We outline the process of launching a bootstrapped startup, from creating an idea, to forming a team, to proving viability.
A Holistic Approach to Launching a Bootstrapped Startup
I talk a lot about an “entrepreneurial journey” when I talk with and consult for t first-time bootstrappers and startup founders. But looking through my explanations, I’ve come to realize that the “journey” metaphor is not as useful or accurate as I was hoping. Building a startup is more about constructing an ecosystem of relationships, an almost organic kind of entity, rather than following linear steps to “achievement” or “completion.” There is no finish line to cross. There is no universal startup guideline for entrepreneurs to follow. The course is different for every entrepreneur.
Instead of paving an arbitrary path for others to journey across, I want to provide entrepreneurs, both first time and repeat offenders, with the tools they need to survey and cut a path to where the can establish their startup.
Assembling What You Know
The first hurdle is assembling what you know into a workable solution. As you look for inspiration, you have to be careful about picking a problem that wouldn’t be easy for competitors to copy. If you’re looking at the evolution of one technology that’s already received lots of investment, it will be tough to outrace established firms on funds alone. You need to get off that primary track and look at where two or three technologies meet. New product properties and capabilities lie in those intersections.
One method is by listening to customers. And we see this in a couple of ways. Sometimes people coming from a business background can quickly intuit a solution based on a customer problem. They can see a need and add product capabilities to match. Other times, salespeople who directly interact with customers, hear where the product is failing and base an idea on a new service or “Version 2.0” of the existing product.
But again, be conscious of where you are looking because big companies can draw on seemingly limitless resources. They can access their team’s knowledge, their manufacturers’ knowledge, and their customers’ insights.
In the beginning, larger competitors might be happy to sit back because they don’t see the possibilities. Either they don’t believe that the market exists, or don’t believe that it would be big enough to merit their investment. They can’t afford to chase the “small” million-dollar opportunities. But unlike big companies, entrepreneurs are not bound to capital hurdle rates and can absorb the affordable loss of chasing after improbable markets and solutions. But entrepreneurs need to be on their guard that as soon as large competitors realize there’s a significant market, they might have some serious competition.
This means that entrepreneurs face a choice of contending with well-funded competitors or exploring a highly uncertain market. One way they can reduce uncertainty considerably is to rely on their direct knowledge of the market–which may not be widely available. Another is to leverage know-how about a new tool or technology that is not yet widely understood. Taking stock of what you know and identifying what is not widely appreciated–or even better, runs counter to conventional wisdom–will suggest where you may gain an edge over larger competitors. If you are competing against small and equally nimble and knowledgeable competitors, you will have to outperform them.
Pulling Your Team Together
Every startup team needs experts in development and in sales and service. The founders must appreciate both.
Let me use an estuary as a model. An estuary is a body of water or wetlands where freshwater lakes and rivers flow into a salty ocean. Depending on the time of year, that transitional area becomes either more salty or more fresh. For our purposes, the ocean is the production operation for the client you’re trying to serve. The freshwater river represents your R&D and innovation centers. And the estuary is how you link the two areas of your business.
A bootstrapping startup must balance attracting, closing, and servicing customers with ongoing product and service improvements. You need to continue increasing the value and differentiation of your offering while keeping the lights on selling the current product and servicing existing customers. In this estuary model, the level of innovation maps to the salinity of the estuary. The team members that live in the technology transfer area between development and support need to be comfortable working with people who operate at both ends of the process. They need to be able to convey the benefit of new features to customers and prospects, but they also need to explain to development what customers and prospects feel is missing or needs improvement. Normally this is where the founders spend most of their time, not wholly customer-facing and not wholly focused on development.
Consequently, employing real-time systems that submit shared planning and manage the sales pipeline and development roadmap in parallel is crucial. Having world-class experts is great, but versatility and cooperation are imperative.
We consult mainly engineers and scientists. And the first thing we tell them is that they’re going to have to learn how to sell. If you don’t know how to sell your idea, then you must be willing to learn or to add a cofounder who can.
