New entrepreneurs often buy in to the corporate mantra that cash is king, but many companies over the years have made it on determination, intelligence, strong designs, and a bit of luck. For angel investors, these companies can be a great investment, because buy–in is very small in the beginning. Founders who are willing to bootstrap have a different idea of budget, and they can often get more done with less funding. If the startup succeeds, then investors might even see a generous return on a relatively small cost.
In our article on the hottest software startups, we talk about Apttus, a successful software company that bootstrapped its way through seven years before seeking traditional investor funding. In such a case, investors have an even greater advantage: the startup is generally further along with its research, plans, and products. It might even have products on the market, providing investors with solid data on which to make a decision. Even then, investment asks may be lower than with non–bootstrapped companies.
Bootstrapping isn't a new concept; entrepreneurs have been using their last dimes to launch companies for centuries. Funding a small endeavor on little more than your own sweat and what cash you can scrape together is a risky strategy, though, and most angel investors are likely familiar with statistics about how many of these small businesses fail each year.
Planning and methodology brings a bit more stability to the bootstrapping risk, and one of the more successful methods today is Lean Startup, which was pioneered by Eric Ries. Ries, like many founders featured in our book, began in the technology field. After graduating, he worked for a Silicon Valley company that would fail within a few years. In 2004, Ries cofounded IMVU, a social network company, through which he met investor and mentor Steve Blank.
Blank invested in IMVU, but he required that Ries and his cofounder audit a class he taught on entrepreneurship. Through that relationship and class, Ries would learn about Blank's beliefs on customer development–a strategy he used to quickly deploy IMVU products and later to create the foundation of his lean startup method. Reis's efficient approach to the startup meant that the product launched within six months. By 2011, the company was generating revenue of $40 million with an equal number of users. At that time, Ries had moved on to other things, however, remaining simply a board observer with the company.
Ries's early successes and failures put him in a position to advise other startups, which he did independently and as part of the team at a venture capital firm. He also used his experience, and what he learned from working with other startups, to create his philosophy of Lean Startup.
- Entrepreneurs are everywhere.
- Entrepreneurship is management.
- Validated learning.
- Innovation accounting.
Let’s examine the concept behind each step and how it applies to the lean startup.
1. Entrepreneurs Are Everywhere
The stereotypical view of an entrepreneur veers between the brilliant college student and the driven scientist, but in reality, entrepreneurs are everywhere and come from all walks of life. By definition, an entrepreneur is a person who organizes and operates a business, sometimes – but not always –– taking on high levels of risk to do so. Entrepreneurs are not restricted to technology startups or cutting–edge biotech.
The importance of this point cannot be overlooked, even though it sounds simple. Opportunities for startups abound in every industry and in every region. When you are looking to fund a startup, you don’t have to be confined to a narrow range of opportunities. Find a sector that intrigues you and focus your attention on startups in that sector.
2. Entrepreneurship Is Management
Going back to the definition of entrepreneur, we see that a core concept is operating a business. The definition does not include brilliant ideas or wild spending habits or even a degree of coolness. It’s about management, which means harnessing available resources to meet goals or at least to provide the best possible outcome under given circumstances.
Management is about discipline and creating processes that help the organization reach its goals.
To make a startup successful, the entrepreneur needs to impose processes and disciplines on the organization. Management is about making good decisions faster even when based on limited information; it’s about getting the best from a team. Sometimes a manager is a coach and sometimes a manager is a dictator or a friend – or a naysayer. A manager manages, and gets things done.
This is a fundamentally different view of entrepreneurs, who often exhibit diva–like tendencies and go off on expensive ego trips leaving reality behind. Investing in a lean startup means your cash won’t be wasted on some of the excesses and errors committed by entrepreneurs such as leaders at Pets.com, WebVan, Den.com, Boo.com or Flooz. These companies all failed.
3. Validated Learning
Using lean startup principles, companies continually test their vision with the only people who can validate it – potential customers. Most startups take the “Nike” approach. They just do it, working diligently to bring a product or idea to fruition and then springing it as a completed product with no time, resources or room for changes or improvements. Many entrepreneurs are disappointed by this approach when the expected sound of trumpets heralding their vision fails to materialize and instead, all they hear is a resounding thud as the doomed product hits the trash.
The MVP, “Minimally Viable Product,” idea strives to find the product that has the fewest features and requires the least effort to create that will still have appeal to a broad enough market to sustain the company’s goals. The minimally viable product feature set does not spring directly from the entrepreneur’s mind, nor will it ever happen in a vacuum unless it’s a fluke of the universe.
Enlisting early adopters is fundamental to this process. The startup needs the feedback from users to measure the product’s viability. By the time the product is ready for full–scale distribution, it has a built–in user base and a history of solving real customer needs.
4. Innovation Accounting
Startups have sometimes felt that they were immune to the realities of business that exist in established industries, but startups need to be even more conscious of the mundane metrics. The entrepreneur’s role is to define the process and provide the roadmap including specific milestones and priorities. This is more than project management and far more than standard accounting. It is a new kind of accounting that measures startups on their business imperatives. It’s a fascinating topic that Ries explores in detail in his book, “The Lean Startup.”
Creating an innovation process is key to the MVP concept and the entire lean startup idea. It involves the product learning cycle: Build–Measure–Learn. The process starts with early prototypes that are shown and tested with multiple customers. Customers provide their feedback on what they like, didn’t like, or what they need to have added before they would be willing to buy the product. The startup measures the product’s current features for acceptability to its target market. The development team takes this learning, adds features that fulfill the identified need and repeats the process until they have come up with a design that meets the need without adding unnecessary cost, extended development cycles or unwanted features.
With Lean Startup, you will eliminate or at least reduce uncertainty in the startup process. Your team will be able to work smarter, not harder as you answer the fundamental question: Should this product be built? Most entrepreneurs ask “What can I build?” or How can I build it?” The lean startup works on the premise that you shouldn’t build a product unless there is a sustainable business to be built. Like the original idea for lean manufacturing, it eliminates waste:
· Wasted time.
· Wasted effort.
· Wasted resources.