Guest post: On Bootstrapping (yes, it exists)

This is a guest post by Duane Jackson. A self-taught programmer with no formal qualifications, he started his first company after his release from prison in 2003. KashFlow was born in 2005 out of his frustration at not being able to find any user friendly accounting software for his first start-up.

On Friday afternoon there was a rip in the fabric of space-time and we got a glimpse into a parallel universe. A universe where bootstrapped startups are as mythical as Santa and the Tooth Fairy.

TechCrunch Europe guest blogger, Iqbal Gandham, worked through the numbers involved with starting a business and concluded that  it was impossible to do so without at least £50k of capital. The problem is in the numbers he started with – a small error here and a small error there are all compounded to create a very erroneous total.

Co-founders are NOT essential, you DON’T need to pay £200 a month for hosting. And if it’s going to take you 12-18 months to get a product out of the door then you’re dead before you even begin.

I officially started KashFlow, my SaaS accounting software business, in 2005. For the first 3 years it didn’t do much as my focus was elsewhere. It was only in 2008 that we really started to push things forward.

Last year, 2010, we finally hit that magic number: £1m turnover.

We’ve never taken VC money. The company was initially funded by a small loan from the Princes Trust, personal credit cards and lots and lots of sweat and 18 hour days.

Bootstrapping a business is very different to building a business with VC money.

Conserving Cash

Every penny you initially spend is coming from your own pocket. This makes you very cost concious and is a good habit to have and to keep as your business grows. We still buy our stationary at Tesco’s instead of Viking.

I suspect bootstrapped businesses get at least  twice as much value out of a pound coin than VC-backed startups do.

Generating Cash

Then there is the urgency to generate cashflow. If you have £10m in the bank you can leave worrying about generating turnover and profit  until next year. Or maybe the year after.

But when you’re looking at an overdrawn bank account and borrowing money from friends to cover the rent (thanks, Lucy!) it really focusses your mind on getting the money coming in.

I’m betting bootstrapped businesses get a product released and generating cash at least three times as fast as their well-funded counterparts.

Smart Hiring

If you have money in the bank you can hire the best (i.e. most expensive) people.

Bootstrapped startups don’t have that luxury. The early people who join a bootstrapped start-up are joining for the right reasons – not the great salary – and appreciate that every penny counts and they work accordingly.

I won’t embarrass my Sales Director by telling you her starting salary, but it’s not far off what our Office Junior is now paid. Her hard work can be directly attributed to half of last years turnover and she’s now paid accordingly.

My right-hand girl joined us straight out of school and was paid minimum wage – actually a lot less if you include the unofficial hours she worked. She knows every aspect of the company as well as I do and can keep everything running (and growing) smoothly in my absence.

Staff are (initially) cheaper, more motivated and work harder in bootstrapped startups than anywhere else.

Inventive Solutions

We needed hosting early on. We could have got it relatively cheaply – certainly for less than the £200/month Iqbal suggests. But due to the nature of what we do, shared hosting wasn’t appropriate. Thankfully, I met another entrepreneur that needed was paying £500/month to a streaming media company that were not giving him the level of service he expected.

So he paid us £400 a month which more than covered the cost of co-locating a server. And as we had very few users it comfortably handled our site, the database and his radio station and even left us some money left over.

Bootstrapped startups find inventive ways to get around the fact they have no money. It’s not begging or asking favours – it’s finding inventive win-win situations.

I’m not saying bootstrapping is easy, it isn’t. But then neither is spending a year of your life pitching to VC firms. The big difference is that when you  bootstrap you still own pretty much all of the company and you don’t have to answer to anybody.

So why the general negative attitude towards bootstrapping? I think there are two reasons.

Firstly, we don’t hear much about the bootstrappers – they’re quietly focused on growing their businesses rather than raising their personal profile.

Secondly, many of them exit early and don’t make it into the billion-dollar, household name category, even if they do make life-changing sums of money for the founders. There’s no shame in that.

Others, like FreshBooks and MailChimp, get a lot of traction without ever raising a penny of VC money. If and when they do, they’ll get much better terms than an unproven startup.

There are times when bootstrapping isn’t a good idea: If you’re launching a consumer product that needs lots of marketing to get anywhere; If you’re launching a tech startup and you can’t code; when your would-be competitors are all based on the freemium model, and you don’t have enough savings to ride out a few years.

I’m glad I live in this universe where bootstrapping is possible, I wouldn’t have it any other way.