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The Simple Shapes of Startups

Written by Ash Maurya

Inspired by this short lecture by Kurt Vonnegut on “the simple shapes of stories”, I thought it would be fun to sketch a few shapes of what starting up looks like:



Then I remembered Sarah Prevette already beat me to this:

[Full presentation here].

So I decided to sketch a different set of curves – ones that show various approaches to surviving until “the sloth of ascent”.

Startups that succeed are those that manage to find a plan that works before running out of resources. While not the most valuable resource, money is like oxygen to your startup – too little and it dies, too much and it can explode. The key is setting yourself up with enough runway to make it through the “humps of iteration”.

Here are some typical approaches for doing this:

The Shape of Side-projects

Most projects start out as side-projects with little cash investment and run mostly in your free time. While it’s possible to build something this way and even stumble into something interesting, most of the times these projects remain as side-projects because learning is slow and often absent customer-learning until it’s too late.

Interestingly enough, you’ll see most of the other shapes to follow start out the same way. I would argue that most projects start (should start) as a side-project. The biggest risk we face is committing ourselves to building something nobody wants and the biggest mistake we make is placing most of the emphasis on building (technology risk).

Rather than jumping into building something, I recommend spending time upfront validating you have something worth building (following a Lean Startup/Customer Development process). A lot of this can be done without any code.

That said, there will come a time (if you’re on to something), when you’ll need to double-down because “starting up” in my opinion can not be done part-time beyond a certain point – It’s hard enough doing it full-time.

The Shape of Funding

This story starts out the same way but after some initial effort, additional runway is provided through various stages of external funding. Some companies manage to build a healthy business using just the initial seed capital. Others go through multiple rounds of funding – each bigger than the last which usually also results in steeper burn rates (driven by the need to show growth).

After the early rounds, the startup is left with only three possible outcomes: run out of resources (deadpool), get acquired, or IPO. This is the case even if the startup starts generating profit because it was built on “other peoples’ money” (areas in red) which comes at a 10x rate of return. The hope here is that the acquisition or IPO event generates “off-scale happiness”.

The Shape of Consulting

This story starts out with the company generating revenue/profit through consulting. Along the way, the company decides to invest in building a scalable product of their own. They are their own prototypical customer and/or have access to clients that are the prototypical customer. The problem here is that building good products is really hard and consulting revenue is non-scalable i.e. you have to actively earn every dollar. Every hour put into your own project requires turning down billable work which is really hard to do – the “consulting-product dip”.

37signals is the poster-child for successfully making it through this dip. It’s interesting to note that they (and others who also managed to pull this off) had other things going on for them (e.g. great content/audience, books, workshops, ruby on rails, etc.) that most other consulting companies don’t have – making their story look more like the next one.

The Shape of Bootstrapping

This starts out looking a lot like the consulting curve. The major difference here is that there is a conscious emphasis towards building multiple scalable and leveraged sources of revenue.

Scalable revenue is money you can make while sleeping or at a high enough “effective” hourly rate to buy you runway e.g. ebook sales, workshops, SaaS products.

Leveraged revenue adds more value to your company beyond the money it brings in e.g. licensing parts of your platform helps mitigate technical risks, selling an ebook helps build a channel platform, etc.

These passive income sources provide the means to experiment with multiple products and then double-down on the most promising ones. The big difference from consulting is that you end up being time-richer. Time is your most valuable resource and most startups die because of a lack of enough attention.

Finally, bootstrapping is not mutually exclusive with raising external funds and many companies go on to do just that to accelerate growth.

Do you have any other shapes you’d like to share?

Lets collect more in the comments!

  • http://twitter.com/njvitto Nicola Junior Vitto

    Hi Ash,
    really cool post…your shapes sketches are wonderful! What I don’t understand is why in the Bootstrapping Shape there’s ever more cash also during the “development” phase…why?

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

    Nicola – 

    Good question. You are right. There should be little cash dips that I’ll add in…
    I think I was trying to think in terms of “effort” which is different between this and the consulting curve. 

    Ash

  • http://twitter.com/njvitto Nicola Junior Vitto

    Sure! I completely agree…
    Also the road to the “Product 1″ is strange but I read it as an optimistic product started as paid work for someone and the switched to a scalable product. It’s very difficult but even possible in the meaning of bootstrapping. :)

    Nicola.

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

    Actually, there I’ve got several examples that I chose to leave out of the post because I wanted to focus on covering the curves only. 

    1. I started my first company building a technology platform which I self-funded for the first 2 months. Then I got a random call from an entrepreneur in Norway who wanted to license the platform even though it was only 25% built. We worked out a licensing arrangement that delivered what he needed, and subsidized the development of 3 additional products that followed that. 

    2. More recently I wrote a book in my spare time and by way of writing it starting running some workshops to test the content. Both the book and workshops are providing “passive income” with which I’m funding the development of 2 products. 

    Bootstrapping doesn’t have to be single-faceted. The key is creating and selling other “value” generating products along the way that in a way you would have to create anyway (byproducts).

  • Ashu

    I find the side-project curve the most interesting one because I hear many people saying that they are working on side-projects while they are pursuing a full-time job. It has always been my believe the in general, side-projects tend to not go anywhere. Also, I think what adds to the give-up state is that you have multiple side-projects going on since you are too afraid to commit to one, so many of those end up in the give-up state as well.

