Ep 4: How to bootstrap your business idea
Helen Vang (00:00):
This is the Startup Reality Podcast, bringing you honestconversations with founders, business owners, and industry professionals aimedat sharing what it means to find your voice, grow your business, and achievesuccess the way you define it, whether that's growing your career or starting abusiness. The Startup Reality podcast shares insights for the journey ahead.The challenges awaiting and the strategies used to overcome them. But before weget started, in the spirit of reconciliation, the Startup Reality Podcast wouldlike to acknowledge the traditional custodians of country throughout Australiaand their connections to land, sea, and community. We pay our respects to theirelders past and present and extend that respect to all Aboriginal and Torres StraitIslander people here today. So in the previous episode, we spoke aboutdifferent funding options that are available to anyone who is looking to starta business or found a tech startup. But this week we we're going to drill downon bootstrapping. And the reason why we're gonna drill down onto bootstrappingis because it is our recommended approach when you are starting up. So, let'shear from William Page again about his experience when it comes to founding atech startup using the bootstrapping technique before you start diving intoraising capital and investment, or obtaining investment from outdoor thirdparty sources.
William Page (01:31):
Bootstrapping is essentially where you grow your businessoff of your own internal cash flows or off of your own capital so you don'traise money from external investors, and you essentially grow through your ownrevenues and your own cash flows. So rather than spending those early daysfocusing on raising capital, what you instead do is focus and double down onproduct development going to market. So essentially what you do during thoseearly days is rather than focusing on raising capital from investors, youinstead focus on creating your products. So essentially what you do duringthose early days is you develop your product and you go to market in order toget customers that can then create revenues to drive into your business, tohelp grow the business. So rather than spending time raising money fromexternal investors, you spend time improving your product and going to market
Helen Vang (02:20):
Focus in the early stage of business is incrediblyimportant. And that's why William and I recommend the bootstrapping approach.But where does bootstrapping actually come from, and where did these concept orthe concept of bootstrapping begin?
William Page (02:40):
Now the term, it's funny, actually, the term refers to the19th sec century expression of pulling oneself up by one's bootstraps. So it'sactually a reference to the high top boots that were pulled on by tugging theankle straps. So it genuinely means doing something on your own without outsidehelp. And in many cases, it's the hardest way to grow your business, but it isthe most effective way you can do it.
Helen Vang (03:07):
So the concept of bootstrapping has been around for a longtime, so long to the point that it's become a figure of speech and it's reallyabout getting your hands dirty and doing what needs to be done. However, asWilliam mentioned, there are limitations to bootstrapping, and we're gonnadiscuss some of those limitations.
William Page (03:31):
So the main limitations of bootstrapping are obviously,it's the more difficult way to grow your business because you have lessresources. So if you have less resources, then naturally it's harder. Theimpetus or the onus is on you to essentially get your product to the market asquick as possible in its most lean or agile manner. You know, save money, do itquickly, do it efficiently. And obviously the pressure is then on you toessentially get customers. So then the pressure is on you to do marketing andsales to get the traction that you need to get customers buying your product sothat you can then obviously get the revenues. So it's the harder way of doingit, rather than just, you know, going out, raising money from someone and thenhaving an abundance of capital to develop your product and to do yourmarketing. You've gotta do it the hard way because you've gotta do all that ina very lean and agile manner with relatively little resources or money.
Helen Vang (04:28):
So that's probably also one of its strengths, right? Sothat's one of the benefits, to be more creative.
William Page (04:36):
Yeah, so exactly. So one of the benefits of it is it isactually because it is the harder way to do it. You actually are in some waysbetter because you focus on your key priorities. You are much more committed toachieving your results in a quicker, more agile manner. You focus on the key,key key priorities rather than, you know, a number of priorities, which someactually may not be a good utilization of your time and resources. So it reallyhelps you with your focus and fundamentally it helps you get to market quickerbecause, well, in most cases, quicker because you are focused on delivering aproduct that is gonna get you revenue sooner rather than later because you'revery survival depends on it.
Helen Vang (05:23):
So, most of the funds from bootstrapping, as you said,come from personal funds. What's the most common practice you see people dowith bootstrapping? Is it like remortgaging homes and stuff like that?
