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Bootstrapping a Lean Startup

Written by Ash Maurya

3-stages-of-a-startup

While not the same thing, Bootstrapping and Lean Startups are quite complementary. Both cover techniques for building low-burn startups by eliminating waste through the maximization of existing resources first before expending effort on the acquisition of new or external resources. While bootstrapping provides a strategic roadmap for achieving sustainability through customer funding (i.e. charging customers), lean startups provide a more tactical approach to achieving those goals through validated learning.

But before going any further, I’d like to dispel some common misconceptions about both models:

Myth: Lean Startups are cheap startups

Steve Blank wrote a similarly titled post to address this mis-definition. Yet, I still hear lots of people wrongly associate the word “lean” with “cheap”. This characterization isn’t entirely misguided but it only captures a sliver of what being lean is all about. Eric Ries co-opted the term “Lean” from “Lean Thinking” which comes from manufacturing.

Being lean is not about being cheap but being efficient with resources..

Money is just one of those resources and there is a time to conserve spending (before product/market fit) and a time to spend (after product/market fit).

Myth: Bootstrapped startups never raise money

Most bootstrapped startups start with some form of initial self-funding (sweat equity, credit cards, savings, etc.) and work their way towards sustainability through customer acquired funding. However, given the type and stage of the business, even bootstrapped companies can and often do choose to raise additional capital if that’s what’s needed for growth.

Right Action, Right Time

I’ve bootstrapped my company for the last 7 years and learnt a lot about bootstrapping from Bijoy Goswami, founder of Bootstrap Austin. Bijoy doesn’t limit the definition of bootstrapping to the more commonly held one about building a company without external funding but rather views bootstrapping as a philosophy summarized as “Right Action, Right Time”.

This mantra applies just as well to lean startups as it does to bootstrapping:

At every stage of the startup, there are a set of actions that are “right” for the startup, in that they maximize return on time, money, and effort.
A lean/bootstrapped entrepreneur ignores all else.

While bootstrapping and lean startup techniques are not just limited to funding, funding is one of the first problems entrepreneurs tackle. A lot of (especially first-time) entrepreneurs feel that step 1 is writing a business plan and getting funded. However, during the early stages of a startup, all you have is a vision and a set of untested guesses. Selling this to investors without any level of validation is a form of waste.

Waste is any human activity which absorbs resources but creates no value.

Why Premature Fundraising is Waste

Getting funded is not validation

Seed stage investors are just as bad at guessing what products will succeed as you are. Without any product validation to rely on, they hedge their bets against your team’s past track record and storytelling ability. So while getting funded at this stage is a testament to your team building and pitching skills, it isn’t product validation.

Without validation you have no leverage

More importantly, without validation you don’t have product/market credibility which typically comes at a price – reflected in lower valuations and investor-favored term sheets.

Investors measure progress differently

While validated learning is the measure of progress in a lean startup, most investors measure progress through growth. Reconciling the two during the early stages of a startup (when the hockey stick is largely flat) can be highly challenging and distracting.

Getting funded always takes longer than you think

Time is more valuable than money. Would you rather spend 6 months pitching investors so you can refine a story based on an untested product, or spend time pitching customers so you can tell a credible story based on a tested product?

Too much money can actually hurt you

Money is an accelerant, not a silver bullet. It lets you do more of what you’re currently doing but not necessarily better. For instance, if you’re building an MVP, more money might tempt you to hire more people and wait to build more features both which can actually hurt you and definitely slow you down.

Constraints drive innovation but more importantly force action.

With less money, you have to build less, get it out faster, and learn faster.

Startups that succeed are those that manage to iterate enough times before running out of resources. Time between these iterations is fundamental.
– Eric Ries

What about all the advice and connections?

Raising funding is not the only way to get good advice. You can and should start building a diverse board of advisors early – made up of customer, technical and business advisors. Many are happy just to be asked, others might require a little equity to formalize a relationship.

It is cheaper than ever to startup

The good news is that it is easier than ever to start a company. You don’t need a lot of capital to start defining, building, and even iterating a minimum viable product towards product market fit.

When is the right time to raise funding?

It’s funny to note how the 37signals folks went from “Outside money being Plan B to Plan Z” between their last 2 books. Once you’re on the other side, it’s easy to make such a declaration but there are certainly better times than others to consider external funding.

Both Lean Startups and Bootstrapping define 3 distinct stages of a startup.

While completing stage 1 is the minimum gating criteria for fund raising, stage 3 is the ideal time.

Stage 1: Customer Discovery/Ideation

The objective of this stage is to find a problem worth solving i.e. achieve Problem/Solution Fit. The most efficient way of doing this is formulating a set of hypotheses and then testing them through customer interviews and subsequently via landing pages. This stage usually takes weeks or a couple months to complete.

Being able to demonstrate problem/solution fit through customer discovery findings and landing page conversions is much more credible than an untested story. The question then becomes can you execute on a solution to this problem and get customers to pay you.

