How to Bootstrap a Company

September 30, 2009

Boots_Hanging The question of how to bootstrap a company is on most entrepreneurs’ minds these days. Attend any meeting of the investment community, angels or venture capital, and you’ll hear how entrepreneurs should focus on bootstrapping their companies and not approach the investment community for funding until they have a proven product concept that attracts customers. One venture capitalist recently said start ups not only need innovative products and marketing approaches, but now entrepreneurs need to think about funding innovations. It’s a great idea, innovative financing sounds good, but how exactly do entrepreneurs do this and what does it mean? I have not heard any specifics or concrete thoughts on the matter, only vague notions. Here’s one method of bootstrapping a company that I have used in the past for a B2B software company. It’s not innovative, but it works.

The basic concept is to find a business customer that needs the product and is willing to hire your company to develop that product under contract. The trick is to maintain joint rights to the portion of product that was developed by your company. This will allow you to modify and resell a revision to the general market. I have found companies are willing to do this as long as what you are developing is not proprietary and does not represent a competitive advantage to them. Proprietary features will belong to the company but the rest of the development effect is usually acceptable for joint ownership. Why would most companies do this? In today’s economic times, companies don’t want to increase headcount but still need the work to be done. Second, the proprietary aspects will be developed by the company itself because they feel this is their competitive advantage in the marketplace and will want to hold this close to them. They are willing to let an outside firm develop the industry standard pieces of the product, which is why they will let you modify and resell the rest. They will also consider the development of the more standard features to be the less risky.

There are several advantages to this approach. First, contract fees are typically 2 to 3 times in house wages and costs. This will allow you to pay your own staff and use the additional revenues to fund the product development for the revision for the general market place. Second, the company funding the development is essentially offsetting your development costs because you are using them as a test site for your product. The portion of the project you developed will undergo a quality assurance process thereby helping your create a error free product further down the road. You will also benefit from their marketing efforts since they will have to help define and prioritize the features needed for the product.

I’ve done this process in more than one stage, where an original company funded the first version of the product and then a second set of companies further developed the first version under contract. The second set of companies paid for licensing of the first version and then paid to further expand the product under contract, which we also held joint rights to this second version. Thus, the second version reaped the benefits of another round of quality assurance testing and input from additional marketing teams. This approach can be continued until you are satisfied that you have a product ready for the general market.

Step 1 is to define what the product is. Step 2 is to identify a set of target customers. Step 3 is to contact those potential customers and present the product to them. Most people are willing to hear what you have to say. While most people hate telemarketing calls at home, they are much more receptive to cold calls at work. Step 4 is to have a follow on meeting to discuss funding of the project. Step 5 is contract negotiations. I have always negotiated the general terms and conditions myself and left the details of the T&C’s to the corporate lawyers. Step 6 is to deliver on what was promised.

As always, there are some pitfalls to be avoided with this method. The biggest is to never stop trying to bring additional companies into the development phase. The first company may end up being a small set of companies. If there is only one company and that company decides to cancel their own project, you are left without someone willing to pay for the bootstrapping. Second, multiple customers will force your development team to think in terms of a general product applicable to many; one that is extensible, supportable, and maintainable.