William Page (05:34):
We don't often see that because that's really puttingeverything on the line. What you often see is people using their own savings.Maybe they're put maybe 10, 20, 30, 40 K aside. Occasionally you see people usecredit cards. So rather famously the founders of Atlassian, Scott Farquha andMike Cannon Brooks. The myth that they say, I dunno if this is true, but wehave no reason to say it, isn't that they started Atlassian with a $10,000credit card. But typically you use your own resources, a few thousand here, afew thousand there, or you get what's called your friend's family in fools anFF raise where you know, you, you talk to your family, you talk to yourfriends, you say, Hey, you know, I need 50 k, a hundred k, you know, andbetween your close network and your close group of friends, you'll get justenough capital to to, to launch. So when you're bootstrapping, you may still doa small raise, you know, from your really close friends and family, but it'snot like you're going out raising capital from rich people. Now you're justgetting just enough money that you need to develop your product to provethere's an interest and a demand for your product. And it's solving the problemto crucially go to market and to generate the revenues that you need.
Helen Vang (06:53):
So if you want to bootstrap successfully, what are some ofthe skills or key principles you need to follow to do it well?
William Page (07:03):
Well look, you know if you want to do bootstrapping, look,it's definitely the harder path, but I would always strongly recommend it tofounders because it's really effective way to get off the ground. So there's afew key principles or a few key techniques or ways that you can do this moreeffectively. So firstly, start remotely, um, expensive offices are no longerneeded. We know this because of covid to keep your costs down by startingremotely. Then obviously that that limits your fixed costs, which is alwaysgreat because you don't have an expensive office to pay for. Crucially focusedon your cash flows, so focused on acquiring customers who are profitable. Soyou focus on customers that will pay for your products rather than freecustomers who won't, which is typically how companies which have raised a lotof capital, they typically grow their customer base quite quickly.
William Page (07:55):
But those customers are usually free customers. They don'tactually provide revenue. Whereas when you are focusing on your cash flows,you're focusing on customers who are gonna pay. A third technique we recommendis be responsive. So use social media channels, blogging, email, voicemail tobuild a view as being a responsive company, even though you're doing it on amuch leaner budget, you are quicker in that sense. Focus on your customers. Sofocus on getting as close as you can to your customers to really understandtheir problems, to understand their needs and understand their wants. The fifthone I'd say is learn to be a jack of all trades. So, you know, there's noshortage of skills that you can learn through you, YouTube and other areas. Soto keep your cost down, rather than paying for a consultant or rather thanpaying someone else to do something, you can learn to be a jack all trades andlearn new things and you might surprise yourself with what you learn.
William Page (08:53):
And, by doing that, really the key is keeping those fixedcosts down. Bartering is another approach. So if you've got a particularskillset which you think is gonna be in demand, then maybe you barter so you dosomething for another startup where you provide your skillset and they'llprovide skills that maybe you need. And that way there's a quid pro quo withboth, both parties providing services bar on a bartering basis. Fundamentally,as I mentioned, keep your costs down so you know, especially salaries, usefreelancers, watch your fixed costs and if you do incur costs, try and makesure that they're proportional to your cash flow so that they're, costs aregood sold (COGS) rather than fixed costs. Um, be careful with your equity. Soonly give away equity to key hires.
William Page (09:44):
You know, who you think can, can help grow your business,uh, you know, come across another good approaches to come across bigger thanyou really are. So, you know, if you come across as being a small startup tovendors and suppliers and partners, then they're not gonna partner with you.They're not gonna use you or sell to you because they believe that you are morerisky. So it's always important if you're gonna bootstrap to come across biggerthan you are. Because then that'll help mitigate risks for the people thatyou're dealing with and will help make you look more attractive. And I mean,guess fundamentally you've gotta hustle. So if you're gonna bootstrap, you'vegotta be prepared to go out and sell your products or services. You've reallygotta be comfortable to speak to dozens or hundreds of potential customersevery week to, you know, be a salesperson, you've gotta get out there, you'regonna focus on bootstraping and you gotta sell. So you've gotta be good atgoing out and really getting in front of customers, potential customers andreally selling your product or your service. And if you do that, if you canhustle, then you'll get cash out, then you'll grow your business.
Helen Vang (10:50):
So there it is guys. That is how you bootstrap and somekey principles to follow when you are going to bootstrap your business.However, I did ask William another question that I think is relevant andimportant to all of us, and that is acknowledging that there are really twophases of which your business can fail. The startup phase as well as the growthphase. And in both those phases there is a need for capital. So the question Iposed to William was when do you phase out of the bootstrapping phase and beginthe capital raising phase?
William Page (11:29):
That's a great question. Um, that's a really greatquestion. I mean, there's no right or wrong answer. There's no general, youknow 1 approach to that, but it would depend on a few variables. You wannaobviously have cash flows. You want to show that there's a lot of interest inyour product. There's a lot of people that want to buy your product or yourservice. So you want to have a steady customer flow because that will help togive comfort to potential investors that you are ready to invest. Secondly, youwant to have an execution plan. So you wanna show that for every dollar thatyou get as capital, as investment, that every dollar will generate an ROI orreturn on investment of a certain amount. So then that's pure growth capital.Cuz you're saying if you give me $1, I will generate $5 of revenue for thebusiness.
