Bootstrapping: Our Real Life Case Study

bootstrapping-tech-companies

We have to deal with funding in every project, sooner or later. Generally speaking, the question is, whether to create a company with your own capital or money borrowed from venture capitalists, business angels or through equity crowdfunding. You can find lots of information on how to approach investors, on the Web. Commonly, investors are very public people highly involved with social media. We have just recently got into attracting investors, so we are just in the middle of the learning curve. But as soon as we have accumulated enough data, surely we will share it. However, what we can share right now, is our solid long-term experience with bootstrapping our business. You have to face funding issues long before you ever contact with a potential investor. To approach investors you have to make something tangible first. A popular idea today is that the “early stage” means the point of profitability in the project. To get to this stage, often you have to start with your own money. But what to do when your money is limited? Well, the answer is in bootstrapping!

In our understanding, bootstrapping is financing of a new project from non-core activities. In the IT market, this usually means offering services to third-parties to pay for the core product development. Depending on the founders’ background, bootstrapping can involve on-demand software development, design, consulting, event marketing, video or photo services. Service business is very specific and requires certain skills that may not be really demanded by your core project. So, you’d better treat bootstrapping as a separate business, as it it likely to become your main business for some time.

We emerged 5 years ago and, of course, we sought financing for our projects. Our market research had shown that finding an idea investor is impossible, and exceptions are but proving the rule. Also, during prototyping we understood that lots of resources are needed to develop the product. Back in 2008 we wanted to create a multimedia messaging service, as SMS seemed very boring. Now this niche is occupied by numerous services like WhatsApp and Poke. We also had to face specifics of the Russian market. Today, startup investment market in Russia has somewhat expanded compared to 2008 (probably, we should have sought better even then, but still.)

There are different ways to look for third-party projects. Think first of your expertise, what you can do well, and look at what your LinkedIn connections are involved with. If you are into developing a Web service, look at what services are actively developed by large companies in the banking, telecoms and media sectors. Probably your development skills are what they need. Consider your field of specialization. In your area, you might easier find your first customers. For example, our focus in online video helped us to get lots of customers, and our active blogging and open source policies helped us to attract foreign customers we could not even had dreamed of :-). Anyway, only such bootstrapping is advisable that gives you something beyond plain money.

So back in 2008, Web service projects were quite natural to us. Such services have always been in demand, with skilled and reliable developers always in minority. Also, mobile TV was very popular at the time: it was considered by mobile operators and Web-based companies. Also, TV broadcasters were looking into more channels for content distribution. Having expertise in this field, we have started to develop online video portals, with very few competitors here (however, all major companies were aware of Netflix and Hulu success).

Looking back, I think we would have better identified the goals of this process from the onset. This way, we could measure our business success by the objectives.

Objectives
In our case (as in many other similar cases), the main focuses of the service business were:
• To generate a stable income to fund our own projects
• To develop domain-specific skills
• To recruit a good team
In the service business, it is important to make an actionable plan and understand how it correlates with your core project. Well, we did not have such a plan. So, we quickly forgot of the core projects, focused at developing our service business and accumulation of more resources to fuel further growth. Over time, a strong feeling emerged that we had gone astray from our initial intentions. The process of continuous scaling up and development of service business is very far from the mindset of most startups (and, it requires lots of energy, by the way). Hence, I came to a conclusion that a passion for bootstrapping and unnecessary growth of revenue from non-core activities (services) may be pretty detrimental for a startup. In some ways, this is similar to over-funding: you get more resources than you have needed, spending more time to manage them. Finally, as a result of such over-bootstrapping, you might stop developing your core project altogether for the sake of short-term gains.

To avoid this trap, create a bootstrapping plan. How many projects and in what area are you going to implement, what money do you plan to earn, and what is your capacity to provide services without compromising the core project plan? Coordinate your bootstrapping plan with your core project plan. Taking important decisions, consider how they fit with your plan and your goals.

Risks
Service business has some serious risks that should be taken into account:
• Staff demotivation – on the one hand, work on different projects creates a sense of constant movement and the opportunity to explore new technology; on the other hand, you may fall prey to running the same routine tasks for different clients. In addition, some customers cannot appreciate the quality of the job done, which can also be a serious demotivator for your staff.
• Deviation from the true goals of the company in pursuit of profit increase and the company’s growth: probably, this is not what you have created your company for?
• You can get stuck with the service business for a long time. Eventually, your core activity may start looking risky compared to the stable income.

Recommendations
So, here are my recommendations to startups that have chosen bootstrapping:
1. Regularly validate your actions against your goals, so as not be held hostage by growth for the sake of growth and work for the sake of work.
2. Plan for your bootstrapping as you plan for any other project. Check for deviations from the plan.
3. Consider recruiting for third-party projects as serious as for your core projects. Third-party projects tend to close out, while your staff condition your corporate culture. You cannot compromise on this. If you feel unwilling to take certain persons to your own project, you’d better offer no job to them at all.
4. Use every opportunity to develop yourself and your team, research cases of your third-party projects. Further, this experience might help your own projects. Generally, this is a very helpful recommendation: use every opportunity to improve yourself, you’ll need all your expertise in the future.
5. Write to your blog, contribute to open-source projects. Bootstrapping will give you a basis to develop your writer’s talent.
6. As the company grows, constantly add new money to your funds. Otherwise, due to external instability, you may fall short of a couple of months before the global dominance, and the company might get bankrupt. The bigger your company, the higher are its monthly expenses, and the higher is the stability margin you need.
7. In most cases, to successfully enter new markets your projects need investors. They will influence reasonable revisions to your product, bring expertise and connections to your business, so as you can grow and stay ahead of copycats. In such a situation, it is optimal to negotiate with investors at a stage when you have your product and traction. However, this doesn’t mean that you cannot get acquainted with potential investors earlier.

Extra materials
More materials on the topic are available here:

  • Guy Kawasaki has made a nice outline of bootstrapping principles in his blog
  • At TechCrunch Moscow 2012, Vasily Esmanov from LookAtMe did a fascinating talk on bootstrapping (seek to December 9 at about 6:15 p.m. in the video player)
  • Fred Wilson’s post on bootstrapping featuring well-known success stories (e.g., Behance)

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