A Better Model for Bootstrapping Startups
This is a repost of the original article by Christian Lindholm, co-founder of Koru, published in the November 2014 issue of CoFounder.
How to make enterprise-startup business relations work
The attractiveness of bootstrapping has sunk over the last years, and it’s increasingly seen as the solution for those who cannot secure venture funding. However, when you talk to successful serial entrepreneurs, bootstrapping is the recommended route. I admit, it is a tough and long route, but there are ways to make the ride smoother.
The best bootstrapping plan is to start selling early. A paying customer is your best indicator of market value. There are a lot of wonderfully positive potential partners who at first seem engaged and motivated, and seduce startups into pilots, trials and partnerships — but this ‘Mr. Show-Me-More’ keeps his wallet well out of sight. Be aware of him. Try to find ‘Mr. Customer’ and bring him value and make him happy from day one.
Creating value is about building trust. Taking small steps with clear goals is a very good way of doing this. This kind of trust-building process is actually, when you think of it, a mirror of modern, agile software development, which is based on short sprints. Agile, sprint-based purchasing processes in corporations could be an incredibly powerful way to renew established corporations who often suffer from an inability to innovate, and at the same time it could work perfectly for startups developing new fit-for-market products.
In purchasing, there are always two parties: the seller and the buyer. This is advice for buyers: start buying from bootstrapping startups. They are a great source of innovation. This is advice for startups: start packaging your offer into a solution as soon as possible and start charging for it. If you cannot charge, you have not created value.
Having worked at different sized corporations in the past, I have heard many arguments against working with startups — they pose a risk, they cannot deliver, their quality is not proven, and they do not scale with increased demand.
If you’re an established company, start sprint-buying. Much of a product’s development is done in stages — from ideas, to concepts, to prototypes, rounds of prototypes to a final product. By dividing the purchase process into smaller sprints, and defining meaningful goals and outcomes from each sprint, the risks are much easier to manage. The buyer should focus on the deliverable at the end of the sprint and compare that to the cost. If the result brings enough value, one commits to the next round. At that point, the financial risk is very manageable, and so is the delivery risk.
Delivery is done by the startup. Startups are created by people who have made a solution to a problem. As such, they have unique knowledge and will minimize any risks against losing their reputation. Tasks and goals are seldom impossible to achieve, they are merely dependent on time. If the buyer accepts some time risk of a later delivery, then it is quite likely that the startup will push a bit longer so as not to damage their reputation.
The other popular argument against buying from startups is scaling. Again, the world has fundamentally changed, rendering that argument invalid. The world is full of specialist firms of freelancers who have unique competence levels at which they can feed themselves. Again due to social software, these freelancers can meet demand. Again, in reality, if the buyer gives a few months heads-up or indicates interest and provides constant feedback to the supplier, the startup can meet demand. If a jump to a new scale is required, one can syndicate the development between several startups.
The final point is intellectual property (IP), which tends to be grossly overrated in the early phases of development. If the corporation takes a slightly more relaxed approach to IP – for example by letting the startup retain the IP and getting a broad transferable license or vice versa – the two can build value together. If the value of the IP and the work becomes strategic, then there are always solutions around the IP from investment and acquisition to licensing agreements. It is worth remembering that owning the IP is only valuable when the company can afford to defend it. That is possible only after there are more than tens of millions-worth of flex in the balance sheet. Creating a good IP portfolio also takes years.
At Koru, the wearable company I co-founded, we have been a supplier to the Finnish national broadcaster YLE in this kind of new agile purchasing process. It started from a workshop I held at YLE where we asked what would happen when news shrinks further and migrates to the body.
TO BUY FROM STARTUPS, BIG ENTERPRISES SHOULD DIVIDE THE PURCHASE PROCESS INTO SMALLER SPRINTS AND DEFINE MEANINGFUL GOALS FOR EACH SPRINT.
A few months later we started a project to build a functional prototype for YLE. We used the sprint approach of 3 sprints of about 2 weeks each. After each sprint, we created the next milestone, and we continued only when the client approved. We focused to ensure that each step generated something tangible, so that one could stop and feel good on both sides. In the first step, we developed a user interface and a prototype using static news data. In the second, we refined the prototype. And in the third, we connected it to live data. Like in many projects, we had unexpected things pop up. In this case, there was more work required in maintaining the connection between the wearable and the phone, which ran a news server fetching and storing the news to be displayed on the wearable. The financial risk was manageable on both sides, and by using milestones we managed to build good trust on both sides.
Most importantly, it worked also as a case of proof for a working business relationship model between small and large companies. Start sprint buying!
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