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This post is the second one in my article series on how to bootstrap your startup.
The series is based on the excellent presentation on the matter by Oussama Ammar, cofounder and partner at The Family.
Make sure to watch the presentation online on Youtube, it is definitely worth your time.
As I mentioned in the first part, bootstrapping means starting your business and growing it by virtue of its own revenues.
It means that you refrain from injecting outside capital (except perhaps a small amount by friends and family), and that you depend on your customers to bankroll your venture in exchange for your product or service.
As we discussed, bootstrapping is a hard but rewarding endeavor, and doing it successfully is a commendable achievement.
In most cases, you start with nothing, and making something out of nothing is one of the greatest qualities of an entrepreneur.
Since you are lacking resources, you are forced to be cheap and also to be resourceful. On that front, one of the best strategies is to do things that don’t scale, something that involves a lot of manual, low-level effort.
In this post, we are going to discuss some more technical details on how to bootstrap your business. Let’s do it!
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Taking care of your Finances
As an entrepreneur and business owner, you need to have a solid understanding of your startup’s numbers and especially of your company’s finances.
Since bootstrapped companies have limited resources, it is that much more important to be on top of your financial numbers.
Remember, in the case of bootstrapping, growth can only be funded by the surplus between the revenue that your business generates and the costs that it creates by its operations.
At this point of the presentation, Oussama goes on to provide his favorite strategies, some of which are a bit controversial.
The first one is based on the thesis that cash now is cheaper than cash later. This is obviously supported by the notion of the Time Value of Money, but the reasoning is much deeper.
Startups have severely constrained resources, so each dollar saved at the early stages is critically important, since it will accelerate the growth of the company.
On that premise, entrepreneurs should take calculated risks. Here is an example.
Suppose that you want to hire a marketing firm in order to execute a campaign for your product and you have a budget of $30,000.
Your first thought is to reach for a mediocre firm that has reasonable prices around your budget of $30K. But that would not be optimal since you are going to get subpar work.
At the same time, you also find a superb firm that commands a much higher rate, at $100K.
What you should try to do is to strike a deal with them where you initially pay them the $30K you already have, and after you reach a specific milestone (e.g. sales number), you pay them more than the remaining amount of the $70K, for example double of that.
With this approach, you receive the value of the firm now, but you defer the payment of the service for some time in the future when your company will hopefully be stronger.
In a way, you and the service provider are both taking a risk that will bring you a much higher return. With this setup, marketing firm is aligned with your goal since it has an extra motive to help you succeed!
As I said, this might be a bit controversial, since it is probable that you will not be able to survive as a company and thus, not able to honor your agreement. So while it can be a very powerful strategy, you must be careful when and how you employ it.
Oussama then touches the topic of paying with equity. As I have said in the past, equity can be very expensive. Not only that, it is forever. When you grant someone part of your company, you are “stuck” with them for better or for worse.
Another strategy to leverage whenever possible is to pay late. Ideally, you want to collect money as early as possible and pay money as late as possible. This has to do with the cashflow of your business, something that you need to monitor closely.
Cash is a limited and precious resource and the more you got it under your position, the more you can leverage it to fuel your growth. For example, you can plow that cash into marketing, which will bring you more customers, who will generate more revenue for you, and, since you collect early, more cash!
With this strategy too, you need to be smart. Not all of your bills are the same. For example, you can’t afford to lose a key supplier or frustrate your employees by paying them late. Make sure to do this in “low risk” situations.
Skip the Seed Round
As Oussama mentions, bootstrapping your company doesn’t mean that you are never going to fundraise (although that is possible too), but that you are going to delay the fundraising.
One of the best approaches to maximize the valuation of your startup is to manage to skip the “Seed” round, i.e. the very initial round of funding.
If you are able to launch, sustain and grow the company to a “Series A” round directly, you are going to reap astounding benefits on three levels.
First, the level of ownership that you are going to retain is going to be much higher than in the case of an initial seed round.
Seed rounds might cost you 20-30% of your company for a small amount of money, and that “lost” portion is going to be further exacerbated by future rounds.
Additionally, you are going to avoid “toxic” investors that might put extra pressure on you and your company in order to succeed.
Finally, you are going to save a lot of time. Fundraising can be painfully time consuming and time is a precious commodity that you can’t afford to squander.
In order to be able to skip the “Seed” round and go for the “Series A”, you need to stay nimble, validate your concept and generate revenues, so that you “derisk” your company somehow in the eyes of investors.
How to Approach Hiring?
One common mistake on hiring that Oussama points out is that people believe that hiring is going to solve all their problems. In fact, he argues that hiring usually creates even more problems, thus you should bring new people in the team slowly.
There are multiple reasons that is true, but I would like to highlight one. More often than not, payroll is a company’s largest expense. If you are not careful with new hires, you are at the risk of decimating the efficiency of your business and even destabilizing it.
The next piece of advice by Oussama is that you should hire to do something that you are good at. You don’t need to be an expert in every facet of your business, but you need to understand how every function inside it works. Ideally, you should be able to figure out what people need in order to be successful in each position.
As a founder, you are going to do everything yourself at the beginning. The truth is to recognize when you have the resources to invest in order to gradually remove yourself from the equation and delegate your responsibilities to people that are better than you at the particular field.
Continuing with counterintuitive advices, Oussama mentions that you should delegate what you know best first. The logic is that if you are good at a specific function, then you are going to be aware of whether or not a replacement is doing a good job or not.
As I have mentioned in the past, the ultimate goal is to delegate everything.
The ROI of Bootstrapping
The significance and value of bootstrapping your company lies in the fact that you get to keep a much larger portion of the equity and that that equity is much more valuable at the same time.
The reason your business is more valuable if your reach a major milestone without external funding is that, by getting real customers, building trust and relationships with them and generating revenue, you build “goodwill”.
Building something from nothing shows major competence. It is essentially going “from 0 to 1”, as Peter Thiel would put it. In lack of better words, it is impressive.
Tracking KPIs Weekly
One thing that I have talked about and that Oussama also stresses is that you should track your numbers and Key Performance Indicators (KPIs).
If you fail to do so, your venture is going to die very soon. The reason is that you are not going to be able to figure out what is working and what is not.
For this reason, you should build a KPI dashboard early on and religiously monitor your KPIs. These would depend on the nature of your venture and could include pageviews, orders, active users, etc. Of course, the king of KPIs is one: Revenue.
With only a few exceptions, the number one metric that shows whether or not you are growing and performing well is revenue. It might take a while for your efforts to manifest as revenue, but make no mistake. If you execute well and provide value, you are going to grow your revenues and scale your business.
As a last point, Oussama talks about when you end bootstrapping. His golden nugget is that you should not look for raising capital, but rather, that you should put your business in a position where fundraising becomes obvious.
Some of the most successful bootstrapped companies eventually raised capital when they were literally chased by investors. In that way, you, as the founder, get in a much more powerful negotiation position.
At this point, the presentation ended and was followed by an 1-hour long Q&A section with several useful questions and answers. Check them out too!
In this post, we discussed some of the most technical, yet important, aspects of bootstrapping a business.
These involve managing your finances properly, hiring in a smart way, and tracking your KPIs on a weekly basis.
I hope that the insights you get out of these two posts will help you bootstrap your startup successfully and create massive value for you, your co-founders and employees.
Now, go out and build a great company!