bootstrapping-business

What Is Bootstrapping? Why A Bootstrapping Business Is The Way To Go

The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

Inside the Bootstrapper Bible

A bootstrapper isnʼt a particular demographic or even a certain financial situation. Instead, itʼs a state of mind.

That is how Seth Godin described bootstrapping in his “The Bootstrapper Bible.”

As firms that are venture capital-backed get so much media attention, it’s easy to miss the other 99% of businesses out there which made it and which built a sustainable business model by bootstrapping.

That’s because by definition firms that are looking for venture capital need continuous PR coverage to play the “look cool game” to ease the hand in the pocket of the venture capitalist’s next door.

Thus, it’s easy to forget of the army of entrepreneurs that from day one decides to go the other route and first build a viable business model, then and when they feel the time is right (if it ever is) take outside money to scale the business.

Let’s start with a simple definition of bootstrapping.

What is bootstrapping?

The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model.

This means using customers as the primary source of cash to grow the business. The bootstrapping process is critical when building up a new company as it enables us to reach product/market fit without relying on external money, which might distract the founders from the customer development journey.

But are all businesses made for bootstrapping?

Not all businesses can bootstrap

It is essential to distinguish among companies that have very high barriers to entry and those that don’t.

Indeed, due to regulations, technological development, or capital requirements, in general, bootstrapping might become hardly feasible.

If you’re building up a whole new technology in a whole new market, no matter how good you are, there will be no customers for years to come. That is because the development of that market requires that technology to be mature.

It also requires an ecosystem to develop. Therefore, in these cases, bootstrapping not only is not a good idea, but it’s not viable. In that scenario, you’ll need outside capital and substantial resources to keep going for years before seeing the first customer.

Instead, if you’re launching a business in an existing market, where other business models proved viable, bootstrapping is the way to go.

Thus, you want to first understand the playground you’re in, to identify the best way to go. Steve Blank identifies four main types of markets:

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
  • Existing markets: usually well-defined with existing customers and well-known competitors. This is straightforward, and in this kind of market, there isn’t necessarily a dominant player or monopoly. 
  • Re-segmented markets: when a market, for instance, is taken over by one or a few companies (monopoly or duopoly), re-segmentation is the way to go. Thus you enter by addressing a need that other dominating businesses can’t tackle. In this way, you can distinguish your brand (think of the case in which you target a specific niche of that existing market). We discussed several times how DuckDuckGo entered the search engine market quite late, and when Google was already a monopoly by targeting a specific niche, users’ who cared about privacy.
  • Clone markets: this is about copying existing business models to transpose them either in other markets (think of how Baidu built its fortune in China due to the impossibility for Google to take off). Or taking a successful business model in a market and transpose it into an adjacent one. Think of the “uberization” of several industries.
  • New markets: in this scenario, your solution is such a novelty that is very hard to identify a potential customer or competitor.

Now, if you find yourself to be in a new market, or you’re trying to clone an existing business model in a clone market, where regulations might make it capital intensive to enter, bootstrapping is not the way to go.

If you are in an existing market, or a re-segmented market, that is where the opportunity lies!

Let’s now dive into what bootstrapping means, what are its commandments, and why it makes sense.

The Bootstrapper’s commandments

In thebootstrappersworkshop.com Seth Godin sets the commandments for the bootstrapper.

He highlights the posture of a bootstrapper:

  1. Ship real work.
  2. Do it now. Not later.
  3. Serve clients that are eager to pay for what you do.
  4. Resist the urge to do average stuff for average people.
  5. Build and own an asset that’s difficult to reproduce.
  6. Scale is not its own reward.
  7. Charge a lot and be worth more than you charge.
  8. Create boundaries for yourself about what you do (and don’t do).
  9. Become ever more professional.

Those principles are fundamental to internalize.

Bootstrapping is not easy, as you’re developing the business without outside resources. Thus, you need to be very good at understanding what’s your market, who is your niche, and what the customers in that niche want.

That’s because customers are your investors.

Customers are your investors

In a bootstrapping mode, you don’t have venture capitalists giving you a free ride to get clear about your business. Therefore, customers, purchasing what you make will be your investors.

It is essential to highlight that also, other key partners will act as investors. Your suppliers are also investing in the business if they extend the credit terms.

Your employees are your investors if they work extra hours to get the business off the ground.

Those are all key players that will make your business model viable.

The company’s vision is in your hands

Another thing to understand about bootstrapping is you won’t rely on someone giving you the vision for your business. You’ll need to have a clear vision and mission for where you want to go.

As you’re not taking outside money, you will be in control and in charge of your business, which requires a lot of focus.

Focus as the North Star

I am a bootstrapper. I have initiative and insight and guts, but not much money. I will succeed because my efforts and my focus will defeat bigger and better-funded competitors. I am fearless. I keep my focus on growing the business—not on politics, career advancement, or other wasteful distractions.

This is what Seth Godin says in his “The Bootstrapper Bible.” A bootstrapper can’t lose focus. Money is scarce at the beginning and either she manages to build a profitable business early on, she risks failing.

