Saturday, February 03, 2007

The Bootstrapper’s Dilemma

The question of focus is an important one for any entrepreneur. We hear it all the time – from the idea of having a “core competency”, from implementing “niche marketing”, and even in the oft-referenced “elevator pitch” – getting your message so focused that you can literally give it within an elevator ride.

Of course, no one can argue that focus isn’t a good thing. But in a bootstrapped company without outside financing, this becomes a particularly tough issue: the question is where to focus and for how long? And what to do if the focus isn’t working? And is the current focus (the one you started with) blinding you to where the real opportunity is? Or is your real problem a lack of focus?

In a venture capital backed company, you typically invest in building a product for a specific market; you then hire the team that can go after that market, and over time you hopefully get enough success in that market from your sales and marketing team to recoup your initial investment and then some. Once you’ve done that, you can think about either taking the product into different markets or starting a second product. If your initial bet doesn't pay off, you think about raising money to attack another market (or hopefully this happens while you still have plenty of cash left), often with a change of management. Or the company goes bust.

But what do you do in a bootstrapped company when you have little or no outside financing?

This is an interesting question because you have two conflicting demands that are coming at you week after week, month after month:
1) you need enough cash and profits to keep the company going, and
2) you have very limited resources so it’s important not to spread yourself too thin.

In fact, these two demands are at the core of what I call the Bootstrapper’s Dilemma: If you have limited cash and need to keep the company going, you are likely to take any sales/revenue you can get, even if it’s not in the area of your focus. Furthermore, you may discover that the real opportunity is in a market/area that is adjacent to what your first guess was. But if you don’t focus, you are not likely to make much headway in any of the areas that you are attacking.

We had this problem at one of my bootstrapped startups – our technology/products could be used in several different markets, each of which was a legitimate and potentially profitable usage of the technology. Each of the markets had slightly (in some cases significantly) different use-cases, even though they all relied on similar (but not exactly the same) technology. This disparity between our different use-cases was causing us to spread our limited marketing and sales and development dollars too thin.

However, we never had enough cash to allow ourselves to focus on only one of those areas and turn down opportunities in the other areas, because focusing also meant that we might not have enough cash to survive long enough for that focus to pay off. In a bootstrapped startup, “Cash, not focus, is almost always King” – if you’re not bringing cash in the door – you might be out of business pretty quickly.

So this brings us to the question – if we agree that focus is important for growing a company, when is it appropriate to focus and when isn’t it?

In my company, one of our co-founders was always asking us to take a bet on one of those areas, and if that bet didn’t work, then it would mean we were done. In that scenario we should shut down the company and go on to other opportunities. The other co-founders, myself included, wanted to see the company survive no matter what – our intent was to build a going concern, not a big hit or a big failure - even if our initial guesses about the market weren't correct.

This brings up a different but not unrelated issue: getting alignment on the motivations of the principals in your company. This is an issue that you should think about carefully in any startup, even when starting a company with someone you know, and especially if you're starting a company with someone you don’t know well. I'll talk about this in another post.

In the end, I believe that this question of focus isn’t as easy or as "cut and dry" as the simple rule of thumb: “you need to focus” – advice which is often given to (but not always listened to by) entrepreneurs.

Recently, I was speaking about this with a colleague who has been “in the trenches” as a CFO with multiple startups (both venture backed and bootstrapped), and his point was: When bootstrapping, you can afford to focus only if 1) you have enough outside money to see it through to the results of that focus or 2) you have a customer who’s funding you for some time, and you can afford, based upon the results of that customer, to turn away other potential customers which do not fit the same focus. Basically, you can only afford to focus if you can literally afford to focus. And if you want to focus, then find either such a customer or raise enough money so that you can do so.

On the one hand, focus provides that “laser-like” intensity which can allow you to really nail a business problem and get into a virtuous cycle where each sale helps to propel the next. On the other hand, insisting on a focus when the market is pulling you in a different direction means you might “miss the boat” on the real opportunity in a changing market; or worse, you might literally run out of cash.

I read a VC blog recently that talked about how one of his portfolio company’s entrepreneurs wanted to build a second, related product before the first product had really gained a lot of traction. The VC of course gave the standard adivce: “you should focus”. But after the entrepreneur insisted, he gave in, and the introduction of the second product served as a key factor in not only rapidly expanding sales, but in laying the groundwork for the eventual successful acquisition of the company.

I think this story makes a very good point. That’s why I like to talk about the “Zen of Entrepreneurship” – because you can’t always follow cut and dry rules without thinking through the consequences and applying them to the unique situation at hand. Sometimes you have to keep a "beginner's mind" when looking at a fluid situation, and recognize that the answer may not be the same as it was even six or nine or twelve months ago.

To truly succeed in the Bootstrapper’s Dilemma you have to adopt a Zen-like state of mind and find a delicate balance among these factors – where the market pull is coming from now, where you thought it was going to come from when you started the company, how much money and runway you have left, how you’re spending that money in going after your target market(s), and of course what your personal goals are for the company and your life. This balance is unique to you and your business and although you can go to others for advice, only you can find the real answer.

4 Comments:

Blogger ss said...

2 great points : (1) focus is necessary to nail solution to the business problem(2) "zen" is neccessary to be able to change course

11:58 AM  
Anonymous nisha said...

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2:03 AM  
Blogger Ali Khan said...

Principal #1: No Cash, No Business.

Be sensitive to market shifts. Adjust strategy accordingly. Keep resources and scheduling aligned with ultimate goals and core principals.
Every shift and all motivations are unique, antiquating any one equation.
Give the moment what it asks for instead of what we think it needs.
That is a pretty tall order but the benefit from such a practice makes it well worth pursuing.
Thank you for this.

12:53 AM  
Blogger Ali Khan said...

Sorry
This is a really good post.
I need another crack at my comment:

Be sensitive to the shifting needs of your target market. Adjust strategy while maintaining the ability to keep a revenue stream healthy. Keep resources and scheduling aligned with ultimate goals and core principals.
Every shift and all motivations are unique, thus antiquating any one equation established through past experiences.

Be with just this and trust you can give the moment what it is asking for instead of what you just think it needs.
Sometimes it's about leading with your vision, other times it's about following the money.

The multiple benefits from such a practice makes it well worth pursuing but nothing worth having comes easy.

3:22 PM  

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