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The Bootstrapping Startup Operating System
Why and how every product should bootstrap to at least problem/solution fit
Bootstrapping an idea is more relevant today than ever, but the rules have changed.
Going back just a decade, starting up was expensive. Acquiring software licenses to build a product, or office space to meet with your team, required capital investment.
Today, all these things are free.
As a result, many more products are chasing limited customers and resources. That is why investors today don’t fund product development but traction. But how do you find traction without funding to build your product?
In today’s issue, I’ll dispel some common myths about bootstrapping and then outline how every product should aim to bootstrap until at least a minimum validation milestone - problem/solution fit.
Top 3 Bootstrapping Myths
A lot of people dismiss bootstrapping their “big idea” for the following reasons:
Myth #1: Bootstrapping is only for small ideas.
Contrary to popular belief, some of the most valuable companies didn’t start with a funding-first approach. They were bootstrapped.
Apple had the stereotypical “two guys in a garage” start,
Jeff Bezos ran Amazon from the basement of his parent’s house, and
Meta (Facebook) started in a dorm room.
Reality #1: Bootstrapping can be applied to any idea.
Myth #2: Bootstrapped startups are cheap.
All products need some starting capital to get off the ground. Bootstrappers often start by investing their own money, so while this characterization isn’t entirely misguided, it only captures a sliver of what bootstrapping is all about.
Money, being a limited resource, needs to be spent well. However, time is even more valuable than money. A bootstrapper aims to minimize the time to switch from being self-funded to customer-funded. If this requires spending more money in the short term de-risking an idea, that’s money well spent.
Reality #2: Boostrapping isn’t about being cheap but efficient with resources.
Myth #3: Bootstrapped startups never raise money.
The list above should automatically dispel this myth, but let’s take it further.
Bootstrapping isn’t anti-funding. Many bootstrapped companies do go on to raise external capital, not for survival but for growth. In other words, pursuing external funding is a strategic decision but deferred to the right time. Until then, bootstrappers prioritize customer funding through sales over external funding.
Reality #3: Bootstrappers often can and do raise external funding but at the right time — when they have leverage.
Premature Fundraising Does More Harm Than Good
As starting capital has become more accessible than when many of the companies in the list above were getting created, many founders today begin with a default funding-first mindset. This often does more harm than good.
1. 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.
2. Everything gets ten times more expensive.
Funding is not charity but a very high-interest loan. You need to return this investment at a 10x rate of return. So that company cell phone that used to cost you $100/mo before funding now costs you $1,000/mo post-funding!
3. Founders have a lot more to lose than investors.
While investors put money in an idea, money is a leveraged asset. Savvy investors diversify their portfolios and protect their downside. On the other hand, founders invest with their most valuable asset: Time. You put all your eggs in one basket, and a typical idea consumes at least 2-3 years of your life. With a 1 in 10 success rate, you do the math.
4. Without traction, 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.
5. Getting funded always takes longer than you think.
Time is more valuable than money. Would you rather spend six 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?
6. Too much money too early can actually hurt you.
Aside from the risk of breaking your cap table, 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 of which slow you down.
When is the Ideal Time to Raise Funding?
In the early stages of a product, you need to focus on learning before growth. But investors only care about growth. Reconciling the two (when the hockey stick is largely flat) can be highly challenging and distracting.
This is why there are better times than others to pursue fundraising:
1. The Earliest Time: Problem/Solution Fit
As investors value traction above everything else, unless you have a proven prior track record, it would be prudent to aim for demonstrating early traction.
Contrary to popular belief, you don’t need to first build a product, and then attract customers to demonstrate traction.
Consider the following two scenarios as an angel investor or accelerator.
Which would you invest in:
A startup that launched its MVP three months ago with 3 paying customers and a few more in the pilot pipeline.
A startup with a growing waiting list of currently over 100 companies that have put down a deposit to get early access to their “to be launched in 2 months” product.
The second is a more compelling traction story than the first, and more indicative of problem/solution fit.
Problem/Solution fit is demonstrating repeatable demand for a product.
