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Tips For Bootstrapping

03 Oct 2012

It’s now over a year since I’m bootstrapping my company. I wrote down a few tips which can help you to bootstrap a small internet based business.

picture: New York Public Library

#1. Start your business aside

When you start with an idea, there are usually two things you need to do to establish it as a business:

First, you need to reach Product/Market Fit. This is a point where you could find users who are willing to pay for your product, and they would be very disappointed if you shut the service down.

Second, you need to find a good customer acquisition channel that gives you a constant stream of new, paying users for an affordable price (Customer Lifetime Value > Cost of Acquisition).

And finding out those two things is expensive, both time and money wise.

If you want to increase your chances as bootstrapper: keep your day job (or your freelancing gig, or whatever steady income stream you have) while starting your business on the side.

In this time, you can try to reach product/market fit and find a viable customer acquisition channel.

Those things don’t need to be perfect, you just want to be sure that you build something people actually want, and that you know that doing more of marketing activity ‘x’ leads directly to more users and revenue.

This advice sounds like common sense, but there are just too many examples out there, online and offline, where people invested upfront a lot of money just to find out later on that a) nobody wants their product and b) they have actually no clue how to get in new users on a regular basis.

Don’t be one of them.

#2. Cut the recurring fix costs

I made the experience that saving religiously on small things, like agonizing yourself whether you should spend those $20 on a book or not, removes too much quality of life than it helps.

Instead, shift your saving focus on the recurring fix costs like the rent for your flat, or expenses for transportation (car maintenance, fuel, etc.).

I think that it’s absolutely possible to cut average living costs down by at least 30% when not 50%.

Move to a cheap flat, don’t have a car, don’t go on expensive holidays. Sure, it won’t be a glorious lifestyle, but it’s not forever…

#3. Track your private expenses

In the early period of your company, the revenue is not high enough to cover your living costs, so you need some savings from which you can support yourself.

To be sure that you have enough savings for that period, you need to know how high your personal spendig is.

I had no clue how much I leave on the table for everyday things like books, playing sports, eating out or going to the cinema. Was it $1000, $2000 or $3000?

So everytime I bought something, I made a note in a spreadsheet the same day. Over time, I had a pretty accurate picture how much money I actually needed.

This helped me in two things: first, I had a realistic number for my financial plan (see point #5).

And second, it was a good habit to stay aware and disciplined of my spending. Probably just the bare fact of writing it down helps a lot.

#4. Have cash for 18 months

Along the way, many things can go wrong: marketing channels are more expensive than expected, the product development takes more time than expected, and so on.

You need some buffers. Cash reserves for hard times. The interesting question is: how much money should you save ?

Chris Dixon wrote a post where he recommended to have 18 months of cash in the bank.

Although his post relates to VC funded businesses, the underlying reason is the same: it takes time to establish products and marketing channels, so have enough reserves.

From my own experience and what I read, have enough cash left to survive 18 months without revenues is a good rule of thumb.

#5. Write a Business Financial plan

You’ve probably heard of a business plans which usually includes chapters like: Executive Summary, Product, Team, Marketing, Business Model, Management/Organisation, Realisiation Schedule, Risks, Financial plan.

My advice: don’t write such a 20-40 page business plan.

Most of those chapters dont’t help you since your most important problems are validating product value and marketing channel, which is done best by collecting real customer feedback (and following principles like Customer Development and Lean Startup) and not writing a formal document.

But throwing away everything from the good old business plan is not wise either: the one thing that has real value is the financial plan (and fits usually on a simple spreadsheet).

Here’s an example on a monthly basis:

Here’s a version to edit

A complete financial plan usually consists of a Balance Sheet, an Income Sheet and a Cashflow Statement. But for a small internet based business, you can skip the first two and focus on the Cashflow only (like above).

Also you can limit the plan to maximum 2 years of forecast. If your business doesn’t work out, you won’t survive longer anyway, and if it does work out you want to adapt your forecasting since many things have probably changed.

