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Kingsley Uyi Idehen
Lexington, United States
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The Art of Bootstrapping
Great tips for real
entrepreneurs from Guy
Kawasaki . Note that Guy refers to the kind entrepreneur
described by Jason Calcanis
in his "Real
Entrepreneurs Don't Raise Venture Capital " post.
The Art
of Bootstrapping : "
Someone once told me that the probability of an entrepreneur
getting venture capital is the same as getting struck by lightning
while standing at the bottom of a swimming pool on a sunny day.
This may be too optimistic.
Let's say that you can't raise money for whatever reason: You're
not a ‘proven’ team with ‘proven’ technology in a ‘proven’ market.
Or, your company may simply not be a ‘VC deal’--that is, something
that will go public or be acquired for a zillion dollars. Finally,
your organization may be a not-for-product with a cause like the
ministry or the environment. Does this mean you should give up? Not
at all.
I could build a case that too much money is worse 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 is
bootstrapping. The term comes from the German
legend of Baron Münchhausen pulling himself out of the sea by
pulling on his own bootstraps. Here is the art of
bootstrapping.
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
up-front capital requirement, short sales cycles, short payment
terms, and recurring revenue. It means passing up the big sale that
take 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% of
car owners to use 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, they can install ten systems. So our first
year sales will be 10 facilities x 10 systems x 240 days = 24,000
satellite radio systems. 24,000 is 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 . I can feel the comments
coming in already: How can you recommend shipping stuff that isn't
perfect? Blah blah blah. ’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 perfection doesn't
necessarily come with time--more unwanted features do. By shipping,
you'll also learn what your customers truly want you to fix. It's
definitely a tradeoff: 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, please ignore this
recommendation.)
Forget the ’proven‘ team . Proven teams are
over-rated--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-process 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. Bauer sticks. Breitling watches.
You name it. But bootstrappers focus on function, not form, when
they are buying things. The function is computing, getting from
point A to point B, skating, shooting, and knowing the time of day.
These functions do not require the more expensive form that I like.
All the chair has to do is hold your butt. It doesn't have to look
like it belongs in the Museum of Modern Art. Design great stuff,
but buy cheap stuff.
Pick your battles . Bootstrappers pick their
battles. They don't fight on all fronts because they cannot afford
to fight on all fronts. If you were starting a new church, do you
really need the $100,000 multimedia audio visual system? Or just a
great message from the pulpit? If you're 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. ’Our conservative (albeit top-down)
forecast for first year satellite radio sales is 1.5 million units.
We'd better create a 24 x 7 customer support center to handle this.
Guess what? You sell no where near 1.5 million units, 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.’ Trust me, every venture
capitalist fantasizes about an entrepreneur calling up and asking
for additional capital because sales are exploding. Also trust me
when I tell you that fantasies are fantasies because they seldom
happen.
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 ecommerce 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
bupkis .
Position against the leader . Don't have the
money to explain your story starting from scratch? Then don't try.
Instead position against the leader. Toyota introduced Lexus as
good as a Mercedes but at half the price--Toyota didn't have to
explain what ‘good as a Mercedes’ meant. How much do you think that
saved them? ‘Cheap iPod’ and ‘poor man's Bose noise-cancelling
headphones,’ would work too.
Take the ‘red pill.’ This refers to the choice
that Neo made in The Matrix . The red pill led to learning
the whole truth. The blue pill meant waking up wondering if you had
a bad dream. Bootstrappers don't have the luxury to take the blue
pill. They take the red pill--everyday--to find out how deep the
rabbit hole really is. And the deepest rabbit hole for a
bootstrapper is a simple calculation: Amount of cash divided by
cash burn per month because this will tell you how much longer you
can live. And as my friend Craig Johnson 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.
Written at: Atherton, California.
"
(Via Guy
Kawasaki .)