How to bootstrap your start-up
During the ongoing Corona situation, we expect that the willingness to invest will decrease. Both Business Angels and VC's will most likely keep their money tight. Especially if you are an early-stage startup or if you were just looking to raise your next round this can be a stressful situation. In this episode, we want to give you an alternative: bootstrapping.
Our expert is founder and serial entrepreneur Christoph Behn who bootstrapped kartenmacherei to become Europe's leading e-commerce player for personalized stationery. Further, he has built the better ventures Group which invests in young and upcoming startups. Here are some insights, on how to bootstrap:
What is the current mood in the investment scene?
Christoph: “Obviously they all say it’s tough but I think we're in a situation where it's unclear how the future will look like if there is any recession coming or how deep the recession will be. Probably the right question is which sectors will profit and which will lose? It's pretty hard to see because there are so many influence factors on different sectors so that no one really can forecast this.”
Almost everyone is telling us that they just wait. They don't do the deals and wait for the situation to calm down until there's some clarity about the right price level.
The difference is: Business Angel doesn’t have the pressure to invest, they can wait it out, VC's often have to invest. Most will focus on reinvesting in their existing portfolio to make sure that they get through.”
Let’s assume I am a founder and it's tough to raise money. What can I do instead?
Christoph: “First, cut costs and reduce your burn rate. Second, I would propose to do bootstrapping. I've done bootstrapping for the last 10 years. There are a lot of pros and cons to bootstrapping but in the situation, I really recommend doing it.
Could you run us through your bootstrapping experience and what you’ve done and what worked and didn't work? How do I actually bootstrap?
Christoph: “Bootstrapping is not glamorous, you're not going to get into any article because of financing rounds. No one is talking about your VC's investment and clapping on your shoulder.
I think the most important thing if you bootstrap: You’re always short on money so just don't spend money. Not spending money means you don't build a huge software. Instead, try to prototype it, go lean. Most people will tell you now that you can’t prototype everything, but actually you can prototype a lot, even Google Glasses started as a prototype. Obviously you don't get like a 100% version, but you get close and you get customer feedback and I think that's the most important thing to get close to the customer.
The moment you add complexity it's getting more and more expensive and you need more people that are getting more and more expensive. You quickly start to lose track, so make sure you start lean and simple in the first place.
One story from when I started kartenmacherei: It was all about designing cards online. We provided templates and the customers put their personal details like names and pictures on the card. I worked in a consulting company and I had this idea of an online PowerPoint tool and ended up with 100+ features. But because I bootstrapped, I had a budget constraint and hired a freelance developer. I told him all the requirements, and he said: “Hey that’s cool, but you told me, you got like 10k, what you want cost probably 10 times as much.” So to make it happen I had to cut down the requirements significantly and prioritize. Obviously that wasn’t easy, it took a lot of effort to find out, which were the relevant features but in the end, we had a design tool that was super easy to use and this became part of our success DNA, to be very simple.
You started your company after five years in management consulting earning good money. What was that like when you bootstrapped?
Christoph: “I had to cut down on all the costs. We started buying food at discounters, didn’t go on vacation for 4 years and I didn’t buy trousers for 2 years. I suggest that you look into your personal P&L to figure out what you are actually spending, e.g. food delivery is super expensive. I gave a couple of lectures in front of students and I said it's the best time to after University because you are used to not spending a lot of money.”
Do you other practical advice on how to bootstrap?
Christoph: “Do as many things a possible on your own. Not only will you save a lot of money, but you also learn a lot. It’s harder if you are a single founder, but if you are a team make sure that you split up wisely and still do it on your own. I learned how to create the designs, bring them online, and did all the customer service. You understand how it works and later you know exactly what is time-consuming and should be automated. Also, if you hire someone, you know what you want them to do. In the long run, I would say that this really helped me to understand my business model a lot better.
Also, you have to be creative. A case that was astounding to me: There was legal software for lawyers and as far as I remembered it required building a database. You would have needed a lot of money to do it. So what the founder did is he pitched the solution potential customers, and he sold the product without having it. With that money, he then built the software. I think that's great because the majority of the companies out there who would build pick up millions of dollars in funding and then go out and build the solution.
I think that's the most important: don't give up. You’re going to have a lot of situations where it seems impossible to succeed, but if you want to be a successful entrepreneur you have to overcome these obstacles. So being resilient is very important. Also, you will probably need some money in the beginning. Try to get it from friends or from your family. The thing is, it is going to be hard - you will have to persuade people. I think that this is also a very important trait: As an entrepreneur, you have to be persuasive.
I think the core of bootstrapping is you don't get an external appraisal. No one is clapping on your shoulders and I think you have to make yourself free from that expectation. If you bootstrap you are on your own even if you are a founders team. I think you have to focus on your customers, their problem, and the potential solution.
I can’t emphasize enough that it can be a tough time and you feel kind of socially isolated. People around you get a raise in their salary and the people you studied with they will look at you and they're going to tell you it's not going to work out. So be strong, be resilient, and don't give a shit about what people tell you. You have to trust yourself.”