Here is an edited transcript of a briefing by Rob Fitzpatrick at the May-1-2020 Bootstrapper Breakfast on the value of taking a long term approach to bootstrapping. Hyperlinks have been added for context.
Rob Fitzpatrick on Taking a Long Term Approach to Bootstrapping
Hello everybody, I’m Rob Fitzpatrick. I have been running startups and little businesses for 13 years now. My first company was an attempt at a scalable startup. We went through Y Combinator, raised funding, had big customers, and then went bankrupt. Since then, I’ve decided that I much prefer bootstrapping, working with a small team, and having the whole thing more within my control. So I’m excited to be talking about how bootstrappers can build their assets and knit their safety net at a Bootstrapper Breakfast.
I Poured Everything Into my First Company
I poured everything into my first company, both financially and emotionally. I had chosen a business that looked real good on a spreadsheet and the investors liked it — huge market, lots of upside, very trendy. But that’s not so helpful when you’re going out of business. And what I realized during that painful transition was that everything I built was being reset to zero; there was essentially nothing I could take with me because that business had been serving the advertising industry, and I didn’t want to serve them again.
We had been trying to figure out social advertising sooner than Twitter or Facebook. Obviously we didn’t and they did, which is fine. But the painful part was that since I never wanted to work in the advertising industry again, all of the insight and contacts I’d built up over four years of hard work were worthless.
A Healthy Entrepreneurial Career
And I was like, “Oh man! That truly was wasted time.” And so after that, I shifted my goal and I stopped thinking of it as trying to build one company and I started thinking of it as trying to build a healthy entrepreneurial career. This experience led to a pair of epiphanies:
First, you’ve got to avoid blowing up. If you start a company and it doesn’t work–which happens sometimes–you need to craft a graceful ending to be able to start your next company. If you have a ton of personal debt, then you’ve blown up and you have to go get a job or you’re prevented from being entrepreneurial. And I was mighty close in my first one. I was in debt. I was emotionally burned out. It was a big hole to dig myself out of.
Second, I realized that I wanted each of my subsequent companies to build a long term edge or advantage such that my second company was easier than my first, and my third easier than my second. I wanted to feel that my career as an entrepreneur was progressing and going uphill rather than restarting from scratch, every time I started a new product or a new company.
This is something that I had missed in my first business. After that, I made an intentional effort that no matter what happens with the product or the company, I’m going to build an edge and I’m going to protect against blow up.
Three Key Assets
This led me to plan for and manage three categories of resources or assets. I consider them entrepreneurial or founder resources–as founders you own them. They don’t belong to the company, they belong to you.
If I had been pursuing a traditional career, each job that I moved through would get easier because I would have an expanded network, additional expertise, and additional credibility. I started looking for the equivalents for an entrepreneur and came up with three:
- Industry insight and connectedness
- Access to strong cofounders and partners
- Established audience and activated network.
Let me take these one at a time.
Industry Insight and Connectedness
The first advantage, industry insight and connectedness, is fairly uncontroversial. The more you know about the industry, the easier it is to spot opportunities.
You don’t need to start from scratch with your customer development because you already know roughly what matters and what the problems are. And if you’re connected—if people already respect you and want to take your call—you can get those meetings, you can get that first client. When I was trying to break into the ad industry, I must have spent the first 18 months just attempting to figure out the foundations and get taken seriously. And that was 18 months of burn rate that was wasted because I didn’t have the basics.
Access to Strong Co-Founders and Partners
The second advantage is access to strong co-founders and partners. Many entrepreneurs seem to expect great co-founders to fall onto their lap. They think it’s a passive process, that just by living their life and they will get to know the right people. But co-founder relationships are very different from the day-to-day relationships that we build in the rest of our lives. They need to be cultivated intentionally. The way that you do that is by working together with people on side projects, hobby projects, gigs, mastermind groups, and other situations where you can see each other’s thinking and work and mindset revealed. This is necessary for you both to trust each other as co-founders or partners. Pre-proven trust makes a huge difference.
