The first in a series of posts about how to run a startup and develop a product, written by guest author Matt Rogers of Aroxo - a person-to-person trading exchange for consumer electronics, computer gear, whitegoods, and more.
The aim of many entrepreneurs is to take a business idea and convert it into a professional and functioning business on a low budget. This is typically called “bootstrapping” and it is fraught with potential pitfalls and dangers. But when done well it can really help get a company going fast, professionally and without the founders having to give up much (if any) equity - or bankrupting themselves.
Over the next 5-6 posts I’ll outline the process which I’ve now followed at several corporates and which I’ve honed to work with my own startup, Aroxo. I’ll discuss what skills you’ll need, how to write your requirements, how to source developers and designers, how much to budget, how to agree a development contract, how to manage your vendors, how to plan your release, all the documentation you'll need, and much more.
So, what does it mean to bootstrap a company? Bootstrapping involves launching a business on a low budget. Practically this means that you’ll outsource (most likely off-shore) your design and development, you’ll rent your servers, you won’t have an office and you’ll have no salary. Prior to launch, the only expensive professional services which you’ll buy will be your legal advice and accountancy services. Everything else, you’ll have to pick up yourself and learn as you go along.
Why bootstrap? There are a couple of good reasons a company should consider bootstrapping its market entry. The founders may believe they are onto such a good idea that they don’t want to give up any equity. Or the founders have taken on a small amount of seed financing, just enough to get them into the market. Either way, bootstrapping is a viable model.
I'm starting this series of weekly posts with an overview of the whole process. In the upcoming posts I'll go into much more detail about each one.
Bootstrapping is a potentially very exciting prospect to an entrepreneur. But it is fraught with risks - and the primary risk you need to guard against is software development failure. Two thirds of outsourced projects fail, so there is a high likelihood of failure. The main causes are:
To have the best chance of success, follow this bootstrapping process:
Clearly, whilst I’ve presented this list linearly, it is entirely possible to parallel run some components - e.g. you can start building up a vendor long-list while you are doing the mock-up and you can easily run your RFI and RFQ process when writing your functional specification. But each stage needs to be completed, if you are to reasonably expect a quality product.
Running through a process such as this is what it means to be an “entrepreneur”, so I‚Äôll be going through each of these stages in plenty of detail in the coming posts.
It is often said that bootstrapping is cheap. But producing a professional and slick product costs money. Our development was a particularly complicated build requiring 5 developers, a systems architect, an html coder, a SQL specialist, 4 testers, 2 designers, a graphic designer, a project manager and a security specialist. If our aim was to raise financing and employ these people directly, we’d have burnt through $5-7 million before launch.
With that in mind a rough budget sufficient to bring a system of reasonable complexity to market would be as follows (and note this doesn’t consider any marketing or PR spend):
| Expense area | Low | High |
| Travel | $4,000 | $10,000 |
| Development | $30,000 | $150,000 |
| Professional fees | $3,000 | $15,000 |
| Patent fees | $2,500 | $25,000 |
| Design | $2,000 | $8,000 |
| Domains/hosting | $1,000 | $1,000 |
| Misc | $5,000 | $5,000 |
| Total | $47,500 | $214,000 |
Project complexity is the main driver of cost - i.e. delivery risk and timescale. Therefore it is exceptionally hard to be accurate with this, but you are in for a minimum spend of $50k. Systems as complex as a trading exchange will involve much bigger numbers. If you have less than this, then you’ll have to do the development yourself - nothing else is going to shift the needle. And by doing the development yourself, you’re competing with an offshore company that has specialists in all the skill areas I mentioned above. Plus there's a practical limit to the size of the project you can accomplish.
When you consider the question of whether to offshore your development, if you keep things local you’ll save on your travel budget. But if you're in the US for example, then your development cost will be anything from 5-10 times higher than offshoring to India or Eastern Europe.
Similarly you’ll need at least one fulltime founder during the development phase to handle the developers and manage any other business development issues which arise during set-up. You’ll notice that there is no budget above for any salary for this individual, so the real cost is much higher if you consider lost earnings during the build.
