37 Signals (now Basecamp) loves the idea of bootstrapping a business. For those of you who don’t know them, they created several project management SaaS tools such as Basecamp and Highrise.
Principals David Fried and David Heinemeier Hansson think so highly of running a business the bootstrapped way that they published the book REWORK to teach everyone else how they did it.
I use Basecamp and Highrise (which they spun off). Both are great tools that have helped myself and my company be more productive. When using Basecamp, you feel the REWORK ethos at play. For example, customer requested features are aggressively vetted until a near customer riot occurs.
Here’s the Dilemma
Seeking out investors is a major time commit that can distract you from building a solid business. Scale may require investors since scale requires you grow faster than your revenue or profit can achieve. The dilemma all tech entrepreneurs face is when/if to raise money and how much to raise.
Case in Point
37 Signals is the classic bootstrapped startup. They champion the idea of focusing on building something that you would use yourself. What this does is focus your company on building better and better products that service a niche in the marketplace.
It might seem obvious, but bootstrapped startups need to have laser focus on building something that will quickly and profitability meet the needs of their customers. That’s why, in February of 2014, 37 signals became Basecamp and spun out or shutdown all the other products they had. This was a bold move but directly in line with the lean way of doing things — focus on what you do great so you don’t become diluted.
Lean Makes You Prioritize
One of the positives about bootstrapping is that it keeps your company/team lean. Lean startups have to make tough decisions on what to work on. These priorities will naturally focus the team on what it will take to make a profitable product.
Contrast this to a venture backed company that’s building out a platform. Platforms are great ways to expand into a different markets yet the platform play dilutes focus and tends to build products or services that are “all things to all people.” If you have plenty of money, this might not be a problem but the challenge lies in when to turn all that effort into a viable business. Just ask the guys at Webvan, eToys or Pets.com.
Take-a-way: Staying lean is the best way to prioritize
Never Let Money Get in the Way of Progress
The downside of a bootstrapped company is that sometimes you need money to get things done. Of course, this depends a lot on the type of business you are running. The capital required to run semiconductor company is far different than the capital it takes to run an SaaS play. Even though money is important, it does not mean you can’t make progress on an idea or concept without it.
With the advent of 3D printing, hardware development kits and Cloud computing, it’s easier than ever to build a prototype and get some feedback. Sure, none of this is “free” but the amount of capital now required is orders of magnitude less than what it used to be even 10 years ago.
Crowdfunding is another recent innovation that allows just about anyone to fund or pre-sell their product. Sites like Kickstarter and Indiegogo are changing the way new ideas get funded. Gone are the days of having to pitch investors. Instead, your customers are your investors and you have a vast pool of eager people to help fund your great idea.
Take-a-way: Never let money get in the way of progress
Got Scale?
Scale is a dilemma that every business faces. It’s the point in your ventures history where you need to really figure out how, what and when scale will occur. In some cases, you may not want to scale up and just keep your company more of a life-style company.
Most companies do require capital to scale up since scale requires getting ahead of your revenue so that you can actually meet demand. The companies that don’t require capital to scale are usually ones that don’t require a lot of infrastructure to buy or have the ability to “pay as you go” for scale. Take for example Goldstar.
Goldstar.com is the world’s largest online seller of excess tickets to live entertainment. Founded in 2001 by Jim McCarthy, Robert Graff and Richard Webster, Goldstar.com realized that venues were giving away tickets for free to shows that were unsellable. “No venue wants to be told that their product is worthless, and no customer wants to go see a show that’s unsellable,” founder Robert Graff said as the problem that Goldstar.com is trying to solve.
Scaling up the Goldstar.com model did not require a huge amount of capital nor did it need venture capital at all. Today, Goldstar.com works directly with 4,000 venues and has over 6,000,000 users, all without taking a dime of investor money.
Take-a-way: Scale may require investors if you need to get ahead of your revenue ramp
Stay Hungry Stay Humble
The bootstrap vs investors dilemma is one that many tech companies find themselves struggling to solve. It’s not a question of whether or not investment is bad or that bootstrapping is the way to go. Rather, it’s a question of what is right for your business. Many a company has taken in too much money only to blow it because they got to cocky or too greedy. The best approach is to keep your company hungry for capital. This means that you spend money wisely and cautiously on ideas that build your business in a sustainable way.
This approach also keeps you humble in that you don’t throw money around needlessly. Many companies waste countless dollars trying to grow just because everyone else is doing it. This makes it extremely challenging to question decisions.
Take-a-way: Be frugal in how you spend the resources you have
Ask Yourself This
- How much money does it take to build your business slowly?
- Is business scale determined by more investment or just patience?
- Have other companies in your market taken investment?
- What exactly would you spend an investors money on?
- How does your Cost of Goods Sold (COGS) scale with growth?
- Does your business require physical inventory to grow?
Dig Deeper
- 76 of the biggest startup failures of all time
- Why you should not raise venture capital
- 10 highly successful bootstrapped startups
- Bootstrapped companies collected by 37signals
- Venture Capital Strategies
- Bootstrapped successes
Next Up
The next dilemma we’ll tackle is niche vs mainstream or how to conquer the world without going insane by getting sidetracked by distraction after distraction. It may seem like a trivial dilemma but many a promising company bit off way more than they could chew and went straight into the dustbin of history. You are not going to want to miss this one.
Stumbled Upon This?
This post is part of the 8 Deadly Dilemmas Successful Tech Entrepreneurs Navigate Series. If you stumbled across this page as you searched the Inner webs, you can sign up for it here. I hope you do :).
