Tuesday, March 23, 2010

Boostrapping a Lean Startup

This article originally appeared on Ash Maurya's blog: Practice Trumps Theory

While not the same thing, Bootstrapping and Lean Startups are quite complementary. Both cover techniques for building low-burn startups by eliminating waste through the maximization of existing resources first before expending effort on the acquisition of new or external resources. While bootstrapping provides a strategic roadmap for achieving sustainability through customer funding (i.e. charging customers), lean startups provide a more tactical approach to achieving those goals through validated learning.

But before going any further, I'd like to dispel some common misconceptions about both models:

Myth: Lean Startups are cheap startups


Steve Blank wrote a similarly titled post to address this mis-definition. Yet, I still hear lots of people wrongly associate the word "lean" with "cheap". This characterization isn't entirely misguided but it only captures a sliver of what being lean is all about. Eric Ries co-opted the term "Lean" from "Lean Thinking" which comes from manufacturing.

Being lean is not about being cheap but being efficient with resources..

Money is just one of those resources and there is a time to conserve spending (before product/market fit) and a time to spend (after product/market fit).

Myth: Bootstrapped startups never raise money


Most bootstrapped startups start with some form of initial self-funding (sweat equity, credit cards, savings, etc.) and work their way towards sustainability through customer acquired funding. However, given the type and stage of the business, even bootstrapped companies can and often do choose to raise additional capital if that's what's needed for growth.

Right Action, Right Time


I've bootstrapped my company for the last 7 years and learnt a lot about bootstrapping from Bijoy Goswami, founder of Bootstrap Austin. Bijoy doesn't limit the definition of bootstrapping to the more commonly held one about building a company without external funding but rather views bootstrapping as a philosophy summarized as "Right Action, Right Time".

This mantra applies just as well to lean startups as it does to bootstrapping:

At every stage of the startup, there are a set of actions that are "right" for the startup, in that they maximize return on time, money, and effort.
A lean/bootstrapped entrepreneur ignores all else.


While bootstrapping and lean startup techniques are not just limited to funding, funding is one of the first problems entrepreneurs tackle. A lot of (especially first-time) entrepreneurs feel that step 1 is writing a business plan and getting funded. However, during the early stages of a startup, all you have is a vision and a set of untested guesses. Selling this to investors without any level of validation is a form of waste.


Waste is any human activity which absorbs resources but creates no value.


Why Premature Fundraising is Waste



Getting funded is not validation


Seed stage investors are just as bad at guessing what products will succeed as you are. Without any product validation to rely on, they hedge their bets against your team's past track record and storytelling ability. So while getting funded at this stage is a testament to your team building and pitching skills, it isn't product validation.

Without validation you have no leverage


More importantly, without validation you don't have product/market credibility which typically comes at a price - reflected in lower valuations and investor-favored term sheets.

Investors measure progress differently


While validated learning is the measure of progress in a lean startup, most investors measure progress through growth. Reconciling the two during the early stages of a startup (when the hockey stick is largely flat) can be highly challenging and distracting.

Getting funded always takes longer than you think


Time is more valuable than money. Would you rather spend 6 months pitching investors so you can refine a story based on an untested product, or spend time pitching customers so you can tell a credible story based on a tested product?

Too much money can actually hurt you


Money is an accelerant, not a silver bullet. It lets you do more of what you're currently doing but not necessarily better. For instance, if you're building an MVP, more money might tempt you to hire more people and wait to build more features both which can actually hurt you and definitely slow you down.

Constraints drive innovation but more importantly force action.

With less money, you have to build less, get it out faster, and learn faster.

Startups that succeed are those that manage to iterate enough times before running out of resources. Time between these iterations is fundamental.
- Eric Ries


What about all the advice and connections?


Raising funding is not the only way to get good advice. You can and should start building a diverse board of advisors early - made up of customer, technical and business advisors. Many are happy just to be asked, others might require a little equity to formalize a relationship.

It is cheaper than ever to startup


The good news is that it is easier than ever to start a company. You don't need a lot of capital to start defining, building, and even iterating a minimum viable product towards product market fit.

When is the right time to raise funding?


