Excerpt from a Havard Business Review blog postby Sramana Mitra | 11:00 AM February 3, 2014
Raising funding for startups in Silicon Valley is a low probability game. Fewer than 1% who try actually succeed.
Outside the Valley, the startup eco-systems are mostly immature, and the probability gets even lower.
The bar to raise seed funding is getting higher and higher. Seed investors are mostly operating as growth investors, expecting that the entrepreneur will somehow manage to bridge the gap and bring a concept to realization. In fact, what these investors really want is to invest in businesses that have traction, not just validation.
In short, they want to come to the rescue of victory.
As an entrepreneur, how do you go from concept to traction? How do you bridge the seed capital gap? What do you do if you are full of dreams, but stuck in the gap between concept and seed?
Offering a service is one of the best ways to bootstrap
This remains a controversial point of view. Most industry observers take the position that companies get distracted if they try to bootstrap a product with a service. But from where I sit, bootstrapping products with services is a tried and true method.
In our incubation methodology at 1M/1M, we actively encourage entrepreneurs to engage in services businesses. In particular, we encourage them to immerse themselves with customers, learn their problems, and do some services projects that not only generate cash, but also generate customer intimacy and trust. Through these kinds of dialogues, entrepreneurs diagnose real pain-points in customers, and end up building products that customers are willing to pay for.
A couple of examples:
AgilOne, a company that provides cloud-based predictive customer analytics, was founded by Omer Artun in 2006. Initially, the company relied entirely on services to get close to customers, understand and address their problems, and in the process generate revenues. Today, AgilOne’s product is a software-as-a-service platform. Much of what the company learned about its customers in the services mode has been developed into its product, although a good percentage of revenues still comes from services.
Andy Chou, a PhD student at Stanford, also bootstrapped his company, Coverity, using services. Andy’s research was financed by DARPA at the university. The technology allows automated cleaning up of large code-bases, and was licensed back to the company by Stanford.
Andy recounts his funding story: “We talked to all of the VCs and told them that if they wanted to invest in us, we would only consider certain types of deals. We presented them with our range of acceptable terms and indicated that if we did not receive offers in those ranges, we were content to continue bootstrapping the company as we had a solid clientele. We were in a sweet position where we had revenues and did not need to receive additional investments to succeed. As a result, we got a good deal from Benchmark Capital. They invested $22.3 million in us in 2007.”
Both of these companies bootstrapped to profitability via services. Not only is this a viable method of getting your startup off the ground, it’s a proven method of reaching profitability, as well. In some cases, it can take you to the enviable position of having VCs like Sequoia or Benchmark knock on your door. In other cases, you could even have investment bankers come calling, wanting to take you public, and a whole slew of late-stage investors wanting to shower you with funds. All those are desirable outcomes.
For other ways to bootstrap find inspiration in this blog post: How to bootstrap your startup by George Deeb