The Bootstrapping Blueprint

The Bootstrapping Blueprint

“Bootstrapping is a way to do something about the problems you have without letting someone else give you permission to do them.”
- Tom Preston-Werner, Founder of GitHub

Not a day goes by when I don’t read an article about a company’s valuation and the millions upon millions of dollars in funding they are receiving.  These media stories have created an epidemic of misinformation that is spread without any understanding of the underlying mechanics of valuations.  For instance, companies have different types of shareholders and certain shareholders get paid before everyone else, no matter the valuation.  This common practice negatively impacts the actual valuation received by the majority of shareholders.  So a company can be said to be worth forty billion, but the actual valuation for many shareholders could be twenty billion. This is one of numerous ways that mega-valuations are manipulated to make a company seem much more valuable.  We are currently nearing a backlash point, however. There seems to be an increasing desire for profitability over growth at all costs on the part of investors—an inevitable flip in the predictable cycle of human behavior.  It’s a cycle that goes something like this: investment in start ups and small businesses, positive economic growth, irrational exuberance, negative economic growth, irrational backlash, and eventually a loosening of new investment and growth, leading to next boom.  Hence the reason Warren Buffett has always said “Be fearful when others are greedy and greedy when others are fearful.”

While entrepreneurs will always inevitably feel the effects of macro market due to sways both on the customer and investment sides, there is a way to build a business without taking external investment.  It requires two things much dreaded in our society—patience and sacrifice. Bootstrapping, as this approach is called, is defined as getting into or out of a situation using existing resources. Or put more simply, it’s financing your business without the help of outside money. 

When and if you decide to bootstrap your business, you will be constrained by the traditional economic model of needing to make actual money.  I know this is a novel idea in promising economic times like ours, but it is an amazing way to generate real and sustainable value for the people involved in the business.  On top of that, it feels really awesome.  With this in mind, I was discussing some business ideas with a friend of mine recently and our conversation sparked the actualization that there is a simple blueprint for bootstrapping.  While the blueprint will vary based on the individual situation, I felt inclined to share the general idea.  Feel free to improve and iterate.

Step One:  Start By Focusing on Large, Reliable Customers

Whether you are in restaurants, real estate, fashion, or consulting, the first and most important step when bootstrapping a business is to land a small amount of larger, more reliable customers.  For instance, if you are selling clothing, hats, or handbags, all you need are samples of your designs to sell to larger retailers.  Once you get that order you can use the first payment to produce the order, or work with a factor to get capital based on that order, without giving up equity in your brand or company.  The same applies to a food product such as coffee.  As long as you have a sample and the ability to roast, you can take larger wholesale clients and use that capital stream to support yourself and business growth.  A consultant or non-physical business is even better off, as you can use the fees generated from your business to pay yourself and staff up on a project basis.  The key is that instead of using outside money to fund operations and giving up equity/control, it is quite feasible to use the money you earn to grow.  The exception to this rule would be a business that requires significant scale to achieve its ultimate goal, such as WeWork, Uber, or Amazon.  All would have likely been acquired or overtaken by incumbents without investment to rapidly scale.  The rub is that most people are not starting these types of businesses, but due to societal pressures and ego, they think they are.  Do what is right for you.

Step Two: Develop Secondary Low-Cost, High-Return Revenue Streams

Once you have your initial revenue stream secured, preferably through larger, more reliable customers, step two is to develop secondary revenue streams that are low cost and high return.  For retail brands this would mean developing a kickass website before opening a kickass retail store.  A website is cheaper to build, less expensive to promote, doesn’t require nearly as much labor to operate, and gives you a direct relationship with your customers.  For some this may not be a website, but rather just a presence on an existing digital platform like eBay or Etsy.  The goal here is to get at least 25% of your income from a different source that you have more control over.  While a digital revenue stream would be ideal, there are products and services that must be experienced—for example, a coffee.  While you can sell a bag of coffee or a coffee cup over the Internet, you cannot sell a cup of coffee digitally.  But that doesn’t mean you need to open a restaurant. A bootstrapper could take a stand at an outdoor market or food hall, paying less in rent/build-out, but making more profit to drive the business growth.  With the downturn in retail, pop-up spaces are often available in major urban markets and can be the perfect way to test a concept without making a long-term commitment.  The key during stage two is to spend as little money as possible, while generating the highest return and brand awareness possible.

Step Three: Long-Term Focus = Happiness & High-Profit Revenue Streams

Now that you have two revenue streams feeding your business, it is time to use that money to establish long-term, high-profit revenue streams.  It’s time to take a step back, analyze your business, and decide the best way forward.  All businesses and people have limited time and resources—the question is what should you do now to maximize your return on time.  You need to take into account your highest profit model long-term, both personally and professionally.  Remember, you bootstrapped this business, so it doesn’t have to serve anyone other than you.  That means that success is defined by you alone.

From a purely practical perspective you should be looking to establish permanence and systems that can be repeated and replicated.  Products, brands, and larger organizations are built on repetition and consistency.  To generate meaningful value and not be a slave to your business you must create something that can generate significant returns without you being present every time a transaction is made. 

A simple example is McDonald’s. Ray Kroc and the McDonald brothers are long gone, but the brand and systems they created generate significant value far beyond their involvement.  And recently, McDonald’s cut its line of signature sandwiches, as they were not selling well and were probably more costly to produce.  Instead, they are focusing on the expansion of Quarter Pounders, a long-term, high-profit revenue stream.  As long as you are satisfying your emotional needs, you need to do the same.  Focus your energy on the highest return revenue streams. This strategy will ensure that you increase your cash reserves and maintain control of the enterprise you patiently built through years of hard work and sacrifice.

We often convince ourselves that things are not possible because we don’t have some resource we need, typically money or time.  The truth is that usually when you sit down and talk it out, there is a way to get there, but it is often harder than we would like it to be.  Most things worth doing are hard, but the payoff is so much better because of the work you put into making it happen.  The famed tennis player Arthur Ashe explained it quite nicely by saying, “Start where you are. Use what you have. Do what you can.”  Your life is in your hands, your heart, and your mind.  Open up to the idea that when the three are aligned, so much more is possible than you think.

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