At a minimum, you’re going to need two types of people: an Inside person, who can keep operations moving forward in terms of development, and an Outside person, who’s willing to go out and talk to people. And both have to communicate and work together effectively. That is the bare minimum. If you are an Inside person, either adopt and embody an Outside mindset or find someone else to join the venture who can. And as you build your team, remember that not everyone is going to be a full-time member. A small startup doesn’t need a full-time webmaster or attorney. In the age of outsourced servers and virtual meetings, you don’t even need a full-time office building.
Finding the right people, however, is essential and requires a clear understanding of the skills, experience, and values they will need to contribute to the team.
It’s rare that strangers can immediately form a viable team. By definition, a bad hire was a good interviewer. An interview cannot duplicate the stress of working to meet a deadline in a small team. To manage these challenges, we recommend that you pay people to work with you on a small initial joint project and get acquainted in a realistic environment. The end of the project acts as a natural and graceful exit point, for you and for them, enabling you to maintain goodwill in the shared communities you both operate in. Too often, founders or early-stage teams do the equivalent of bringing an engagement ring to the coffee date. It’s important to allow everyone to understand what they are signing up for and allow a painless exit for all parties if things don’t work out.
Another point to keep in mind is ensuring that your fellow team members share your sense of mission. Entrepreneurship has been romanticized into Silicon Valley’s version of the Wild West. It reeks of adventure and reward. But in actuality, it’s a harsh, unforgiving landscape. It takes a certain amount of insanity to leave civilization for the lawless wilderness, and not many people are crazy enough. If you can hold a regular job, you probably should. It’s important that you and your team are not working on an idea because “startups are cool,” but because you all believe in the mission.
There’s a quote by playwright George Bernard Shaw that reads, “The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”
I have taken an entrepreneurial to life since I drive. I have spent time in larger firms for as long as I could take it. But I realized I was better able to deal with entrepreneurs’ psychological problems than the political challenges inherent in the enterprise. So I want to assure you that Shaw is correct: you need the crazy, unreasonable people to drive innovation. However, your team of “unreasonable” people still need to be able to compromise, disagree but support, and move forward.
To recap: A good team consists of Outside people, Inside people, mavericks, developers, go-betweens, previous coworkers, industry experts, cowboys, and at least one very lucky person.
Talking to Prospects
You’ve assembled a team that can work together. You’ve developed a list of ideas and opportunities to explore. The next step is to start making offers against one or more of those opportunities and begin the learning process. Ideally, you’ve been talking to potential prospects from day one.
Keep in mind that a strong, negative reaction is better than a lukewarm. If you talk to someone about this particular problem and their response is, “that’s nice,” or “it’s not really a problem for me,” then you’re not gathering evidence that will lead to useful insights. You want a stronger reaction, positive or negative. If people who fit your target customer definition aren’t interested in discussing the problem, or giving feedback, or even criticizing your idea, then it’s back to the drawing board.
Your core objective in talking to prospects is not gaining their approval, it’s clarifying the problem you’re trying to solve. Revisit where you developed your original belief that a need existed and people in similar environments. Determine what alternatives you are obsoleting: what will your prospects stop doing if they pay for your offering. Write about the problem from a prospect’s perspective and see if you get readers. Are prospects in enough pain to take a chance on a startup offering an incomplete or partial solution (your current offering is certainly incomplete compared to where you will be in a year). Desperation is a good indication that there’s a real need for your idea.
If I had a horrible leaky pipe, for example, that was preventing me from showering or even flushing my toilet, then I would be pretty desperate for a solution. In desperation, and because I’m not a plumber with any water pipe expertise whatsoever, I might settle for wrapping the damaged pipe in duct tape so I can at least shower. It’ll probably only hold for a couple days but at least it’s something. The point is, people that are in pain accept partial solutions because they simply want the situation to improve. Tape would improve things a little bit, but an easily operable tool that permanently seals the crack would be much better. It’s just not available to me.
Entrepreneurs can get caught in a “perfection cycle” mindset, where prospects claim that they need the product to be perfect and meet all their needs before taking action. But what are their alternatives? If a prospect is willing to live with an alternative until yours is perfect, they are not a real prospect. Their attitude does not automatically mean your product idea is not viable.
There’s a balancing act happening here. Sometimes your solution is completely inadequate, but sometimes it could be that you don’t have enough of your product or service available to convince your audience. And deciphering between the two is no easy task.