    It’s hard for someone like to me argue this point because I am still young and starting out. I am also one of those that is doing a contracting job and doing that side-project. I am trying to steer away from the eventual give-up state and it would be very useful if I had the perspective of someone experienced explain how side-projects ended them in the give-up state or why they strongly feel it might not be a good path, or vice-versa.

    What experience lead you to this curve Ash?

  • http://twitter.com/CeeJayLouis CeeJay Louis

    Wow, I really like these sketches.

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

    I agree. At the same time I would argue that most projects start this way. The biggest risk we face is committing ourselves to building something nobody wants and the biggest mistake is placing most of the emphasis on technology risk. 

    Rather than jumping into building, I recommend spending time upfront validating you have something worth building. A lot of this can be done without any code.

    That said, there will come a time (if you’re on to something), that you will need to double-down because starting up in my opinion can not be done part-time. It’s hard enough doing it full-time.

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  • http://www.blacklabprojects.nl Jeroen Roodnat

    Great article. Maybe it should also show enthusiasm and founder energy levels in the different fases. 

  • http://twitter.com/brookr brook riggio

    Great seeing some bootstrapper love here! If you had the 4 graphs in front of you, and just had pick one, it seems like an obvious choice…

  • http://twitter.com/brookr brook riggio

    Great question. Like Ash is saying, it all comes down to understanding who your customers will be. Does your product help them make money? Does it make a difficult/repeated thing easier? Do these potential customers pay for things that make things easier?

    If you said “yes, yes, yes”, then you might be on to something… See if your audience is interested in the smallest possible incarnation of your product possible and grow from there.

  • http://twitter.com/nanodome Nanodome Ltd

    Do you think lean startups are fundable during Sarah Prevette’s “humps of iteration”?

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    I really enjoyed this article. It is always nice when you read something that is not only informative but entertaining. Excellent!

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    I am great fan of your blog.Every time i come here i see something very new.Thanks for sharing the information!

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    great post!

  • http://twitter.com/evangineer Mamading Ceesay

    Thanks for this.  For London Creative Labs’ Social Startup Incubator curriculum, I had already decided to put in a module on Finance and Bootstrapping.  The Shape of Bootstrapping will be a great exhibit for that module, the whole article is an insightful look at how startups should think about acquiring and maximising their resources to survive and thrive until they have a scalable product.

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  • http://aizon.me Rafael

    Really interesting post, 
    I’ve got a lot of new insights here.’
    I am also interested in this start-up field and have my own related side project which I am testing now http://aizon.me

    Thanks for great article

  • http://www.evergreensearch.com Eric Siu

    Thanks for the graphs – they really help paint a picture of the ups and downs of each model!

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    I read your article with great interest.Thanks for you sharing.

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    Thanks for the article. Very interesting.

  • Chad Tabary

    Good stuff!  I’ve been in the humps of iteration plenty of times, only to sigh later on the plateau of disenchantment, lol ;)

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  • Anonymous

    Great  Charts of  Startup Journey

  • http://www.brandings.com/ Kim Oakland

    Never really had thought about it like this before.  The charts do make it clear .. and fun — especially the “plateau of disenchantment” (been there)..  Thnx for the insight!

  • http://www.skmurphy.com/ skmurphy

    A very thought provoking post.

    It looks like you have temporarily taken down the bootstrapper picture. I think the cash should be able to go negative to represent draw downs from savings or outside investment. This reminded me of Richard Caro’s “Cashflow Fingerprint” for startups see http://blip.tv/science-to-profits/startup-cashflow-fingerprint-1344528 for one talk

  • http://twitter.com/rarjunpillai Arjun R Pillai

    I think your shapes should show Negative cash also. :) Great post

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

    Yes. There is a downward slope that shows depleting cash. It’s a slight slope because it’s drawn relative to potential upside.

    I was using the horizontal axes more like the crash landing point when the project runs out of resources versus actual cash at hand since entrepreneurs do different things to fund their creative addictions.

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

    Thanks for sharing the video Sean.

    The picture is up but maybe you were experiencing rendering issues on the blog. I chose to represent cash draws as a negative downward slope. I wanted to stay away from showing negative numbers since it’s different for each entrepreneur. Some manage to bootstrap from customer revenue from day one, others keep a day job, others tap into savings etc.

    I was viewing the horizontal line as the crash point where the entrepreneur runs out of resources and calls it quit. Maybe would have been better to draw these without an intersecting horizontal line and just showed relative cash against starting point over time (?)

    Cheers.

  • http://www.skmurphy.com/ skmurphy

    This also reminded me of work by Sal Virani and Mark Twum-Ampofo on a “Visual Language for Finance” http://www.saintsal.com/2012/01/a-visual-language-for-finance/

    If you could represent the decision tree in advance (or at least develop an initial model) a tornado diagram (for example http://smartorg.com/2011/10/tornado-diagram-resolving-conflict-and-confusion-with-objectivity-and-evidence/ ) would complement this visualization.

    I think there are stocks and flows of revenue, expenses, team morale/energy, committed revenue (either recognized ratably or recurring) that this kind of chart could model and a related decision tree or roadmap.

    There is a similar diagram that maps morale as a ramping sinusoid that could also be incorporated. I blogged about some other interface models http://www.skmurphy.com/blog/2011/11/25/better-interfaces-interview-treemap-tornado-chart/ that could also be incorporated.

    We should talk.

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