Stage 2: Customer Validation/Valley of Death

The objective of this stage is to build something people want and validate your business model i.e achieve Product/Market Fit. This is typically the hardest and most uncertain of the 3 stages as you are simultaneously iterating on product and searching for a repeatable and scalable business model. This stage can take months or years to navigate. Many startups end up running out of iterations here and either seek external funding or give-up.

Having built a minimum viable product and gone through a few iteration cycles certainly puts you in a much stronger position to demonstrate your ability to execute and maybe show some early traction albeit still mostly flat.

Stage 3: Customer Creation/Growth

After Product/Market Fit your objective is to SCALE. This is the only time when both you and investors are aligned on the same measure of progress – growth. Now is the best time to raise funding if you still need it. If you’ve been charging customers all along, you might find you don’t need a lot of additional capital which ironically is the best time to raise it.

How do I survive till Product/Market Fit?

Keep your day job

The first stage, finding Problem/Solution fit, can really be done part-time with very little burn. It typically has a lot of waiting time built-in e.g. contacting customers, scheduling interviews, collecting metrics, etc. Until you find a problem worth solving, it really doesn’t make sense to quit your day job.

Build an audience

Now is also the best time to start building an audience around your problem domain. Start a blog. Comment on other blogs. Get active with social media in other ways.

Build a Minimum Viable Product

The outcome of stage 1 is a handful of features. Build just those features, and nothing else. Again this can usually be done in your spare time but I’d highly recommend full disclosure with your employer before writing any code. You’d be surprised how supportive they can be. I took on a day job at travelocity shortly after I founded WiredReach and not only did they not have a problem with it but they actually supported me with a flexible working arrangement so I could get work done at different times of the day.

Conserve burn rate

The biggest burn in a software business is people. Hardware is cheap.
Rent don’t buy. Don’t scale till you have a scaling problem. Don’t hire till it hurts.

Charge from day one

Testing pricing early and getting paid is the ultimate customer validation in a lean startup which aligns nicely with bootstrapping where cash flow is king. Make a goal of first covering your hardware/hosting costs, then your people costs.

Sell other related stuff along the way

It is very tempting to take on unrelated consulting to survive but it becomes very hard (if not outright impossible) to build a great product in parallel. Instead look for other related stuff you can sell along the way. License out a piece of your technology, write a book, give workshops, get paid to speak, etc.

Shortly after I started building my p2web framework, I was contacted by another entrepreneur who essentially funded the development of the platform in exchange for a custom application we built on that platform. Not only was this related work, it also helped uncover customer and technology validation.

Speed up learning

A fundamental principle from lean startups is speeding up build/measure/learn cycles and there are a whole lot of techniques at your disposal to do this like continuous deployment, qualitative and quantitative split testing, etc. The key here is keeping your feature set small and spending 80% on existing versus new features. Every addition has to be vetted with validated learning to make the cut. Otherwise kill the feature.

Boostrapping + Lean Startup = Low Burn Startup

Getting to product/market fit or out of the valley of death is the first thing that matters. Until then, bootstrap to buy yourself iterations and apply lean startup techniques to maximize learning from those iterations.

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  • andrewcahoon

    Ash – very good posting. I have one item to correct, however. When you wrote 'Eric Ries co-opted the term “Lean” from “Lean Thinking” which comes from manufacturing.', this is not accurate. Lean comes from the methods used at Honda and Toyota, and incorporates the enterprise wide operation (all functional areas). The companies first learning about Lean in manufacturing (primarily from the famous book by Jim Womack, Daniel Jones, and Daniel Roos entitled “The Machine that Changed the World”) somehow incorrectly spread the word that this was a production/manufacturing-only methodology. It has a much broader application that can provide benefits many time more than in manufacturing.

    [Reply]

  • http://twitter.com/lohcs lohcs

    Hi ! Wonderful piece of writing and thank you for sharing your insights! I'm new to starting up and on the ideation / coding phrase and frankly, I'm really quite confused on the directions that a new startup should take. Your post here answered a lot of my questions!

    Just another question, where would be a good place to look for business advisors or mentors? At which stage do you think a mentor is important to guide the new startup to greater exposure for their products ?

    [Reply]

    Bill S Reply:

    Hi Ash Thank for that excellent article. I am new to startups but realise from your article I am confusing customer validation with early round funding, falsely believing that winning a modest early funding is in some way providing me with validation, rather than proving evidence that I am reasonably conpetent at selling and producing a successful pitch. In some ways it could be viewed as early avoidance of customer validation, which I turn could be the downfall of the startup.
    Thank you

    [Reply]

  • http://www.ashmaurya.com/ Ash Maurya

    Thanks for setting me straight there Andrew. You are definitely more the expert on Lean.

    [Reply]

  • ruang

    Wow, so much good advice.

    Thanks for finally making the distinction between lean startup and bootstrapping – it's a topic that needs to be addressed but one I've never read. For so long I've been wondering if I was doing something wrong by not following the lean startup gospel, but this makes everything clear.

    I am keeping my day job. The amount of waiting time is quite ridiculous. I get tired of those motivational authors that tell you to go for broke.

