I’ve always been fascinated by bootstrapped businesses that grow slowly, and hit their stride around year 4 or 5 or 10! What make them interesting is their ability to do so without much outside capital (less than $500k).
Unfortunately, too much of what we see in the mainstream, and what is praised are the home runs hit by startups that are well-funded in their infancy. But then we see that they are the ones that are prone to early acquisitions. What leads to their early acquisitions is an inability to balance cost and revenue. People don’t keep tabs on their sources of costs: servicing customers, overhead – employees, and production. Instead, the founders strongly fixate on growth, but it’s actually growth that fuels rising costs. No matter what business you’re in margins are what matter.
Then there are those that aren’t acquired and manage to IPO. Once again the IPO isn’t fueled by a strong revenues, but growth. Resulting in common cases where the stock falls precipitously after the IPO, I think we know of a few out there today that have experienced this…
Hence, as founders we have to ask ourselves the question, should we really be striving for hyper growth? It seems unsustainable because it creates a set of expectations that are untenable long term.
So how do you get past the hype and instead focus first on building a sustainable bootstrapped business that will eventually be big?
1. Focus on value creation.
This of course means that you have to really understand what your customers need, what they are willing to pay for, and how both of those variables change as you move from an early adopter to a mainstream customer.
You can offer a simple value proposition to early adopters and still monetize off of them. However, you might receive push back after sometime, because they’ll want you to provide deep value that keeps them engaged.
There are startups that don’t raise a lot of capital, and manage to get to break even early on from their early adopter pool. The secret to their success is putting emphasis on the following formula:
simple product value proposition (keeps cost of servicing down)
+ attractive pricing (based on perceived value to early adopters)
+ volume (matching up the pricing to the # of customers needed to hit break-even) + identifying key distribution channels (cost effective but lead to quick word-of-mouth)
= repeat business and sustainable revenue growth (keeping customers engaged monthly)
There aren’t too many businesses that I’ve seen do this exceptionally well, but here are a few that come to mind: MailChimp, Olark, FreshBooks. Because these are all SaaS products they did have to go through a ramp up period, where they were building product for awhile. The founders worked hard to keep costs low during that ramp up period, but they also had to think about how they were going to attract customers quickly to make ends meet.
2. Steady and sustainable growth.
It’s perfectly normal to grow and then hit a plateau. But once you hit a plateau you have to figure out why you are there. You have to ask yourself the following questions:
- “Have I created a solid repeatable model?” (Seeing steady monthly revenues.)
- “Is it possible to scale to the next level, if I employ a new strategy, or are there limiting factors about the business that make it hard to get to the next level?” (Limited supply, increased costs of goods, or a limited distribution channel.)
- “Are there competitors who have entered that are taking away market share?”
- “Is market demand growing or shrinking?”
3. Knowing when and how to get to the next level.
The most important question that I think founders fail to ask themselves is: “Do I even want to grow this business or am I happy where it is today?”
Realize that growing a business from where it is currently at may require new strategies, and those strategies require some level of introspection. You have to analyze what has worked, and what hasn’t. Then figure out if what has worked can continue to work, or if you have to take some time to discover new methods. Most importantly:
- Will those new methods pay off?
- How long will they take to pay off?
- What’s the work and resources required to make it all happen?
Going after mainstream customers required 2 strategies.
You’ll first need to figure out how to sell a product to a mass market, which means figuring out new marketing tactics that expose a common problem or experience across customer types. The second is offering the new customer types a product at a reasonable price, that satisfies demand, production, and service costs. e.g. the price reduction of the initial iPhone, which led to wider adoption.
When you build a business over time it gives you time to think about these strategies. But too often we get caught up in a desire for hyper growth, which may or may not arrive. The desire for it is detrimental to our first goal of creating a sustainable business first by offering a product that customers demand.
