How to Bootstrap a Startup Video Available

How to Bootstrap a Startup by Sean Murphy

If you are a technology entrepreneur who doesn’t fit the typical profile for a first-time VC investment, you can find it difficult to generate interest in a business still in the planning stage. However, if you persevere to solve a critical problem or create new possibilities for your customers, you need to start building your business with only limited financial resources.

Bootstrapping does not preclude seeking investment when your active business merits and requires it. But it starts by making a difference and building a real business as proof of your products’ need for and value.

Below is a short video clip from the talk

In the video, Sean Murphy addresses what you and your team need to do to bootstrap your business: find early customers and revenue using internal cash flow and organic profits. He draws on his experiences with clients at SKMurphy, Inc. and insights he has gleaned from the more than 800 Bootstrappers Breakfast meetings he has attended since October of 2006. The Lean Culture meetup is famous for being very interactive, and he will be no exception: he welcomes your questions and insights if you can join us.

Edited transcript for the Team, Technology and Traction video snippet

Evaluating an opportunity is not simply about the problem or the market but what you bring to the solution—team, technology, and traction. We will start by looking at what team you can assemble, what technology you can build, and how you can get traction.

Team

The team brings three things. They bring know-how, they bring relationships, and they bring money. Not everybody has to have all three, but the team you assemble has to bring these three elements together.

Intellectual Capital
Social Capital
Financial Capital

Team: Intellectual Capital

Intellectual capital is the know-how. The team must have the ability to do things and execute with distinction. When people talk about projects they’ve worked on, they should have used that skill and delivered results, and it’s even better if they’ve delivered results that led to revenue or profit. So you’re looking for have done, can do, and you’re looking for rare or unique knowledge to drive differentiation in your offering, so that’s one set of tests. Only some people have to bring this, but on the team, you’ve got to be looking for people who can help you differentiate the product.

Team: Social Capital

Social capital is the people you know and your skills at forming new relationships. This may mean you can reactivate old relationships and call in favors from people. It means you can ask people you know, “Can you help me find somebody that fits this profile? We’re trying to talk to people that have this kind of problem.” You need to network from where you are to where you are trying to get to. In the early days, you will spend your social capital, first of all, just on candid feedback on your product. You want people to tell you your baby is ugly, or here’s what’s missing. Then, you will use it to open the door for early sales and sourcing early employees and other people who can advise you informally or formally. So, the social capital is a big leg of the stool bootstrappers lean on.

Team: Financial Capital

You’ve got your savings. You may have friends and family; you may reach out to qualified investors, angels, VCs, and corporate investors. As bootstrappers, we like revenue as a source of financing because it’s non-dilutive and shows proof of value. The fact that you talk to an investor and they’re excited about your idea offers less proof than somebody who fits your target customer profile. They actually pay you because now they’ve quantified their love, which is wonderful. In general, startups tend to over-engineer their first or minimum viable products.

Technology

In general, startups tend to over-engineer their first or minimum viable products.

One path we see is consulting or services first. This can be transactional. You can use your product but keep it behind your back. System integration means you use an established product. You essentially position your product as an add-on so that you need both to get the result and finally get to your full product.

Depending upon the nature of what you’re delivering, sometimes you can sell audits just to help people get a handle on the severity of their problems. You can sell a workshop, or you can explain to them how they can manage the problem. You can sell consulting that may be service or transactional around a deliverable; sometimes, people just want more information about this. If you’re working on a painful problem or working where there’s an area that people are interested in, people will pay for information provided it demonstrates domain expertise.

eMobus Example

In the case of eMobus, they started with a spreadsheet. Today, we would call this a no-code solution; they did it as consulting. They added the PDF scanner, which they kept under their hood. Then they put it on top of QuickBase to get scale, and then finally, they brought on a CTO and an actual cloud stack, so it took multiple steps.

Candidly, they were feeling their way. They were trying to decide, “Is there really a big enough market here to make this work? We don’t want to make a huge investment to discover that there’s no market,” so they were also cautious that way.

Traction

When we talk about traction, which is the third leg of the stool, there are multiple ways to get started:

Developing a pitch or a demo
Writing a business operating plan
Spec a first product
Writing code/creating technology
Writing a business plan to raise money if you’ve found a market that both merits and needs money

Just writing the pitch and the demo, giving it, and keeping your ears open allows you to learn much about the market. If instead of trying to close the person, you say, “Hey, do you have this problem?” You can learn quite a bit if you use it more to explore the problem.

Traction is the ability to set and hit targets that reduce risk, and there are internal targets and external targets. You can define and deliver product pieces on spec and schedule. You can get other people excited to join the team, and these are all accomplishments, but what matters is revenue from customers and references from customers who say, “Yes, I’ve gotten value out of this. I’m satisfied with this. I’ve not only paid for it once, I’m going to pay for it some more. I’m going to expand my use of it.”

Many teams get far down the internal execution side; they don’t want to talk to customers until the product is perfect, so this illusion of progress can go on for months or longer.
Then there’s contact with the market and sometimes tears, so you need to get out there as soon as possible, talking to people who have the problem or have the need.

Pivot or Persevere

Failure is at least a nagging possibility as you’re doing all this, so there are two ways to look at this. The first thing, and what several successful serial entrepreneurs have shared with me, is when the team came together, they made a plan A. Still, they also made a plan B, C, and D, and they said, “Look, given who we are and what we can do, here are three things we could do, five things, we could do,” whatever. And what that allowed them to do was if they hit severe problems, as you get into that and you execute, and you start to get emotionally committed to a path, this becomes the pivot or persevere question. But the problem is, if you don’t have a plan B and you’ve been executing on plan A for a while, you get tunnel vision around that target. And so it’s like, “Should we give up or continue?” And then nobody wants to give up because, if instead, you say, “Hey, there’s an alternative we identified we can do,” you can start to explore that if the primary path isn’t working out.

You usually set your nominal goals at breakeven operation, “Can we at least make enough money that we’re covering our costs? We do not have to put money into the company, which gives us more runway to explore.”

Finally, you may meet with unexpected high success, and now you have a plan that may merit investment, or you may want to look for other partners. But it’s important to have the hard conversations early and anticipate that things will only sometimes go according to plan.

Summary

We have talked about the team, technology, and traction. We discussed three kinds of capital: intellectual, social, and financial. We’ve talked about the need for specific skills and expertise that drive product leadership, and we’ve stressed the importance of traction as both the ability to set and hit targets, particularly customer references and customer revenue.

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