Speed of execution

My secret weapon is knowing how to cut through bureaucracy. My size makes me faster and more nimble than any company could ever be.

Once again, Seth Godin makes a good point where he mentions that a bootstrapper needs to focus on being faster and more agile, and avoid bureaucracy or politics. Where the founder who took a substantial investment from venture capital might be in the position of having to show how she is putting that money in motion.

The bootstrapper doesn’t have anything to prove except that building a viable business model, for the employees and the customers.

Mastery and Passion

When you build a company, especially in a re-segmented market, you better be passionate and be willing to master that niche. Otherwise, it will be hard to gain a strong position where incumbents have already an established brand.

In short, you want to look at being the best in the world for that vertical, which requires a lot of mastery.

A little to lose but a lot to gain

As you bootstrap your way up. You’ll initially have very little to lose.

That’s because you don’t have an established business model. And where incumbents can’t tweak their business model, as they would risk killing their cash cow – think of the case of Google (now Alphabet) if it were to stop tracking users, it would lose its advertising business which makes up most of its revenues.

You can go all the way in. You can experiment with your business model and make money in unconventional ways.

Salesmanship

If you’re bootstrapping your way up, you need to understand you are the most important salesman of the company. Thus, you need to go in understanding your market, your customers, and why your solution makes sense to them.

You need to be able to communicate it. You need to talk to your community regularly and that how you enable to bootstrap.

In it for the long-term

A bootstrapper is in it for the long-term. As we’ve seen, bootstrapping requires mastering and passion. And those don’t go along with short-term thinking.

Bootstrapping is about survival

A lot of this manifesto is about survival. A true bootstrapper worries about survival all the time. Why? Because if you fail, itʼs back to company cubicles, to work you do for someone else until you can get enough scratched together to try again.

Once again, Seth Godin highlights a critical point in “The Bootstrapper Bible,” there is no alternative to the failure of your business. That is why you need to be paranoid about survival.

Start from a proven business model

To be a successful bootstrapper, you don’t have to reinvent the wheel. You can start from a proven business model and copy it. Copying a business model won’t get you far, so you’ll need to add your twist, or improve X times on that existing business model.

You can start by looking at how exiting companies organized their distribution, sales, and marketing, how they positioned themselves, to bootstrap your way up.

Differentiate from the incumbent

market-entry-strategies
An entry strategy is a way an organization can access a market based on its structure. The entry strategy will highly depend on the definition of potential customers in that market and whether those are ready to get value from your potential offering. It alls starts by developing your smallest viable market.

The fact that a company controls a market limits competition. However, usually, that same company won’t be able to satisfy the whole market. If you’re good at listening to those people who are not satisfied with the incumbent, you can build a business on top of that.

Thus, be careful at what opportunities an existing market hides. You might think that as a market is dominated by a large player, a monopolist, fewer chances you have.

However, you’ll find out this is far from reality. The longer a company has been a monopolist, the more it might have imposed unfavorable conditions to its end customers, which might grow unsatisfied over time.

What the bootstrapper has that the big corporations don’t?

As we have seen so far, the bootstrapper starts from an unfavorable position when it comes to money and human capital. However, the bootstrapper also has a few unfair advantages.

It is focused, it is fast in executing, it has nothing to lose, and it can grow its brand equity very quickly, due to an intimate relationship with its customers and the ability to charge higher prices if going for a niche. Coupled with the inability of the large corporation to cover that niche.

microniche
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.

Beware, a bootstrapper is not a freelancer, but an entrepreneur

A freelancer sells her talents. While she may have a few employees, basically sheʼs doing a job without a boss, not running a business. 

In “The Bootstrapper Bible,” Seth Godin highlights the critical difference between the bootstrapper, which is by nature an entrepreneur, and a freelancer.

In today’s world, that might be easily confused. But Seth Godin helps us understand the difference:

An entrepreneur is trying to build something bigger than herself. She takes calculated risks and focuses on growth. An entrepreneur is willing to receive little pay, work long hours, and take on great risk in exchange for the freedom to make something big, something that has real market value.

When to play venture capital game?

example-staged-rollout

Source: blog.leanstack.com

In my interview with Ash Maurya, we looked at when it made more to look for money from venture capitalists. And it was clear that the best time for that is scale.

As we’ve seen scale is not a prerogative of the bootstrapper, which is in the first place, building a business for the long haul.

However, if the bootstrapper decides that it makes sense to scale the business further, at that point, when product/market fit has been achieved, money and the competence of a venture capitalist might help.

It is worth mentioning that if you got to that stage, you’re in a desirable place to be. That’s because you managed to pass the hardest obstacle of an entrepreneur’s path (the product/market fit) and now you have the option to keep growing organically, or scale.

In that circumstance, you’ll be able to negotiate the best deal to secure capital and to keep control of your company.

In a few cases, even when product/market fit is achieved, if the competition has picked up quickly, the business might still be in jeopardy, as scale might become a necessary condition to survive.