    “Bootstrap to buy yourself iterations” – awesome phrase!

    [Reply]

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  • igorkryltsov

    Regarding “Charge from day one”.

    Will you allow to have a private beta to get early adopters on board and giving them a system for free (during this period or forever) and working with them closely BEFORE “charging from day one”? I can not imagine skipping this stage especially if a system is not simple just because I think it wouldn't be fare for first customers who will use system otherwise.

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  • http://www.ashmaurya.com/ Ash Maurya

    Charging from day one is just that. Now it is fine (and usually expected) to give them a free trial period but your intention for charging (and pricing) should be clear and upfront. I did a blog post on “Experiments in Pricing” which goes into this topic some more.

    [Reply]

  • stevecwilkinson

    Ash – great post – speaks to a lot of what I've been learning over the last few months since I started my latest business. In terms of practicalities, I wrote a brief post on other ways to save money when bootstrapping (Low Burn in a Lean Startup) which some of your readers might find helpful – although at the time I hadn't made a clear distinction in my mind between a lean startups and bootstrapping in general, so thanks for the clarification. Your insights into external funding for bootstrapped startups are also really useful.

    In terms of your advice to keep your day job – I understand the sentiment, but I wouldn't make this a golden rule. Jason Cohen provides some cautions about this, and I also think there is a sense in which you aren't really committed until you make the leap, but for sure it makes sense to conserve your cash for the longest possible time while you're in the customer discovery phase.

    (Not sure if you were aware, but there is a typo in the graphic: 'Boostrap')

    [Reply]

  • http://www.ashmaurya.com/ Ash Maurya

    Thanks for the comments and the typo alert (it's been fixed). I hadn't seen Jason's article till after I published or I would have certainly included a link. That said, my point was to drive a strong call-to-action to overcome initial inertia, and to look first before leaping (achieve problem/solution fit). Too many people don't even try because they use lack of money, current job, etc. as an excuse.

    As to moonlighting beyond customer discovery, yes your mileage will vary and full disclosure is a must. There too, people tend to think employers would flat out refuse and this has not been my experience.

    [Reply]

    Nick Carter Reply:

    The employer’s reaction will have a lot to do with your exact responsibilities to them as a company, and the honest openness about your exit strategy (from the job, not your business, that is). If you’re not competing, and you can remain committed to offering them your all during the day, they should be in support of your moonlighting.

    [Reply]

  • http://twitter.com/voidmonk Ashutosh Nilkanth

    “Lean” is largely about efficiency and reducing waste. But “lean” is also about being frugal — just like any other business. In my opinion, a $700 event (for example) about “Lean Startups” is counter-effective and a waste of money for many “bootstrapped” startups.

    [Reply]

  • http://www.ashmaurya.com/ Ash Maurya

    Ashutosh – There is a difference between “Lean” and “lean”. The former emphasizes efficiency not frugality. As to the event, yes it's certainly “not cheap”. As a bootstrapper I only go to events if I can justify some return on time, money, effort. If I weren't speaking at the event, I'd try to qualify for the scholarship program, and otherwise watch a simulcast of the event. The content of the event (and most events) is free and if that's what you're after you can get it much more cheaply and efficiently by not going.

    [Reply]

  • http://www.ashmaurya.com/ Ash Maurya

    Ashutosh – There is a difference between “Lean” and “lean”. The former emphasizes efficiency not frugality. As to the event, yes it's certainly “not cheap”. As a bootstrapper I only go to events if I can justify some return on time, money, effort. If I weren't speaking at the event, I'd try to qualify for the scholarship program, and otherwise watch a simulcast of the event. The content of the event (and most events) is free and if that's what you're after you can get it much more cheaply and efficiently by not going.

    [Reply]

  • http://twitter.com/yurixus yurixus

    A great article, great tips. I would also add that invoking VC money at a later stage will allow you to keep much of the company shares/profits to yourself.

    [Reply]

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  • http://www.democrathings.com Juan Chaparro

    Awesome. I needed to read this.

    [Reply]

  • http://twitter.com/HAZEX1981 櫨山 義隆

    Thank you for sharing your knowledge of startups。

    [Reply]

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  • Anonymous

    Great and insightful article, Ash. Based on my experience, I think the biggest hurdle is the inception stage. It is not so much about finding problems to solve. There are a lot of problems out there to be solved. However, it is extremely difficult to gain a large following without advertisement.

    That said, I do agree with you posting comments on relevant websites like TechCrunch and Reddit helps to get the message out there. For that reason, I just launched a website called PopularStartups.com. The goal is to give voice to upcoming startups.

    You can read more at Popular Startups

    http://www.PopularStartups.com

    [Reply]

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  • satya

    ash great advise. thnks for sharing

    [Reply]

    Ash Maurya Reply:

    thx!

    [Reply]

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  • Layla Sabourian

    Awesome post, good to know I am headed in the right direction. I am one of the few employees I know who is actually asking permission from my manager to work on my side project/startup, so let’s hope he says yes :) I am still confused what is the difference between lean startup versus bootstrap?

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