Back to the Basics: Bootstrapping, by Definition.

“Hi, I am Bob, and I am bootstrapping a startup.”
“Oh, great!. What do you do?”
“Well, we are building this service which does that in a different way”
“oh” (with a little disappointment) “So bob, how can I help?”
“I would like to run my business plan with you. Is that okay?”
“Sure, go ahead.”

Ten minutes later..

“So bob, how much do you require as the bare minimum to start operations”
“hmm.. about half a million”
“ah.. bob.. lets think bootstrapping, without any fancy hardware, expensive people, health or employee benefits, and no snazzy offices, furnitures or secretaries… how much do you need?”
“About half a million”

Ladies and gentlemen, that would not be bootstrapping.

The first mindset that you need to have when bootstrapping is possibly the same position that Bill Gates and Allen would have been in when they started Microsoft. Yep, Microsoft was actually bootstrapped and in a very good way. Its probably because of that process that the company continues to thrive – in one or more ways – through the ages (compared to companies such as Lotus, which kinda had an early start and also are below the radar as of now).

Quick fact: Microsoft was bootstrapped, whereas Lotus was Venture financed.

Well, do you think Bill and Allen were a little crazy to want to bootstrap when they could have approached the VCs that have always been around in the valley? Well, actually they did. They didnt go too far. Both Bill and Allen were college dropouts. They were targetting a market which wasnt proven yet, and everyone knew that there was going to be lot of ploughing before anyone can sit before the candlelight and eat the bread made from the grains of that field – if there was a field to plough in the first place (PCs themselves werent a popular concept back then).

The two man team didnt have money, nor could raise money, so they decided to grow organically till the point when they could establish the credibility, the track record and gain the upper hand to negotiate a fair deal. Thats the position that every startup should aim for.

I met a very enthusiastic aspiring entrepreneur yesterday, who quoted me about 200,000 USD as seed capital requirement, but doesnt have a team in place yet. When you start doing a breakup of that initial capital, most of it was going towards the licensing of content for a service they would be delivering.

One thing you learn while bootstrapping is that, you never hand out money like that. You always negotiate and make people believe and bet on you. If you are going to make an investor do that, might as well do that to some more others as well – atleast you will have people cheering for you.

Before getting back on track, I’ll leave a note: Never make an all cash deal when you are a startup. And never make the deal which makes an upfront payment of what you require. I do realize that it is subject to deals, but always make a small downpayment and base the rest dependent on your growth. You will have to do some hardselling here, but that is expected from you when you are building a startup and are going to be challenging someone to take the money in the ecosystem away, into your pockets.

Read this for a fact: Less than 5 – 10% of companies in the Fortune 500 Inc. have taken venture capital. Some chose not to go for it, the rest were actually rejected. Was it a bad choice on the part of the entrepreneur, or on the Investor’s camp is a topic I would not want to venture into, but one thing I can say for sure is that… stay away from easy money as long as possible. What you learning during your “bootstrapping” days, is what will enable you to survive in the days ahead. It will make the difference between a company that rises like a mushroom, and a company that is build to last. I absolutely believe in that.

Disclaimer: This is a post that has been made on my personal blog and is reposted here.