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Thursday, December 21, 2006

Web 2.0, Bootstrapping and those Evil VCs

I normally try to avoid jumping on the bandwagon with my blog postings, but I'm making an exception this time because of this post on Web 2.0 and VCs in Fred Wilson's A VC blog. Go ahead and read it now, it's a much more important post than this one...

A little while back I had to do the numbers for a startup business plan. The decision had been made to go for funding, but being an engineer I just had to run the bootstrapping scenario as well. As the post above describes, we had a minuscule burn rate while we were building the product, but after that things got trickier. It came down to a surprisingly risky self-funded growth strategy or an infusion of fairly major cash at about the eighteen month mark.

The slow-growth route turned out to be risky for several reasons[1]: The strategy required us to stay tiny, but that meant depending on just a few customers making up a major percentage of our business. We simply wouldn't be big enough to acquire or support more and we wouldn't have the cash to be hiring. To make the numbers work I had to assume that we got customers fast and kept them forever. Sales and support is shockingly expensive (at least it was to me at that point) If we lost customers we immediately went negative cash flow, which is a very ugly thing when there isn't much left in the bank. And there's that little matter of lag time between hiring salespeople and getting any benefit from them. Just a little bad luck and we were out of business.

Competition was another risk. We knew of several other groups doing similar products. There was much brainstorming on niche strategies (make the slice small enough and you get your own piece of pie), but there are limits. It's hard to eliminate every last competitor without putting yourself in a unsurvivably small niche. You can do it for a while, but if you have any intention at all of growing you have to consider how long it takes to get your product to a larger market. The numbers had to assume we had a magically defensible series of larger and larger markets to play in as we (oh so slowly) grew.

Finally, there was focus. The slow-growth strategy meant an awful lot of "doing this to survive long enough to do this other thing we really want to do." Not necessarily a business risk, but it's a big motivation risk. It can take a very long time to bootstrap your way into a "real" business. Why even do a startup unless you've got a passionate belief in your product idea and want to see it on the market sooner rather than later? Watching the spreadsheet extend out year after year off to the right before we were "there" was sobering.

Of course, VCs are evil and must be avoided at all costs, but to anyone considering bootstrapping all the way up I recommend running the numbers both ways.[2] You might find the devil starts to have a certain appeal when you hit that high growth part of the curve.

The end was, sort of like this post, anticlimactic: things stopped very suddenly and I never found out how accurate my numbers were. Maybe this time around I'll get to see...

[1] All of which will be in any good business book or course on startups. But it's one thing to read it and another thing to live it :-)

[2] The Sloan School OpenCourseWare site is good. Somewhere in there are lectures and notes that mention all of the above points and more, plus pre-filled-in business plans with actual numbers.


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