When to Stop Talking to Prospects
As a rule of thumb, talk to 20-30 people. Albeit, if the 30 people you talked to can’t relate to the problem, or are not interested in your solution, that doesn’t necessarily mean you have a bad idea. If nobody’s excited, yes, you may not be working on a real problem, but there might also be some selection bias inadvertently excluding the real prospects.
A couple of years ago, we were working with a client who wanted to explore the demand for a chip design tool. They were looking to solve an issue referred to as Clock Domain Crossing, where you have multiple clock domains on a single chip. The founders had worked at a company where they had managed to solve that problem, and were now looking to offer the solution to other companies. We talked to at least 20 chip design engineers. Unfortunately none of them could relate to the problem.
We decided to persevere because we knew the team had come from an environment where this was definitely a real issue. We ended up at a specialty conference for chip designers. This time, when we asked if people were facing clock domain crossing issues, about a dozen people raised their hands. We had found our prospects.
Your customer research and customer discovery are never really finished. You can talk to a hundred people, and have several of them buy, before you find your true customer base. You may shift to another problem after talking to 20 prospects. Whether you pivot or persevere, you will need to continually check the viability of your service or product and grow your understanding of its market value. The only way that you prove desirability is by getting paying customers. Too many startups fail because they assume that a promise to pay for a service in the future is the same as customers actually buying. You can’t rely on surveys; you have to make a real offer and get paid (over and over again).
Learning From Failure
As loathe as we may be to admit it, failure is inevitable. Startup founders need to be willing to keep pushing forward despite lots of setbacks.
Dr. Charles Townes developed the concept of the maser and then the laser, winning the Nobel Prize in 1964. He continued to make fundamental innovations in various branches of astrophysics for another two decades. He described two kinds of feedback that he encountered when exploring concepts for new instruments. Some people would say, “That’ll never work.” He learned to ignore this answer. Other people would say, “That’s very interesting, but previous inventors were never able to get past this problem or this constraint.” Townes paid close attention to specific feedback on possible defects in his approach. He ignored the generic cries of futility but incorporated any informed skepticism into improving his approach. So should we all.
If you watch an infant learning to walk, you will see that they fall constantly. And after every stumble, they get up and try it again. As adults, we tend to stop after the first tumble or two. I don’t mean to suggest that entrepreneurs embrace failure and leap towards misguided ventures. Failure sucks. But as a bootstrapper, you have to be willing to experiment with lots of different ideas and methods, especially if you’re developing something in a relatively new field. The secret to the infant’s success is that they weigh very little and don’t fall very far at all. You need to adopt this same approach, crafting safe-to-fail experiments, and only risking losses you can afford in your market exploration efforts.
The experienced entrepreneur knows how to harness failures productively, and prefers making new mistakes to repeating old ones. They also learn from others’ mistakes, knowing that they can learn as much in the library or in conversation with other experts as they can in their own lab. This allows them to explore ideas that have failed previously and solve them by bringing new insights or new technologies to bear.
And No, It Never Gets Easy.
The problem is, as soon as you start to be successful, people take notice. They look for ways to do the same thing cheaper, or faster, or better in a different way. Take the TomTom GPS, for example. They had this great piece of hardware for locating stuff, and it was super successful. They never anticipated that Apple would add the same capability to iPhones and take away a lot of their business. TomTom had all the expertise and manufacturing capabilities, and then Apple comes out of left field and approaches the same problem in a completely different way.
Sometimes the person who’s first doesn’t win. Sometimes seventh place wins. Sometimes cheaper wins, sometimes better wins, sometimes different wins. There is no real equilibrium point where you’ve achieved success, and life is easy. You’re continually building this knowledge base, and cultivating this ecosystem of relationships with partners and customers. That’s why it’s so crucial to keep re-examining existing assets, reconnecting with people, and reviewing your product’s feasibility, desirability, and profitability.
SKMurphy Can Help
It’s essential to understand all three types of business assets you will need to succeed: financial, intellectual, and social. Contact us for an office hours session to help you evaluate current and potential business assets.
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Working Capital Series
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- Building, Borrowing, and Keeping Trust
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- How to Leverage Current Business Assets For Growth
- A Holistic Approach to Launching a Bootstrapped Startup
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