Chase customers not investors: bootstrapping tips for startup founders

The rhetoric around tech startups hides an extraordinarily rapid switch in the balance of power between startup founders and investors. The term tech startup entrepreneur has been glamorised to the status of celebrity, creating an inappropriate yearning for a whole generation of founders enthralled by the prospect of raising a round and being transformed into a unicorn.

Einstein said compound interest is the eighth wonder of the world. Morality pitted against the compound leverage of capital is often outmatched, but there are people building startups outside the sphere of the venture capital dominion that have little systemic need to tell their story.

Recognise your thirst for venture capital is vanity capital. Entrepreneurship is an emotion of ambition. Venture capital appeals to another emotion – greed. Stop chasing investors and start chasing customers. Avoid the time, energy and emotion wasted attracting investors, managing their expectations, and getting through to the next round of funding. But at present, the mindset has shifted. Investors have won. Why have they won? Well, the gung-ho sentiment of raise money, raise money has killed off the do-it-for-yourself bootstrapping ambition.

The origin of bootstrapping comes from pulling oneself up by one’s bootstraps, a reference to C19th high-top boots that were pulled on by tugging at ankle straps. It generally means doing something on your own, without outside help, and in many cases, the hard way. Bootstrapping is the minimalistic startup culture approach, characterised by extreme sparseness and simplicity, a process whereby an entrepreneur starts a self-sustaining business, markets it, and grows by using limited resources or money.

There are entrepreneurs wily enough to stay outside of the system and play the game on their own terms, but for the most part, the collapse of the balance of power is not a good thing as it is stifling the real driver of entrepreneurship: entrepreneurs should chase customers, not investors; they should chase revenue not rounds.

Bootstrapping has been discarded for other people’s money, which changes everything.  In accepting venture funding as the de facto model for growth, entrepreneurs have handed control to investors with a narrative that encourages a short-term focus and rush to exit, and not a long-term building and learning journey. When you take money from investors their business model becomes yours.

But with the metric of success (and ego) being raise a round, founders end up on a different path that effectively makes them mercenaries for hire. They are prospecting for gold in someone else’s Klondike, rather than being self-driven mavericks shooting for their own moon. It’s a path that promises jackpots, but actually creates an agenda simply linked to financial return for someone else, not innovation, creativity or product-market fit. Startup funding, when applied with wisdom, can work for founders. Applied naively, it is a back-seat driving mechanism which investors micromanage, steering and controlling velocity by their authority via board seats and shareholder agreements.

It’s hard to carry on a conversation with most startup founders these days without hearing the word round. Their eyeballs fixate on money. Once you take the money, it’s a debt owed, with all the nagging reciprocity that comes with it. Don’t just accept the definition of success is the next round because everyone else is cheering that. The chorus of the masses is loud, and that’s seductively alluring. But let’s take a step back.

The real question is why did you launch your startup?  I don’t believe most people are solely motivated by fawning over the latest hockey stick phenomenon. Bedazzled maybe, but I invite you to dig deeper and explore your original motivation. Curiously, the hand-wringing camp usually wins.  Lest you feel inclined to be snarky about this plot, consider this: What most entrepreneurs gamble for is not the space trip and big fortune, but merely a business to be proud of, a good living and sustainability.

There are very few winners in the chase the round approach. It involves a massive amount of self-delusion. This narrative works as patronising sarcasm precisely because the standardised term sheet marks the promise of Emperor’s New Gold. To be sure, there is no single right or wrong answer for everyone, but don’t take money just because it’s there. But beyond that, cash is addictive. If you let investor funding become the driver for your business early on, it’s very difficult to wean yourself off of it as you grow.

So, why not take all of that energy and hustle chasing investors and turn it inward to build yourself a better business, albeit on a slower growth curve? Instead of selling to investors, sell to customers. Think about ways to increase revenue – build your brand, scale the sales team, upsell on added value, get new customers in the door. Make your startup its own financial backer.

 Bootstrapping affords far more opportunities: 

  • You’ll stay passionate about your startup and discover key talents you didn’t know you had. Don’t be quick to hire when you can do the work yourself. Putting in more sweat instead of hiring others, especially in the early days, will help keep your costs down.
  • Later, bootstrapping is likely to attract the right talent. You’ll bring in people who can actually push you forward because you’ll have better insight into who you need.
  • You retain control today, and in the future. You don’t have to sell equity for investor funding. It also ensures all of your cash generated from profit remains in your business and your own pocket, not investors.
  • Most importantly, without investor financing, you’ll grow a better company that is about your vision, that’s less dependent on pleasing investors, and thus more likely to develop the type of product or service your customers need.