As an example for the growth rates: the current year-to-year growth of my revenue is about 180% (ca. 9% monthly). I’ve searched for some other examples and found Amy Hoy and the folks from mite who report similar numbers. But there’s also an exemple of extreme growth from Peldi of Balsamiq Mockups with over 1000% (22-23% monthly) per year.

So, for a new small and bootstrapped internet business, I think that 100-200% revenue growth per year (ca. 7-10% monthly) is realistic. Though, a much higher growth rate is not impossible as Peldi shows.

Now, the goal of the financial plan is less to be exactly right with the projections for month ‘x’, but to calculate a few scenarios and see the dependencies. For example: given costs ‘x’ and growth rate ‘y’ and current revenues ‘z’, how many months does it takes to reach profitability? Or how long can you survice if the growth rate is only half of what you expect?

Play around with a few scenarios, this gives you a good feeling about the numbers of your business.

But in any case, I would stick to conservative assumptions and growth rates. The only reliable prediction is that it takes always more time and costs than you expect.

#6. There are only two kind of expenses

When it comes to spending money, think of it as there are only two variations: expenses that will help you to save money, and expenses that help you to bring in more money.

For example, I still have my crappy 10 year old desk. When I move out one of the drawer too strong, one part of it drops off. But who cares. I won’t generate more revenue with a new desk.

In contract, I wouldn’t hesitate in investing programming ressources in a new admin feature on my site that will let me do a certain task much faster, or spending money for an A/B testing or analytics tool to increase conversions.

#7. Focus on a premium niche

In most markets, you can carve out a niche: a group of customers that is big enough to make a living of it, but not big enough to arouse interest from the bigger players.

The focus on a niche and on premium customers is kind of a strategic choice, e.g. to avoid heavy competition and to be more profitable (earn more money while having the same amount of work or even less).

For example, my business connects local handymens with employers. The handymens can be divided into two groups: professionals with a commercial register entry and privat persons who want to earn a side income.

In this example, the professionals are my premium niche.

A few months ago I made the decision to focus on the professionals only and to drop the segment of privat persons completely.

The reason: after a thorough analysis of my data, I found out that the privat persons caused at least 2-3 times more negative ratings than the professionals. This means more support requests, more work and more bad word-to-mouth for my business. Second, the payment defaults for this group were significantly higher, which means less profit. And last but not least, professionals didn’t like it to compete with privat persons, so their retention rate suffered too.

Merely focusing on the professionals segment solved many problems at one time for me and helped me to increase profitability.

Sure, I miss now some opportunities. The professionals are not so interested in small volume jobs in the $50 range. But the bigger risk is to fall between the chair and the bench while trying to please everybody.

This applies also to pricing: be careful with pricing, don’t set it too low. You may attract penny pinchers and saveaholics who can give you a hard time. Here’s a good podcast about this topic from Patrick McKenzie and Amy Hoy.

#8. Sell your by products

I have this point from the 37signals blog, but you can find this concept also on other blogs, here’s a great analogy with buffalos.

The advice is pretty simple: take stuff that was never intended to be sold, repackage it a bit, and then sell it.

Let’s say you have a newsletter that you’re sending out to your customers, mainly to promote your business. Why not selling some advertising space on your newsletter to other companies that are a good fit for your subscribers?

Or in my case: I have an online marketplace and the revenue model is based on transaction fees from awarded jobs.

But I also offer for a monthly fee premium listings for service providers, so that they can not only quote on listed jobs, but also present themself to employers directly on the site.

I never intended to sell directory listings, and it’s not my main focus. But the service providers are registred on my site anyway and there’s a demand from the market. So it was kind of obvious that this would become my by-product.

Any more tips?

I’ve listed only eight points, but I’m sure there are more. If you have any more tips for bootstrapping, drop a comment!

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