This should give you a good overview of the bootstrapping process, In my next post I‚Äôll outline how to document your requirements in a “functional specification”, how to build a mock-up of the service using free development tools and how to structure your strategy. And I‚Äôll be giving plenty of examples.
Here now are the key takeaways to this post:
Written by Matt Rogers of Aroxo. If you'd like to know more about Aroxo, you can sign-up for their beta trial using the sign-up code “readwrite“.
Listed below are links to blogs that reference this entry: How To Bootstrap Your Startup.
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The first in a series of posts about how to run a startup and develop a product, written by guest author Matt Rogers of Aroxo - a person-to-person trading exchange for consumer electronics, computer gear, whitegoods, and more. digg_url =... Read More
The aim of many entrepreneurs is to take a business idea and convert it into a professional and functioning business on a low budget. This is typically called ‚Äúbootstrapping‚Ä? and it is fraught with potential pitfalls and dangers. Read More
La revue de presse hebdomadaire pour vous faire d√©couvrir ce qui se passe ailleurs, dans d’autres blogs. Il s’agit d’articles en fran√ßais ou en anglais que j’ai trouv√© au cours de ma veille quotidienne et que j’aimerais... Read More
This is the second post in our series on how to run a startup and develop a product. In part one, How To Bootstrap Your Startup, we outlined the process of bootstrapping your company into existence. In this post, we... Read More
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Thank you very much for this helpful info. Can't wait for more ;).
Posted by: Serkan | September 10, 2007 4:44 AMThanks Serkan - the next post will be up soon.
M.
Posted by: Matt | September 10, 2007 4:46 AMGood read but... is outsourcing bootstrapping if you have founders with the skills to do this part?
Posted by: Darren Stuart | September 10, 2007 4:53 AMWhat an excellent article! I can't wait to read the rest of the series. Thanks.
Posted by: Stephen Glauser | September 10, 2007 5:28 AMHey Darren - if you are doing it all yourself then you're definitely bootstrapping, but not off-shoring. Good luck!
Posted by: Matt | September 10, 2007 6:28 AMExcellent post!
I hope the next one is ready soon!
Do you have any offshore development companies you can suggest?
And for design companies ?
Posted by: Martin | September 10, 2007 6:48 AMHey Martin, Thanks for the comment. I thought long and hard about this one when I decided to start the series and decided that I'd describe how to create a long-list, and how to sift it into a short-list rather giving any personal recommendations.
I'd feel uncomfortable making a recommendation and then being partly responsible if the development didn't go as planned.
Posted by: Matt | September 10, 2007 6:59 AMHi Matt,
Great post!
I'm part of a team within Microsoft that seeks to help Independent Software Vendors get started on our platform. If any of your readers are bootstrapping their business and could use a bit of free help from us, they might want to check out http://blogs.msdn.com/usisvde/archive/2007/04/20/abc-s-for-software-vendors-who-want-to-partner-with-microsoft.aspx.
Thanks,
Posted by: John Pelak | September 10, 2007 6:59 AMjmp
Good article, but it's important for readers to realize that this isn't the only reality of bootstrapping. It's more than viable to build a business alongside other things you're doing (especially if you're self employed), barely spend ten thousand dollars worth of time (or even no dollars, if you're doing it in your spare time), and still cash out well at the end. People needn't be scared thinking they need $50k around to build a startup.. because if they're smart or they have a different way of doing things, they don't.
Running through a process such as this is what it means to be an ‚Äúentrepreneur‚Ä?,
Again, this is not strictly true. It's not always a heavy, organized slog being an entrepreneur. You don't /have/ to build vendor lists and out-source.
Posted by: Peter Cooper | September 10, 2007 7:23 AMIt would've been nice to hear a mention, or at least suggestion, of the role open source software plays in the development process - even if to say it shouldn't be used. The lack of that mention makes me question the overall quality of the conclusions.
Posted by: Dave | September 10, 2007 7:44 AMHey Peter. Thanks for your comment. You are absolutely correct that nothing is mandatory, and following any particular process isn't the defining characteristic of bootsrapping. The process I outline is a way of protecting yourself from a development failure which can be critical for a start-up.
