How and Why to Bootstrap (use your own funds) to run a Start Up

I read this article about a fellow rodinhood loosing 15 lacs eventually leading to shut down in a year and in my heart I was like wish I had met them before. Well with a hope that it helps other entrepreneurs I am sharing my thoughts about building a company using your own money. 

Quick Background (I know how to Survive) : 
I have built 2 companies from scratch and have learned the hard way how to survive. And at least 3 times in my career as entrepreneur I have reached a point of shutting down Tekno Point, I did shut down for the first time in 2003 but chose to restart in 2004 and since then faced 2 more occasions 2008 and 2012  reaching the point of shut down but managed to survive.  

CloudThat is the second company I co-founded and we are yet to hit any bumps as all the learnings from the first company has kept things smooth. 

Why Bootstrap? 
India needs lots of entrepreneurs. Entrepreneurship can change the fabric of the society and create a huge impact. While we see lots of funding stories giving an impression that funding is the key to build a company – there are enough stories that tell you otherwise.

For example Tiny Owl, Housing and many companies who got some crazy money, are yet to become a ‘success’ as a business. 
Access to money does not guarantee success. So lack of money should not stop you from chasing your idea which can solve a problem. 

Does your business idea qualify to Bootstrap? 
One of the key things to ask yourself before you choose to bootstrap is what kind of business idea are you chasing? 

Profit Vs Valuation
How soon is your business idea expected to generate profits? If you are chasing an idea where you are relying on Valuations, you should stop reading this post right now. I come from the belief that profits are critical and not everyone can afford to wait like Amazon or many of the “winners take it all” mindset companies that have access to crazy funds. 

I have not built a ‘Unicorn’ so cannot share anything about it 🙂  

Product Vs Services
Again I have no experience in building a product company. The challenges of building a product company can be very different. However I think principles of survival remain the same so hope it helps. 

I recommend you go through Alok’s PPT on Products vs Services in case you are confused what to do. 

Now that I am done with all the disclaimers, let me start with How to Bootstrap… 

6 Key concepts any entrepreneur should understand 

1. What is Managing Cash flow?
If there is one single reason why start-ups fail, then I would say it is lack of understanding of this concept of Cash flow. Before you spend a single penny towards your business idea, it is important you understand it. When I failed in 2003, in hindsight I realised one of the biggest reason was back then I did not understand what is Cash flow. 
When I google the meaning of cash flow it says – “the total amount of money being transferred into and out of a business, especially as affecting liquidity“.  The most useless definition there could be. 

I learnt what is cash flow the hard way and here is my definition:

From expenses point of view:
Cash flow is using money as a resource to get things done with minimum reduction of cash-in-hand.
Cash-in-hand = Ability to buy time and build resources for market to accept my idea.

For example, a lot of entrepreneurs buy office furniture or ACs when they start up. In 2004 when I started again I only had Rs 1 lac at disposal. Instead of buying the AC I got them on rent at Rs. 700/- per month. Similarly paying a little higher for a furnished office is far more logical then taking a vacant office and spending on furnishing, rent, etc. By doing that I have increased my cash in hand which in turn helps me to buy time for my idea to get accepted. 

From income point of view: 
Cash flow is timely flow of money to keep improving the threshold level of Cash-in-hand ensuring I stay in business and am able to keep my immediate financial commitments. 

For example, you get an order worth Rs. 10 lacs but if do not have enough money to sustain the expenses required to full-fill the order and payment terms is 30 or 60 days after you deliver – your cash flow situation just killed your business and not lack of orders. 

Look for Ways to enhance Cash-in-hand 
Be open to do ancillary things with your skill and resources which contribute in increasing the cash in hand. Do not change your core focus, this are things you have to do temporarily. 

For example my company was about Flash Training, but I signed up as re-seller on Rediff and sold domains and hosting space which helped me to enhance my cash-in-hand and buy time for Flash training offering to start getting accepted. While I did that, I did not identify myself with rediff reselling. To whomever I met I only spoke about Flash Platform.

2. Who is my customer?
Another important decision you need to make is to define who is your customer. Common fallacy is everyone needs my service. But if you try to sell to everyone you will run out of resources and again the company dies not because the business idea was bad.  So knowing very well who your potential customers are will conserve energy and resources. 

Parameters to define my target Customer 
Apart from basic things like demographics, income level, geography, the following 2 things should be considered : 

Sales Cycle 
Amount of time a customer takes to close a deal combined with payment terms. Define who is your customer based on this parameter. While you might think everyone needs the service, choose customer segments that have least amount of time for closing the deal.
For example, schools take crazy amount of time to decide and there are multiple layers of decision making, also they are spoilt for choices. Can your cash flow support the amount of time schools take to decide to give you the contract ?

This article from a fellow rodinhood illustrates challenges of selling to schools.  

Ignorance Level  
Different businesses use this either ways. If you have more money and huge market size only then you can aim at people with high ignorance level.  

If you are in a niche service look for customers who are very informed so you have to spend minimum effort to get them on board. Spending tons of money to create awareness amongst those who are at higher level of ignorance might not be a great use of your limited cash in hand. 

For example in the training business, you can have college students, working professionals and corporate training as possible customers. Lots of training businesses fail because of not matching the product offering with ignorance level. 

3. Understand difference between Business Model Vs Revenue Model 
I don’t think I can come up with anything simpler than Alok’s article .

In one line – Focus on creating a robust business model, revenue model will follow.  Only thing I would like to add is higher the predictable revenue the better it is for your business. 

4. Managing the demon called desire for growth
When Bootstrapping, in every growth stage you have to factor-in the possibility of things going wrong. While taking decisions during good times, keep in mind that things can go wrong. This will help you face the lag period. 

For example instead of moving to 1 large office we took 9 small offices  in the same building and that helped me to sustain the fiasco in 2008 where economy was gripped in recession. If I had one large office – shutting down would have perhaps been the only option. 

Another aspect related to hiring in growth phase I had covered  in this article dating vs getting married.

5. Positioning – 

What do you stand for in the mind of the customer?  You need clarity on reasons for which your customer would call you.  Premium Vs Cheap, Entry Level Vs High-End, Fast Vs on time.  General Vs Specialised 

Once a positioning is established it is very difficult to change the customers’ mind. For learning more, I recommend reading the famous book: Positioning: The battle of your mind. 

6. It is okay to quit, adapt, pivot yet continue your journey as Entrepreneur. 

I gave up my desire for retail training in Tekno Point. We only do corporate trainings now, but things have never been so good in terms of numbers. Keep adapting and learning to optimise your way of running the company. 

Do not mix failure of the company with your failure, in fact all the failures that come by will increase the probability of your success – do not hang up your boots as an entrepreneur.      

I am limiting this article to things related to early stage decisions. Rules of the game keep changing at each stage and the uncertainty it brings is what makes this journey of entrepreneurship both dreadful and exciting. 

Hope this article helped you. Please share your comments and any other input you would like to add to this article. 

– @modyhimanshu