Bootstrapping your startup in a flat world

 "Anything that can be digitized can be outsourced to either the smartest or the cheapest producer, or both" 

 

As Thomas Friedman points out in The World Is Flat there are powerful forces at work ‘flattening’ the world – i.e. connecting and empowering individuals and companies globally, and enabling even the smallest to serve a global audience.

For entrepreneurs, this has many intriguing implications, one of which is that bootstrapping your startup has never been easier. And with the global credit crunch going on, it is worth considering the full range of financing options.

"Pulling yourself up by your bootstraps"

Bootstrapping involves the founders contributing a modest amount of capital and then using the cash flow from customers to fund the business.  It is an alternative to the more heavily publicised path of raising money from angel investors and venture capitalists.

 Successful bootstrapping requires that you:

  • Start with a narrow & well-defined focus
  • Keep your startup and ongoing costs low
  • Get cash flowing ASAP
  • Invest revenue back in the business to fund growth

Bootstrapping works best in industries where growth does not require much extra working capital (e.g. for physical stock, accounts receivable, etc). In other words, the nature of your business model affects your ability to bootstrap.

Making use of a flat world 

Eliminate activity that is not essential, focus your effort on high value work that you can do best, and outsource the rest to others whose expertise, systems or circumstances enable them to do it better, cheaper and faster than you. And remember to look globally for supplier options.

For example, I am currently working with an internet-based startup that is taking the bootstrap option. In the short term they have had to say "No" (or at least "Not Now") to various opportunities in order to focus on their initial niche. And they have eliminated the need for external setup funding by using the flat-world phenomenon to eliminate 60 to 90% of key startup costs:

  1. Incorporating a company:   Typical cost is $1500 to $3000 for a stock-standard company incorporation. Most lawyers and accountants have templates they recycle and get junior staff to do the customisation. But services like Cleardocs have set up highly automated systems to get the cost down to a bit over $500 while keeping quality as high if not higher than traditional alternatives.  Saving = 67% to 83%
  2. Brand development:  Traditional brand agencies quote between $3,000 to $10,000 for developing a logo and stationery kit for a start-up business venture.  But $700 on Elance  got us 8 concepts (2 concepts each from 4 designers) plus considerable time with our preferred designer to refine and finalise the design. Saving = 77% to 93%
  3. Website development:  In-house development requires considerable attention to people and process issues, and might cost $100,000 to $200,000 for this project. Outsourcing to a custom development house could cost $250,000+ while developers that customise around standard modules quoted $25,000 to $50,000. But if you’ve got a well-defined project, it’s hard to go past low-cost, highly-skilled people in India, Russia, and elsewhere (which you can find on sites like Elance ) to deliver a major, customised website for $10,000 to $20,000.  Saving = 60% to 92%

The Net Result 

Bootstrapping in a flat world is about using connectivity and global reach to find ways to minimise the upfront costs, get your product to market quickly and keep you focused on the key activities that you do best. Once the cash starts flowing, you can then invest that revenue stream back into growing the business.

Note that bootstrapping doesn’t exclude seeking outside funding later on. You should be able to get a decent valuation on the back of an existing business with real customers, compared to just a business plan with a bunch of assumptions.

Further Reading 

Whether bootstrapping is right for your venture is something only you (and your professional advisors) can decide, but I hope the above at least gets you thinking. If you need further encouragement, bootstrapping success stories include eBay, Microsoft, Oracle, SAP, and Remember the Milk.

For other comments on bootstrapping, check out the articles here, here , here and here
 

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