Posted by: Matt | September 10, 2007 7:55 AMDave, I'll cover the various platforms when I look at the RFI and RFQ stages.
Posted by: Matt | September 10, 2007 8:00 AMGood article - thanks.
Just one comment about the process.... entrepreneurs may benefit from visiting their short-listed vendors in person before awarding a contract.
Having outsourced several large IT projects I would say this is well worth the time and money.
Andy
Posted by: Andy Gill | September 10, 2007 8:13 AMBrilliant and very accurate post. We have been bootstrapping our startup for the past 10 months and will be launching both the product and the company at DEMOfall in two weeks. Matt, I am a little spooked by how well you summarized our process so far!
We went through almost that exact development process. There are few steps in there that I could imagine shortcutting without paying a price. Our offshore development team is in India and the result has been excellent because we followed a disciplined process in both selection and ongoing development. I do think there is a built-in level of inefficiency with offshore development. Our team is 5 engineers, 2 QA and a project manager. I think if we were doing this in-house we would be at about 2/3rds the team size for a more accurate cost comparison. Managing development is definitely a more than full time job, especially the closer you get to launch.
Our product is fairly complex and Matt also nails the budget pretty well. We are on the high end of the range, and I think expecting less would be unrealistic unless you are building something really simple (and therefore with limited inherent IP).
I can’t wait to read the rest of the series!
Posted by: Aaron Mann | September 10, 2007 8:26 AMHey Andy - I couldn't agree with you more. I've always done this with the various development projects I've worked on at corporates, but we cut it in favour of lowering the budget for Aroxo. This was especially true as we found some of the best developers to be in Russia and India, therefore splitting the travel.
We replaced visits with calls. But face to face is significantly better.
Posted by: Matt | September 10, 2007 8:48 AMVery nice post Matt! Full of valuable information and definitions. I look forward to your future posts!
Posted by: Doug Dosberg | September 10, 2007 9:04 AMshould also take a look at kevin merritt's post about saying no to some requests from large and attractive customers early on:
http://www.blist.com/blog/index.php/2007/09/07/focus-on-one-delivery-model/
Posted by: mathew johnson | September 10, 2007 9:14 AMMatt: Interesting article but overall I disagree with such a narrow interpretation of bootstrapping. My main beef is with the focus on outsourcing and offshoring, since you don't really address the risks of not 'owning' the team that created a good chunk of your application.
Dollars saved in the short term come with a price further down the road, whether that's the cost of having to create your own development team from scratch or the inevitable price you'll pay with respect to the ability to move quickly later on. By way of example, our development team includes one of the core contributors to the open source development framework we use for much of our work; I simply couldn't offshore that person, no matter how much I might appear to save.
It's relatively straightforward to develop functional specs. and manage the development process via an outsourcing contract, but I think what you give up is the creation of a core team that is passionate about what they're building. I'm not saying my interpretation is right and yours is wrong, but it would be interesting to hear your thoughts on the risks of outsourcing.
Posted by: Daniel Gibbons | September 10, 2007 9:21 AMDaniel. Before we decided to out-source Aroxo I was in a real quandary over this, basically I really wanted the lead developer and sys arch sitting next to me cutting code.
However, none of the founders were professional developers (I can cut code, but I'm not a professional dev, just a hobbyist). So the only way we'd get to employ a team of developers was to either do a VC round (on the back of powerpnt only), or give equity up to another two founders, both of which involved a lot of dillution. To keep the equity we out-sourced.
However because I wrote the functional spec, and had a lot of input into the ERD and some of the critical system design I've stayed very much in the loop and on top of the design, although I have now reached the point where the lead developer knows more about the details of the system that I do.
Both models certainly work, it's down to access to financing, the risk appetite of the founders and their skillset.
Posted by: Matt | September 10, 2007 9:43 AMHmm, our current startup (now doing more than 1M/year) was bootstrapped for its first year on just 1500$ (and with that we grew revenue to 25K/month).
No salaries, at first, but we did a lot ourselves and then did a lot as trade and/or on an advertising basis.
