28th, 2008 at 8:24 pm
Great advice to take into the new year. Thanks for your great contributions, Guy.
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Jim Damicis | December 31st, 2008 at 4:43 pm
I agree wholeheartedly with number 4 -Forget the proven team. As a small buisness I find the best collegues and employees tend to be those that are humngry and energetic. They must alos be talented but there are many talented professionals out their that could not survey in a small buisness, innovative environment. If a candidate comes from a large company or intitutional background I often find them to be overpriced and overvalued.
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Solomon King | January 2nd, 2009 at 5:40 pm
I’ve been bootstrapping two companies (http://www.nodesix.com is one) for three years now. Ran deep into debt on occasion, but this article has pointed out a few things that I definitely did wrong, like well, pretty much the entire list (yeah, not having a college education can be painful). Many thanks for this!
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