The author, Anthony Coundouris, is the founder of accounting and analytics firm Futurebooks. A version of this article was first published on the Futurebooks blog.
Making revenue in a free world can be daunting when you have to pay rent and salaries. But if you decide to bootstrap your business, you are not alone. 85% of startups worldwide fund their startup idea by consulting and contracting their labour. 20% of Futurebooks clients bootstrap their companies.
To make the process hopefully a little easier for you, here’s a two part guide on how your startup can do well without funding from investors (part two coming soon).
Definition of bootstrap
Investopedia defines entrepreneurs to be bootstrapping “when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.”
There a few ways to bootstrap a company using operating revenues. They include:
Corporate salary. One co-founder keeps a corporate salary job, and the other founder runs the startup. The salary-maker is the cow that is milked each day to feed the business.
Consulting. Normally quoted at an hourly rate, founders dedicate twenty percent of their time adding high value to a corporate firm. For example, a startup creating a platform to manage shipping inventory may use their high-level knowledge to design special parts for ships.
Production. Normally quoted as a project fee, a startup hires low-cost employees and contracts labor to build customized products. For example, a startup that creates a platform to serve videos may produce video content for content providers.
White labelling. A product is manufactured by a startup, and packaged and sold by other companies under varying brand names. This is a great way to get paid to test a product in the field. Startups like Dealised have made white labelling their entire business model.
Corporate sponsorship. Secure sponsorship dollars by building unique value for a corporate client. An example is offering exclusive use of a product for a limited time that will reach a new segment of customers.
Start with a function, not a business
Recently, US tech founder Glen Coates began bootstrapping his startup Handshake. In 2011, the company processed over US$100 million orders.
“I never decided to ‘bootstrap’ Handshake. My point of view was that I should be able to build something useful that people would be willing to pay for. If I could do that and get a small number of them to pay, that would be proof that I should continue what I was doing,” say Glen.
Handshake focused on creating a single, beneficial function, eventually expanding to become a business over time. The key was to start simple, but not so simple that no one would pay for it.
“Looking back, I was able to bootstrap Handshake because my idea wasn’t a ‘change the world’ idea to begin with. It was to build a simple iPhone app that would make sales people’s lives easier.”
“We are executing on little pieces of it all the time so that we are constantly getting more traction, building a bigger team, and moving there step by step instead of hiding in the workshop for years and then bringing an untested, unseen product to the world.”
Incubate using consulting fees
Adrian Teh and Yuvan Kumar, cofounders of the Malaysian startup Highrise Pro, are funding their startup with consulting fees. They have a web development company called Leanis Solutions that partially funds Highrise Pro.
“We’ve always wanted to create our own startup but with little resources at hand, we decided to offer consulting services,” says Adrian.
“We got referrals here and there and it helped sustained us. We accumulated enough and decided to incubate our own in-house startup — Highrisepro. While I work on Highrisepro, Yuvan focuses on data services projects, since it was his core during his employee days.”
As of today, they’ve managed to launch Highrisepro, secure a few data services projects with local financial institutions while offering custom web application development and lean startup consulting services to clients.
Let the customer bankroll the startup
In the first two years of operation, China-based Cmune bootstrapped using personal savings from founders. In the third year Cmune contracted their time to build 3D virtual worlds for a corporate client, leveraging on their base platform.
“We hired and trained up a local intern. The client bankrolled the entire team (at low salaries) for a year. The work was mostly licensing of technology and production. The project generated revenue 10x the intern’s salary,” says Benjamin Joffe, the company’s co-founder.
Being based in China made Cmune’s fees attractive to the overseas client.
“I think doing client work is a classic means for companies who don’t have external funding to bootstrap. The risk is that you become too distracted from your core competency while building someone’s IP.”
Experiment, but stay focused
Tudor Coman, cofounder of Flocations, has these words of wisdom to share on white labeling a product.
“When a big player like an MNC comes up to you, they expect quality. However, when you just entered a B2C market like we had, you’re fighting for traction, and ‘polish’ and technical ‘quality’ are the last things on your list since we were still trying to validate the product,” says Tudor.
Nonetheless, he doesn’t regret his decision.
“We followed the promise of a large carrot, but in the end we violated the startup rule of ‘stay focused on one thing’. But it’s a business opportunity after all and experimenting with your startup is part of the whole game, so we would probably do it again.”
Final words from Adrian Teh
When using consulting fees to bootstrap, Adrian has a few tips to bear in mind.
1. Maintain a crisp vision. Know exactly where your destination is and keep your focus while you juggle your way there. Consulting services is just a way to bootstrap, and you’ll always get offers that are hard to resist. If you attend to all opportunities, you’ll soon find out (after 1 or 2 years) that you’re being dragged around by external factors instead of moving towards your destination.
2. Be honest. Think about yourself as a doctor, and that you are treating a patient with a problem. Suggest what’s needed and if the client doesn’t need to spend that extra cash, let them know how they can save. That extra touch of care can bring you referrals.
3. Stay lean. Your ideas are a bunch of questions waiting to be validated. Get out of the building and start interviewing customers. Get them to pay you a small amount as a sign of interest and commitment. This approach will help keep expenses low while funding your own ideas. When you’re finally done with validation, strike sharp and fast like a samurai with his Katana.
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About the author
Anthony Coundouris is the founder of accounting and analytics firm Futurebooks. Anthony is obsessed with helping start-up companies incorporate, conduct industry analysis and develop positioning. He has ten years experience in media and marketing, and was founder of Firestarter, a digital marketing agency. Firestarter was acquired by Novus Media in 2010.
The post How you can bootstrap your startup without losing your sanity (part 1) appeared first on SGE.
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