Posted by: Jeremy Wright | September 10, 2007 10:05 AMThis is the first I've heard outsourcing development for bootstrapping, I'm much more familiar with the founders doing the work - quitting and taking a break between jobs to create something demonstrable, though for me it just ended up helping me find my next job. I've had mixed experience with offshoring, even from relatively advanced countries in the 80s. A Taiwan outfit created a c lanaguage interface to EEMS which worked, but I had to speed it up by a factor of 4 by rewriting what they did. Another Korean outfit ported a spreadshseet in C from DOS to UNIX, but required a lot of handholding to rid it of all bugs. You'll have be to on top of what those people are doing.
http://blogs.msdn.com/usisvde/ for Microsoft ISV partners
Posted by: Arthur Hu | September 10, 2007 10:30 AMVery fresh article
Posted by: Adi | September 10, 2007 10:37 AMGood luck!
Posted by: teknolojik internet magazini | September 10, 2007 12:07 PMNice article.
Many companies that offer server technology have special programs for startups as well, which makes owning your own equipment easier and less expensive for startups. Sun Microsystems has a program called Startup Essentials http://www.sun.com/startup that's designed specifically to help early stage startups get into some great equipment, free software and other great stuff too.
Posted by: Jackie | September 10, 2007 12:27 PM@Matt (#20): That makes sense. Having total ownership and intimate knowledge of the spec. is key.
@Jackie: I would recommend instead Amazon's EC2 and S3 platforms. No matter how deep those discounts are on the equipment and Solaris hosting, it's still going to be a healthy chunk of change that could better be spent on development time.
Posted by: Daniel Gibbons | September 10, 2007 12:39 PMGreat article Matt. I will also suggest that investors with low budget take advantage of sites like Underratedsites.com to get free publicity for their products/services.
UnderratedSites.com is a directory of great sites that are not getting the rating, coverage and the publicity they deserve.
>
Posted by: Sarah | September 10, 2007 3:08 PMI am the co-founder of Underratedsites.com
I don't see why owning your own server equipment makes much sense for perhaps 80%-90% of Internet companies. There's a niche that needs it, but few people starting out do. That said, I don't think EC2 is reliable enough to depend upon, and the entire reputation of a startup can hinge on that. The best technique is just to lease / rent dedicated servers from hosts like SoftLayer, The Planet, etc, and pay several hundred dollars a month out of your revenues. That way you can expand but without going beyond your means. The bandwidth and level of service many of these companies provide for merely hundreds of dollars a month makes it a no-brainer.
Posted by: Peter Cooper | September 10, 2007 3:26 PMHi, I'm going to follow this series with my life.... I have recently launched a health fitness social site called iStats.. its currently in beta but have decided to let everyone in so I can get feedback... Let me know what you think
http://istats.com.au
Posted by: Craig Morris | September 10, 2007 8:53 PMGreat article. We've bootstrapped our project as well and are about to entire a public beta release. For about a year now, we've been working on a social network for sports fans,
FantasySportsMatrix.com. =)
We've found that costs and risk can be minimized significantly if your team can handle the UI in-house...
Cheers!
www.fantasysportsmatrix.cm
Posted by: Michael Vu | September 10, 2007 10:21 PM...a social network for sports fans!
Okay, well done, we really like it. And your next great article will appear when?
Posted by: Craig Blurton | September 17, 2007 9:24 PMGreat article Matt ... unfortunately ... how can we trust you?? Your website doesn't even work.
Warning: Unknown(e:\domains\a\aroxo.com\user\htdocs\): failed to open stream: Permission denied in Unknown on line 0
Warning: (null)(): Failed opening 'e:\domains\a\aroxo.com\user\htdocs\' for inclusion (include_path='.;c:\php4\pear') in Unknown on line 0
Posted by: Steve | October 4, 2007 11:01 AMGreat post, Matt! Especially love the breakdown of work up to the RFQ. We found the low end of the cost scale to apply to our startup, except for hosting, which runs us considerably more (even through a low-cost provider).
I wrote a short article some months back on funding a start-up -- perhaps some of your readers will have an interest. Looking forward to seeing what aroxo is all about.
Best of luck!
Posted by: Shaun Taylor | October 5, 2007 5:53 AM