You don’t need a working product to demonstrate tangible demand when you follow a demo-sell-build or Mafia Offer campaign. Going from idea to enough paying customers in 3 months is possible across any product - hardware, software, or service.
2. The Best Time: Product/Market Fit
The best time to raise your big funding round is when you and your investors are aligned on growth. This is when you’re hovering around Product/Market fit, where the fog of early-stage uncertainty lifts.
At the point, you are better able to
measure accurate unit economics,
chart a believable 5-year growth forecast with a 10x story.
3. The Ideal Time: Could be Never
Before rushing into the fundraising bandwagon, it’s important to assess your underlying ambition and goals.
“Before making business plans, create a life plan.”
- Bo Burlingham
Be warned that this can be a deep why exercise but one that saves you much heartache later. This is why I strongly advocate designing your business model as the first step for all early-stage founders.
There’s a long list of happy bootstrapped companies that never needed to raise funding because it didn’t align with their goals. Jumping into the fundraising or accelerator bandwagon because everyone else is doing so is the worst reason.
The good news is that starting a company is easier and cheaper than ever, and there isn’t a one-size-fits-all.
How Do You Survive Stage 1 and Get to Early Traction?
I’ve bootstrapped all my products (Lean Canvas, Running Lean, USERcycle), and here’s how I did it.
1. Keep your day job.
Many successful ideas start as side-projects. The first stage, finding Problem/Solution fit, can 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, quitting your day job doesn’t make sense.
2. Build a minimum viable audience.
Now is also the best time to build an audience around your problem domain.
Start a blog/newsletter.
Post on LinkedIn.
Comment on other posts.
Speak at events.
Test and spread your unique point of view.
3. Sell your Mafia Offer before building your MVP.
Before delivering value to customers, your customers must want your MVP. You test this not by building your MVP but by testing your UVP (promise or offer). My favorite offer type is the Mafia Offer, which, as you can guess, is an offer your customers can’t refuse — not because you strong arm them, but because it’s too good to pass up.
The Mafia Offer is built through a combination of problem, solution, and jobs-to-be-done interviews designed to uncover what customers want versus what they say they want. The next step is assembling your learning into an offer your customers can’t refuse.
“It is not the customer’s job to know what they want.”
- Steve Jobs
If you can’t get customers to accept your mafia offer, why do you think your MVP would be any different?
4. Conserve burn rate.
The biggest burn at this stage is people or time.
Be ruthlessly efficient.
Rent, don’t buy.
Don’t scale till you have a scaling problem.
Don’t hire till it hurts.
Spend money to accelerate the right kind of learning.
5. Charge from day one.
Testing pricing early and getting paid is the ultimate customer validation, which aligns nicely with bootstrapping, where cash flow is king.
6. Sell other related stuff along the way.
It is very tempting to take on unrelated consulting to survive, but it becomes difficult (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 technology platform in my first company, another entrepreneur contacted me, who essentially needed what I was building for a different use. He funded the platform's development in exchange for a right-to-use license to our platform. Not only was this related work, but it also helped uncover customer and technology validation.
My next company started as a series of blog posts, which turned into a book, workshops, Lean Canvas, and the Lean Stack platform. Each product was a learning tool and a product that we sold along the way (and still sell).
The Airbnb founders sold branded cereal while testing their idea to generate awareness and much-needed cash.
Learning how to make money is an essential entrepreneurial survival skill they unfortunately still don’t teach at school.
7. Hold yourself externally accountable.
Getting hit by an idea is like falling in love. The first stage is what I often refer to as the honeymoon stage of the idea when it seems like anything is possible. This is also the stage where we easily lose track of time, and days quickly turn into weeks and months.
Chart a roadmap and build an external accountability system with other stakeholders to hold yourself regularly accountable.
Products are inherently risky, but prematurely going all in is even riskier.
Instill a bootstrapping mindset to get you to the first significant milestone: Problem/Solution fit. This is when you go from hoping you’ll create something people want, to knowing you will. Spend three months now to save you three years later.