The Boostrapper’s Dilemma: Navigating A Bold Myth

The following is a case study on the venture capital ecosystem and bootstrapping a startup through customer acquisition. In the first section, I’ll describe the importance of venture capital, but explain why it can be destructive if pursued too early. In the second section, I’ll discuss my company’s customer acquisition strategy, even though it came too late for pure self-funding. In the third and final section, I’ll review and connect the first two sections while admitting my faults.

I.

Every culture drags along its share of myths. Myths can be entertaining and even historically fascinating. But, more often than not, they are debilitating. A bold myth exists in startup culture, unique to the early stage business cycle, that says the success of a business is dependent on the injection of investor capital.

Without a doubt, venture capital has been influential, even necessary, to much of the booming success of the technology ecosystem, including the software platforms and hardware infrastructure we use, rely on and take for granted everyday. Venture-backed companies have even produced ‘a little in, a lot out‘ effect on the country’s economy. Here are key statistics for 2006 through 2008:

- Venture-backed companies now account for 12 million jobs and 21% of GDP;

- 81% of the software industry’s 1 million jobs originate from venture-backed startups;

- Venture-backed companies showed 1.6% job growth in the private sector vs. 0.2% in the industry as a whole.

While I can’t deny the importance of venture money, my argument is that startups, mine included, would have a higher success rate, including valuation and profitability, if raising venture capital was eliminated as a first priority in the business cycle. The fund raising process is painful, distracting, and most of all, desperately time consuming.

Looking back on my company’s business strategy, I believe my time would have been better spent attempting to acquire early customers rather than attempting to raise a seed investment, which I eventually did. The goal should be not take outside investment unless you absolutely need to. The process of fund raising has a high opportunity cost, and if timed incorrectly, can potentially ignite the failure of a company.

Established investors bring valuable inputs, including seasoned experience, an established network, credibility and of course, money. But, anyone with even minor business sense will realize what’s missing from the input list: proof of market. Meaning, just because a business has taken capital doesn’t mean they are a money making business.

While I admit my mistake of spending too much time on fund raising and not enough time bootstrapping, I’ve developed research on early stage customer acquisition strategy. While my research is unique to my company, the lessons have industry crossover, especially for consumer facing businesses.

II.

The goal of my company was, and partially still is, to provide analytics insightful enough to help an organization improve their decision making. Because the majority of data we are parsing is from Twitter, the target customer needed to be small enough to be approachable, but dealt with brands, products or names mainstream enough to be talked about on Twitter. Also, by approaching smaller clients, we would have a higher probability of reaching the decision maker.

The hypothetical ideal customer, in my case, lined up with four types of clients: consumer goods, marketing agencies, investment firms and political consultancies. Further research would prove that two of these made sense, and two did not.

The clients we avoided with their respective sales strategies are described below:

- Selling directly to a consumer goods or “brand” company (top)

- Selling to a middle man–a marketing agency–who would then charge their “brand” company (bottom)

The consumer goods companies with high conversation products are difficult to approach and typically bureaucratic. The time dedicated to making a sale, if at all, would be vast because of the approval layers necessary to do business with a startup.

Selling analytics to a marketing firm, while more approachable than consumer goods, was avoided as well. Our major competitors were devouring this space, and from the marketing firms we spoke with, many had proprietary tools that accomplished a similar goal. Our software wasn’t developed enough to beat them at their own game yet.

The clients we did approach with their respective sales strategies are described below:

- Selling to a middle man–a political consultant–who would then charge their clients (top)

- Selling directly to an asset management firm (bottom)

Political consultancies are small enough to approach while dealing with client issues big enough to gather conversation in social media. Our value proposition was to provide analytics regarding a politician or campaign topic with insight that would be otherwise unattainable. There were few competitors in the political space, and our theory is that sentiment data could be used to by a politician to tailor a specific message during a campaign.

We also approached investment firms small enough to reach a decision maker with portfolio companies that were discussed in social media. The value proposition was that investors could use our platform to gauge sentiment about a company they were invested in or considering investing in.

III.

The goal of this case study was to discuss customer acquisition as an alternative to early stage fund raising in direct reference to how I approached my first customers. While the importance of venture capital is necessary to scaling a business in select cases, it’s becoming apparent that it’s less valuable than it used to be, simply because the costs of starting a technology company are decreasing.

While raising an investment round may be on your company’s tentative schedule, I highly recommend focusing on early customer acquisition as a way to bootstrap. Although I didn’t do this, my hindsight research tells me I should have.

Related Essays

• Failing Irrationally
• Customers vs. Investors
• Less Wrong

• « The Triumph of Bullshit: A Real World Fallacy
• » Entrepreneur’s Disease: A Convo with Colin Marshall

blog comments powered by Disqus