In that scenario, either you plan for an exit, or you get ready to blitzscale!

Scale requires money, and network

After product/market fit, you proved your business model at the point where money, which before was secondary, it becomes critical.

That’s because scaling becomes a game of dominating a larger and larger share of a market. Let’s be clear, scaling up is in many cases a matter of choice. And as you scale, you might lose or change your initial vision.

Also, scale requires (especially in industries dominated by regulations) a strong network of people that can help pass involve large stakeholders.

Thus, in that scenario, it makes sense to reanalyze the market and see how it has changed. If competition still enables you to keep growing organically, then you have the option to keep bootstrapping your way up.

If market conditions have changed, that is where you want to look at money as a way to defend your position, by scaling or niching down again!

How MailChimp bootstrapped to over $700 million in revenues

How did MailChimp grow from scratch to $700 million in revenues (as of 2019)? 

That would require a whole book. Yet, as a quick intro, MailChimp’s founders had a web design agency focusing on enterprise clients. And by the early 2000s, they had designed an email marketing service for small businesses. 

Therefore, initially, they used the money from the web design agency to fund MailChimp. And only in 2007, they would shut down the web design agency, to focus a hundred percent of their time on MailChimp.

It took them another couple of years to transition MailChimp from an email marketing tool to become what they call an all-in-one Marketing Platform, with a set of other functionalities.

In September 2009 MailChimp went freemium. Its user base went in one year to 450,000 users. Ever since MailChimp has grown into a successful company.

Later on, MailChimp would use freemium as a growth strategy. However, MailChimp didn’t start as a freemium. When they launched the company back in 2001, they didn’t even have a free trial.

freemium-business-model
The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting in customers help spread the brand.

They didn’t have a clue of what the freemium was.

They only started to consider the freemium when they realized that each paying customer was able to sustain at least nine unpaying customers.

As remarked by MailChimp:

We’d never consider freemium until our “1” was big enough. Enough to pay for 70+ employees, their health benefits, stash some cash for the future, etc.

They leveraged on the data they had to decide what sort of pricing made more sense to them.

As highlighted on drift.com by  co-founder and CEO of MailChimp, Ben Chestnut:

Ever since inception, I’ve been fascinated with the art and science of pricing. I’ve tinkered with pay-as-you-go and monthly plans for $9, $9.99, $25, $49, $99.99 and so on. We’ve changed our pricing models at least a half-dozen times throughout the years, and along the way we tracked profitability, changes in order volume, how many people downgraded when we reduced prices, how many refunds were given, etc. We’re sitting on tons of pricing data. When we launched our freemium plan in 2009, you betcha we used that data to see what would happen if we cannibalized our $15 plan. If we had started with freemium at ground zero, the story would’ve been different.

From there the company kept building loyal users base with its free plans and by having already a solid paying customer base, it could also afford to add features to its marketing platform and make its SaaS product sticky. 

In the meantime, the freemium offering enabled MailChimp to grow its user base quickly (the year after the launch MailChimp user base grew by 5x, it’s paying customers by 150% and its profits by 650%). 

Over the years MailChimp would focus on expanding the capabilities of MailChimp to have it become more and more a marketing platform.

As a quick recap: 

  • MailChimp founders used the resources from their web design agency to develop a scalable product. Email software for small businesses.
  • It took them a few years before the founders could shut down the web design agency and focus a hundred percent on MailChimp.
  • The company focused for almost a decade to build a sustainable customer base, able to potentially cover the cost of a forever free plan.
  • By 2009, MailChimp launched its forever free plan, and it quickly expanded its user base, paying customers and profits.
  • The next decade would be spent in developing more and more features to make MailChimp more of an all-in-one marketing platform, rather than just an email software company. 

Key takeaways

  • Bootstrapping is about building and growing a business by having customers as key investors in the business. In short, your business is so fine-tuned around customers that it can grow organically and with high margins, thus financed by them.
  • The bootstrapper is an entrepreneur at all effects. She/he doesn’t think as a freelancer but ad an entrepreneur able to build a scalable business. A bootstrapper cal starts as a solopreneur but if the business becomes scalable to bootstrapper will evolve the business model.
  • Bootstrapping often starts by identifying profitable niches, or microniches and add value from there. 

Suggested resource

the-bootstrapper-bible-seth-godin
The Bootstrapper Bible by Seth Godin is an ebook that explains how to bootstrap a business.

Business resources:

What does bootstrapping mean in business?

The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

Why do some entrepreneurs use bootstrapping?

Bootstrapping is a great way to grow a business organically as it gets financed by the customers. Indeed, bootstrapping is about fine-tuning a business based on its key customers. And as a business grows without outside funding and investments, founders can keep control over the equity, strategy, and vision of the organization.

What is the difference between debt and equity financing?

In debt financing, the company contracts a loan which needs to be repaid with interests. Creditors have the right to claim their credits. With equity financing, investors endow a company with capital. The company doesn’t have to repay the money received. However, equity holders own a piece of the company and earn when dividends are issued, or the equity gains value.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here