In a survey conducted by Quartz Media on why startups fail, it was evident that funded startups were more likely to run out of money than those bootstrapping, because they were more judicious and focused on making better decisions. There is clear evidence that external funding distracts founders.

Every startup has a limited runway and investment can help extend that but going too early makes external funding a temporary fix. Instead, give sufficient time to test and perfect your business model, allowing you to focus 100% on your customers. If you can satisfy them, and they pay for it, you’re in business. If they don’t, you’re not. It cuts to the chase a lot faster. When you are forced to rely on your customers it puts you in direct contact with them and you quickly find out exactly what they want and don’t want. It’s amazing how quickly you learn what is necessary and what’s not when your funds are limited. 

Let’s stop all this craziness. You need validation from customers willing to pay for your solution. Your key to economic independence isn’t reliance on outside investors, it’s the creation of a customer base that believes in you and your venture. Hewlett-Packard started with just $538 and a garage. That was a lot of money in 1936 when the company was founded, but that equates to about $7,500 in today’s currency.

Bootstrapping a business is a lesson in hard work and flexibility. The pros and cons are obvious, but here are my ten tips to make bootstrapping a viable startup strategy:

1. Find a co-founder Having two perspectives heading your startup can be critical. When bootstrapping, the vast majority of the work is done internally, so cofounders need to complement each other’s skill sets. If you’re good at different things, you have a better shot at being able to do everything between the two of you, keeping expenses low.

2. Develop a business model that generates early cash The most successful bootstrapped companies have a business model that generates cash as quickly as possible. Sell services before product. Without any cash inflow, you’ll burn your reserves before gaining any real traction.

3. Watch cash like a hawk Spending out of a personal bank account is sloppy and risky–instead, fund a bank account specifically for the business. to track and learn what adds cash and what diminishes cash from the business. Avoid debt. Watch your cash like a hawk, daily.

4. Don’t outsource jobs you can do yourself When bootstrapping, hiring out for a job you could do yourself is an avoidable expense and a wasted learning experience. Avoid hiring a team right out of the gate, bring on one hire at a time. Start part-time and expand their role as they prove their value. Operate with a lean but strong team—make every employee count.

5. Learn and develop more skills If you don’t know how to do something, learn it. Don’t be afraid of learning new things; you’ll be surprised by your abilities. The ability to run as many startup operations as possible at first can help you maximise those limited funds.

6. Leverage free advice Join networking sites or forums and connect with those who have experience and knowledge you need. Become a serial networker and connector, find a mentor to give insight and guidance.

7. Swap and barter You may not realise it, but you have knowledge, skills, resources, and contacts that other entrepreneurs may want and vice versa. Find out what other founders need and see what you might provide them in exchange for something you are lacking.

 8. Be thrifty Being fancy doesn’t get the job done. Be smart with your money. Pick functional that delivers results. Start with the free versions of G-Suite and Dropbox. Saving on little things goes a long way. You must be both frugal yet willing to spend – the trick is knowing where. Prioritise expenses that have a direct impact on sales. Pay attention to what’s working and cut out what’s not.

9. Invest in your web site Securing your website domain and designing the site are major exceptions to the cost over quality rule. Regarding your domain, don’t think you can buy it later once you have more traction. Buy the domain outright from the beginning and start building brand equity around it from day one.

10. Be discerning when chasing early revenue Your goal is to get as much traction as possible. While you chase revenue, you will randomly encounter opportunities that could deliver a significant bump in growth – but at the expense of modifying your operational model or product offering.

Evaluate these opportunities before jumping on them: seize them if they’re aligned with your long-term goals and decline if they are a distraction from achieving further growth. At an early stage, what might appear to be a quick-win revenue bonanza may distract you from building a scalable, repeatable business model.

To succeed as a bootstrapped startup, you have to persevere for the answers you need. Ultimately, bootstrapping is making an investment in yourself, by yourself, for yourself. In a startup, hope is the fuel of progress. Focus your entrepreneurial endeavours based on your passion, ideas and ideals, not other people’s money.

Ditch the hustle mentality. Grow at a speed that works for you and your own circumstances. Don’t obsess over competitors landing investment, instead lay the groundwork for growth that is manageable and sustainable to develop and refine your own vision for the business. Be eager to learn as you go, and DIY everything you can.

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