|Last modified: 12-12-2013|
Greg Gianforte, founder of $30-million RightNow Technologies Inc., learned that bootstrapping is not simply about pinching pennies and cutting costs. Smart bootstrapping is about turning your lack of resources into a competitive advantage.
If you boiled down his philosophy of bootstrapping, it would run something like this: lack of money, employees, equipment -- even lack of product -- is actually a huge advantage, because it forces the bootstrapper to concentrate on selling to bring cash into the business.
For the bootstrapper, business is all about just two things: making product and selling product. "Nothing Happens Until Someone Sells Something" reads the sign in his otherwise spartan office. In other words, bootstrapping clears away the clutter and makes you focus single-mindedly on the customer, which is what any smart entrepreneur needs to do anyway. It compels you to be creative, and it's an acid test for figuring out whether you've got a real business or just a plausible-sounding business plan. But bootstrapping is a safety net, too, because if you wind up with no sales, no customers, and no business, well, at least all you've lost is time, not money.
Sales as a method of market research. It allows you to determine very quickly, without much money, if you have a viable business idea.
After a couple of weeks of calling, Gianforte knew exactly what his potential customers wanted. That's when he got around to building the product. He spent two months writing a basic program that allowed a company to judge which information to publish on its Web site, based on E-mail queries that it received.
Gianforte began charging for RightNow software within three months of its release. He set the price point deliberately low -- offering customers a two-year license instead of a perpetual one -- to jump-start his sales.
Every business needs sales. But a bootstrapper has to be single-mindedly obsessed with sales. How else can you get the cash to keep the business afloat?
It's not surprising, then, that when Gianforte made his first three hires, in March 1998, he hired salespeople -- and only salespeople. Unlike so many entrepreneurs starting Internet companies at roughly the same time, Gianforte decided not to hire any marketing executives or to look for someone to forge strategic alliances. Not that those functions weren't important. They just weren't as important as making sales now.
Gianforte relied on his wife, a former consultant, to handle accounting and operations. "She was my safety net," he says.
Gianforte couldn't afford to send his salespeople on sales calls. So he had them work the phones. He's firmly convinced that telesales is the better system.
Gianforte came up with an alternative to expensive marketing brochures -- a concept that remains a key part of RightNow's selling strategy. It's a demo Web site that copies the look and feel of a potential customer's Web site, with RightNow software loaded in. Over the phone, a salesperson walks the prospect through the site, showing how RightNow's software works.
Gianforte also replaced marketing dollars with social capital, ie. PR to handle contacts with technical writers and software reviewers.
A big part of successful bootstrapping is knowing where to spend money.
Building a product presents another problem for a bootstrapper. How will you pay for it? Sales hires bring in cash. Technical hires don't. Normally, they don't, that is. But all along Gianforte had been listening hard to customer feedback and using it to refine his company's product. It wasn't a huge step to begin asking customers to pay for additional features that they requested. "Not many software companies do a good job with that," he says. "They always try to build something in a vacuum."
These days RightNow doesn't ask customers to pay development costs for new features, as a rule. "We reached a point where the product was mature enough," says Myer. But Gianforte still wants his top software developers to talk to at least five customers a week. "We say to the developers, 'Your job is to build a product that sales can sell. Figure it out.'"
"I think a lot of entrepreneurs think they need money to build the business faster when they actually haven't figured out the business equation yet."
What’s a big company got that you haven’t got?
What's a bootstrapper to do?
Success is persistence. Set realistic expectations. Don't give up.
The first law of bootstrapping: Great ideas are not required. In fact, a great idea can wipe you out. Coming up with a brilliant idea for a business is not nearly as important as finding a business model that works. A business model is a machine, a method, a plan for extracting money from a system.
Key elements of a business model:
Business models should have the following five attributes:
Just because it's cheap to start doesn't make it a good business. Don't fall into the trap of doing the easy business, or the fun business, or the sexy business. In the long run, any failed business, regardless of how cool it seems, is no fun.
DO YOU WANT TO BE A FREELANCER OR AN ENTREPRENEUR?
The most successful bootstrappers don't invent a business model. They trade on the success of a proven one. There are countless advantages to doing this. Here are a few:
EVERYONE IS NOT LIKE YOU: Don't fall into the trap of assuming that everyone needs what you need, wants what you want, buys what you buy. Instead of starting the business that makes stuff for people just like you, do some real research. Go to the library. Don't invent something that requires you to have a handle on the purchasing habits, the psychographics, and the changing demographics of the whole country. Instead, find a thriving industry and emulate and improve on the market leader. She's already done your homework for you.