William Page (12:18):
So you wanna be able to be at that stage where you havethe certainty over the customer demand, the certainty over the need for yourproduct. And then you're basically saying that I'm now at the stage where I'veproven that there's a demand, I've proven there's an interest for my product.Now I'm less at the stage where I need to scale, so I need to pull more moneyinto either developing the product better or in, in improving the product or inmarketing or selling the product more widely. So it's at that stage whereyou've shown that, you at the stage now where I like to use the analogy of arocket where, you know, you've built your rocket, your rocket's ready to go,you just need to put fuel in. And that's the growth stage where really whatyou're looking for is fuel to get you to your destination.
William Page (13:08):
So you just need that fuel to get there. And the best partis if you are talking about growth capital, then it's not in the same whatlikely you'll get that. But investors will be quite interested because you'reable to say, look, we're very limited resources, we've managed to grow ourcustomer base by this. We've managed to grow our revenues to this. We'reproving that we're a growing company, we have an increase in need for ourproducts, but to take us to the next level, we need to invest heavily in divertup in the product and marketing more effectively. So to go back to theAtlassian example, I think Atlassian didn't raise their first round ofinvestment until, I think it was about eight years, I think it was around 2010that they did their first round of investment.
William Page (13:54):
And at that stage they'd proven that there was an interestin their, you know, there was a sufficient, they'd proven there was asufficient customer base for their product and that they had cash flows andrevenue. So it was at that stage that they did the growth capital. So yeah,they, they raised, they raised, I think it was 60 million in 2010, which isprobably, I think eight years after they launched. So by that stage they'dproven that they had, you know, product market fit, people were interested inthe business. So then they just needed some investment to really grow thecompany more quickly.
Helen Vang (14:32):
So essentially one of the key benefits to Boot strappingis that we have historical data, which means that
William Page (14:39):
Oh yeah
Helen Vang (14:41):
So basically the growth, like exactly to your point, be withthat historical data, you can give more confidence to investors and the timethat you'd be looking at sourcing external investment or funding is when you'relooking at when your business is ready to scale. Because you see an opportunitythat comes with scale essentially is what you're saying, right?
William Page (14:59):
Correct. Yeah, so the point with Growth Capital, which issomething that is ideal is because you're showing that you've got the data toprove that you've got the product market fit, that you've got the customers,that you've got the need for your product, that it solves the problem. Andessentially all you need now to grow more quickly is additional resources. Andby getting additional resources, you'll grow your company more quickly andthat's growth capital.
Helen Vang (15:28):
So with all of that said, the last question, I swear it'sthe last, is, does that mean that growth capital is easier to come by thanother types of investment capital?
William Page (15:47):
Yes, to a certain extent it is because I mean, obviouslyyou've gotta have a good business, you know, you've gotta have a well runbusiness. You've gotta be able to utilize the data from your business to showyour return and the return on investment. But if you've got a business which isprofitable, or business which is growing quickly or which is shown that there'sa strong customer demand, then you can create the, um, not the story, but youcan, you can model it as such that people can see that for every dollar theyput in, they're gonna get a certain incre improved return. So then it's a mucheasier story to sell because a lot of the risks, you know, the biggest risks inthe early years of investing in startups is execution risk. The risk that yourfounders won't be able to execute on their plans and that there won't be aproduct market fit and there won't be a need or demand for the product.
William Page (16:40):
With growth capital the founders have proven they canexecute, so that risk is mitigated and they've proven that there is a productmarket fit because their company is selling alot of that product. So the twobiggest risks for investors in the early years of investing in startups aremitigated. So at a growth capital stage, those risks are really not issuesanymore and they're the biggest risks that investors typically fill. So thenit's just a question of the, the financials making sense and crucially the foundersor the business owners having a plan to utilize to show how every dollar thatthey get in Growth Capital will generate a return because they have a specificplan and a specific focus for how they're gonna spend the money that they'reraising.
Helen Vang (17:24):
And that's all we have for today's episode. If you likeit, don't forget to subscribe. You can also follow us on YouTube, just searchfor Startup Reality and your host William Page and Helen Vang. Next week we'regoing to start looking at product development and in particular, how the worldis pivoting or how you can pivot from development in China to other areas ofthe world, or more localized focus as the world is changing and China begins toposition themselves a little bit differently in the market. We'll speak to youguys then.