Funding or bootstrapping

By Jarrod Drysdale

The too-simplistic paths to startup success.

After my 15 minutes in the spotlight, I was fortunate enough to speak with a handful of experienced and successful founders. I’ve condensed what I learned down to a few important points I haven’t seen mentioned elsewhere. This knowledge is nothing new for experienced entrepreneurs, but those of us just getting started don’t see this kind of advice often enough.

One important note: the definition of success is relative. For some, it means breaking even on monthly revenue. For others, it means being the next Facebook. I’m not going to proselytize about this here, so, as you read, feel free to insert your own definition for success.

It’s business time.

Most tech startup founders don’t know the first thing about business. I certainly don’t. This is the biggest reason our startups fail. Not because we chose the wrong business model, market, or executed poorly. Failure comes from not understanding the relationship with customers and the principles that guide every kind of business.

From reading tech blogs and listening to gurus, you’d gather there are only two strategies for success: charge money or pursue an acquisition. People with business degrees (or just more experience) know better. You can make money many other ways, such as from partnerships, charging other companies for access to your users, and transaction fees. Even a combination works. (Also, advertising and IPOs, but these have become more challenging in recent years.) The only limit to the possibilities is your creativity.

No matter how inventive or brilliant your strategy, more important is learning to gauge the likelihood of success for that strategy given market context. Not every strategy will work in every market. For example, consumers leap at the chance for special deals, which are in essence nothing more than ads. If you really think about that, it’s shocking—most people complain about ads. Business is counter-intuitive, and often the most obvious approach is dead wrong.

Business fundamentals will determine your strategy. Research is critical. You need an understanding of customers and their desires, habits, beliefs, and needs. Before you build, you need to know how you will market. You need to plan how to present your product not only so that people will understand, but also in a way that gets people excited. Great ideas fail us. Ideas are all about us, and not our customers. All great businesses focus on the customer.

One-sided views of business fall flat. As newbies, we binge on blogs, books, podcasts, and conference talks. We assume the advice we glean is correct; after all, the people giving it are successful. However, every business is unique. No two businesses operate or grow the same way. Just because a tactic worked for one successful dude, don’t expect it to work for you. What we newbies need is not stories of how so-and-so earned her millions, or how some guru thinks you should do things his way. We need a mature and rational understanding of business.

This sounds obvious, but how many tech entrepreneurs to you see discussing business? We talk about features, code, design, and “monetization.” We read up on marketing, optimization, and SEO. Occasionally we add a new popular business model to our cannon, but these are all surface issues. We’re missing the most important part: a solid foundation built on centuries-old, proven business principles.

Success takes more than building software and selling it.

Many bootstrappers, like me, read Getting Real and think all we need to do is build something great and charge for it. We’re missing the point; just charging for your software product won’t bring you automatic success. Getting people to pay you is hard work.

Boostrapping appeals to me for its fundamental and obvious nature. Plus, if you charge customers, you have revenue. This makes sense. It’s logical and understandable. Starting small gives you freedom to experiment and get it right.

However, charging money for your software still requires the right combination of target customer, software product, and market environment. As I learned with my first product, not everyone is willing to pay. Not every product is worth a monthly payment. Not every market welcomes a simple transactional structure. Before you write a single line of code, do some research. Talk to people. Learn to ask the right questions, and don’t quit until you prove or disprove every assumption. Bail if you don’t like what you learn.

(I’d like to add that I’m in no way trying to argue against the advice of the 37signals guys. I owe them a huge debt for the good advice and inspiration to strike out on my own. Their books are essential reading. My point is that entrepreneurs need more knowledge than a couple of books can provide.)

Funding is complicated.

Saying VC is evil or funding is somehow less altruistic sounds great when you’re standing on a soapbox. I understand that people who say this are just trying to establish that it’s not the only choice for tech startups. However most of this dialog also suggests it’s one or the other; that business must be either purely bootstrapped or purely funded. The Lean approach is the first voice of dissent; here, funding is seen as a means to spur growth rather than start. This is constructive. The popularity of the Lean methodology is encouraging. The startup community is beginning to mature; we’re recognizing the complex nature of business. It’s a good start.

If you’re a newbie, you need to understand a few things about funding:

  1. To get funding, you need to prove the viability of your startup. This means users, numbers, and a sound strategy.
  2. To get funding, you need connections. If VCs and angels don’t know you or you don’t get an introduction, they won’t even listen to your pitch.
  3. Funding is not going to make your startup successful. Success is in the fundamentals. You need to get that right first. Funding can be an option later on, but you probably don’t need it when you’re just starting out.
  4. Incubators are glamorous and exciting. They give you connections and advice. However insiders will tell you the advice from various advisors often conflicts. Even in this concentrated environment, you face the same dilemma—which guru should you listen to? The benefits provided from incubators will not replace a whole understanding of business. After all, not every incubator startup succeeds.

For these reasons, funding is an insurmountable challenge for most newbies. Boostrapping is often more attractive as a first step. If you still want to swing from the fences from the onset and need funding to do so, go for it. I commend your ambition. Just know what you’re facing.

Grow up already.

I’ve realized my understanding of business was immature. Join me: let’s put all this simple-minded, one-sided business advice behind us. Let’s stop wasting our efforts on businesses that can’t succeed and stop repeating each other’s mistakes. I, for one, am exhausted of post-mortems.

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