Consumer products are almost impossible to bootstrap. Especially consumer products that need to be sold in thousands of drugstores in order to be profitable. Your business is about the process. It's not about the product. If you structure a business model that doesn't reward you as you proceed, it doesn't matter how much you love the product. Pretty soon there won't be any product to love.
The bootstrapper is focused on finding a market that will sustain the process. A platform that responds to the work you do. With a business model that works, the deal is simple. You invest time, effort, and money. In return, your market responds with sales, cash flow, and profits.
Businesses that are also hobbies usually cause bootstrappers the most trouble: restaurants, toy design and invention, creating gourmet foods. On the other hand, mail order, consulting, acting as a sales rep or other sort of middleman, all work great. So does focusing like a laser on a very obscure market that is growing fast.
FOLLOW THE MONEY: Understanding the value chain of your business is a great first step in getting to the core of how you're going to succeed. A value chain is the process that a product goes through before it reaches a consumer. The more value you add, the more money you make.
When looking at a business model and the value chain it creates, I like to start from the last step:
If you're selling a custom service or a high-priced good, consider selling it directly. That cuts out lots of middlemen, and leaves it in your hands. If you can make this self-priming, you've gone a long way toward making your company successful.
Here's my best advice to you: Stop planning and start doing. But none of this will happen if you stay inside and keep planning. Build your business. One day at a time, one customer at a time. Lower your downsides, focus on the upsides, and start building. But start.
Most entrepreneurs don't think about money too much when they decide to start a business. But without money, there is no business. Planning for the money doesn't have to be complicated. But you do have to be consistent and, most of all, honest with yourself. The time to develop a multiple income source strategy is not when you run out of money. Then it will be too late. Right now, plan for the money. At the same time, don't let the sideline take over (unless you want it to). It's so easy to get focused on the short term, on the “now,” that you ignore the reason you started the business in the first place.
My rule of thumb is that debt is bad. You should borrow money if the borrowed money is going directly into something that will generate profits exceeding the interest, eg. you know you've got the sales and you'll be able to pay off the debt in 90 days. That's good use of professional debt. Be sales-focused. A well-financed company can afford to build a product and hope customers will come buy it. You can't. Sales before investment!
Here are the two most important sales rules you'll need:
There are no guarantees in life, but the odds are that if you can take care of these nine things in your business, the rest will take care of itself.
RULE 1: FIND PEOPLE WHO CARE ABOUT CASH LESS THAN YOU DO. Instead of trying to cajole a skeptical banker into lending you money on faith, borrow money from the people who have the greatest interest in your success: your suppliers and your customers.
RULE 2: SURVIVAL IS SUCCESS. At the beginning, when you're armed with a plan and a cash-flow statement, you might be tempted to be very choosy about which projects and which customers you take. Don't do that! (At least not too much). Watch the money. Take the money. Allocate a percentage of your week to making money. Any way you can that doesn't distract from the core business. If a project makes money, it's a good project. If a product makes money, it's a good product.
RULE 3: SUCCESS LEADS TO MORE SUCCESS. The more you do, the more you do. Being in front of people will lead to new opportunities, new products, new engagements. Be in motion, because customers like motion. Try to keep a reserve of 6 months' worth of operating expenses in the bank. When the number drops below six months, that's a message that your focus is in trouble.
RULE 4: REDO THE MISSION STATEMENT AND THE BUSINESS PLAN EVERY THREE MONTHS. Start from scratch. “If we were starting over—no office, no employees, no customers—would we choose to be where we are today?” If the answer isn't, yes, then it's time to take a hard look at the path you took and the impact it has had on your business.
RULE 5: ASSOCIATE WITH WINNERS. Four groups of people will dramatically influence how your business evolves:
Line yourself up with the wrong people in each category and, like a poorly created bonsai tree, your business will grow up twisted and misshapen.
RULE 6: BEWARE OF SHARED OWNERSHIP (OR, WHY RINGO WAS THE LUCKIEST BEATLE). Well, a 50/50 split is almost never fair. It's almost impossible to find a situation in which two people contribute equal amounts, have equal needs, have mutually consistent expectations, and will stay with the business the same amount of time. Inevitably, someone feels cheated. And someone goes for the ride.
RULE 7: ADVERTISE. SPEND REGULARLY ON ADVERTISING, PERSISTENCE IS THE SECRET TO SUCCESS, BE CLEAR, TEST AND MEASURE.
RULE 8: GET MENTORED.
RULE 9: OBSERVE THOSE LITTLE BIRDS THAT CLEAN THE TEETH OF VERY BIG HIPPOS. Find bigger, richer, more stable organizations. Partner with them. It gives you credibility and access and sometimes, cash flow.
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