It's funny to note how the 37signals folks went from "Outside money being Plan B to Plan Z" between their last 2 books. Once you're on the other side, it's easy to make such a declaration but there are certainly better times than others to consider external funding.

Both Lean Startups and Bootstrapping define 3 distinct stages of a startup.



While completing stage 1 is the minimum gating criteria for fund raising, stage 3 is the ideal time.

Stage 1: Customer Discovery/Ideation


The objective of this stage is to find a problem worth solving i.e. achieve Problem/Solution Fit. The most efficient way of doing this is formulating a set of hypotheses and then testing them through customer interviews and subsequently via landing pages. This stage usually takes weeks or a couple months to complete.

Being able to demonstrate problem/solution fit through customer discovery findings and landing page conversions is much more credible than an untested story. The question then becomes can you execute on a solution to this problem and get customers to pay you.

Stage 2: Customer Validation/Valley of Death


The objective of this stage is to build something people want and validate your business model i.e achieve Product/Market Fit. This is typically the hardest and most uncertain of the 3 stages as you are simultaneously iterating on product and searching for a repeatable and scalable business model. This stage can take months or years to navigate. Many startups end up running out of iterations here and either seek external funding or give-up.

Having built a minimum viable product and gone through a few iteration cycles certainly puts you in a much stronger position to demonstrate your ability to execute and maybe show some early traction albeit still mostly flat.

Stage 3: Customer Creation/Growth


After Product/Market Fit your objective is to SCALE. This is the only time when both you and investors are aligned on the same measure of progress - growth. Now is the best time to raise funding if you still need it. If you've been charging customers all along, you might find you don't need a lot of additional capital which ironically is the best time to raise it.

How do I survive till Product/Market Fit?



Keep your day job


The first stage, finding Problem/Solution fit, can really be done part-time with very little burn. It typically has a lot of waiting time built-in e.g. contacting customers, scheduling interviews, collecting metrics, etc. Until you find a problem worth solving, it really doesn't make sense to quit your day job.

Build an audience


Now is also the best time to start building an audience around your problem domain. Start a blog. Comment on other blogs. Get active with social media in other ways.

Build a Minimum Viable Product


The outcome of stage 1 is a handful of features. Build just those features, and nothing else. Again this can usually be done in your spare time but I'd highly recommend full disclosure with your employer before writing any code. You'd be surprised how supportive they can be. I took on a day job at travelocity shortly after I founded WiredReach and not only did they not have a problem with it but they actually supported me with a flexible working arrangement so I could get work done at different times of the day.

Conserve burn rate


The biggest burn in a software business is people. Hardware is cheap.
Rent don't buy. Don't scale till you have a scaling problem. Don't hire till it hurts.

Charge from day one


Testing pricing early and getting paid is the ultimate customer validation in a lean startup which aligns nicely with bootstrapping where cash flow is king. Make a goal of first covering your hardware/hosting costs, then your people costs.

Sell other related stuff along the way


It is very tempting to take on unrelated consulting to survive but it becomes very hard (if not outright impossible) to build a great product in parallel. Instead look for other related stuff you can sell along the way. License out a piece of your technology, write a book, give workshops, get paid to speak, etc.

Shortly after I started building my p2web framework, I was contacted by another entrepreneur who essentially funded the development of the platform in exchange for a custom application we built on that platform. Not only was this related work, it also helped uncover customer and technology validation.

Speed up learning


A fundamental principle from lean startups is speeding up build/measure/learn cycles and there are a whole lot of techniques at your disposal to do this like continuous deployment, qualitative and quantitative split testing, etc. The key here is keeping your feature set small and spending 80% on existing versus new features. Every addition has to be vetted with validated learning to make the cut. Otherwise kill the feature.

Boostrapping + Lean Startup = Low Burn Startup


Getting to product/market fit or out of the valley of death is the first thing that matters. Until then, bootstrap to buy yourself iterations and apply lean startup techniques to maximize learning from those iterations.

1 comment:

BUCK said...

Great Article.


This help integrate both the "bootstrap" and "lean" strategies and the training many have recieved from business schools ( the MBA ) with the business plan - venture capital approach. I love the last stage approach as scvaling, that to me is a key aspect of the testing / validation activity. If it won't scale it most likely can't be bootstraped & must be ventured.

BUCK