If you look back at my career, I’ve had such good luck with co-founders, but it’s also because I’ve gone out of my way to cultivate those relationships. Even if someone wasn’t available, basically whenever I met a smart person who seemed to have value system which aligned with mine, I wrote their name down in my “co-founder dream list” and then I went out of my way to create a side project with them, because co-founders are never idle and available at the moment you need them. The type of people you would want—and the same is true for business partners—always have other opportunities.
So you need to build the relationship ahead of time so that six years later when they’re like, “Oh, I sold my company or I lost my job,” boom, you can pounce on that and vice versa, if you sold your company or lost your job.
Established Audience and Activated Network
The third resource is an established audience and activated network. The audience is pretty self-explanatory. It includes having a popular blog, a newsletter, whatever. There’s this great anecdote when Jason Cohen—who blogs at asmartbear.com—was starting WPEngine, he said he was going to build it in public. He said (paraphrased), “I’m going to build this company in public. I’m bootstrapping it. You can see what I’m doing.” And he started succeeding immediately and had to stop sharing his numbers when he passed like ten million in revenue. And one of the comments, which I just loved, was someone saying (also paraphrased), “Well that’s not fair. You’ve got this blog. You’ve got 20,000 email subscribers. Of course you’re going to succeed.” And he’s like, “Yeah, that’s why I’ve been telling you for 10 years that you should start building these audiences now, before you need them.”
Take a Long Term View
And the fascinating thing to me, is that in the short term, building these assets is always irrational. They take extra time and have a long payoff period. So building a blog or a mailing list or building a pool of co-founders, it’s always going to look like a bad decision on a one-year timescale. But on a ten-year timescale, it allows you to build businesses that no one else can touch. And it’s like a massive multiplier to your luck and your ability to succeed.
And so the little quote in my head is:
“Unfair advantages grow from irrational habits.”
It applies to so many activities; if you go out of your way to do incredible customer service, then even if your business fails, those customers will buy from your next business. So these irrational habits build an edge.
A long term view can give you plenty of advantages but here are the main ones for me.
- Cut friction of early customer discovery, customer validation, and early sales.
- A safety net if you need to shut down via either jobs, freelancing, or quick opportunities
The first benefit is when you start a new business or a new product or a new whatever, you get to save up to a year of time by skipping the friction from your early customer discovery, validation and sales. You already have the contacts, so they automatically set up meetings with you or take a coffee. You already have the foundational industry knowledge so you know the problems. It’s such a time advantage. If you’re burning, say five grand a month, saving ten months of customer discovery dead-ends is as good as getting fifty grand in funding because it saves you that much time.
The second benefit comes into play when you do (unfortunately) find yourself in a cash squeeze. When I was going out of business for the first time, my mom was terrified because I burned all my savings and she was like, “Ah, you’ve got no money. What are you going to do? You’re going to be bankrupt. It’s going to be terrible.” (And still, she was still very supportive, which I enduringly appreciate.)
But for me it didn’t feel that scary because I knew I had an activated network. I knew a lot of people and they knew I could do what I said I could do. Which is important. The important word is “activated”, not “network”. I think a lot of people get network wrong. They think network is about who you know. But it’s not. It’s about people who know you and who also know you can do a valuable thing. So if you’re the world’s greatest programmer, that’s so useless when you’re in a real cash squeeze, because it takes two or three months to spin up a freelancing pipeline. So if you’re tight on money and you’re choosing between doing a job or cross subsidizing your company, it’s too slow. That network needs to be activated, where the people know you and they know you’re good at what you do and they trust you can deliver. Then it really acts as a safety net where you can convert network to quick cash and save your company or stay in the game for your next one.
Invest Effort For The Long Term
These career assets are non-obvious because you have to pay for them like you would pay for insurance. You devote say 10% of your time forever to maintaining and building these resources and maintaining these safety nets. But it ensures that if your company doesn’t work, you bounce right back and your next company is easier than your first. And over time what that builds up to is this unfair advantage where you can go after ideas that no one else can go after. They simply can’t compete with you because you have all the partners, you have the best co-founders, you’ve got this incredible amount of industry expertise. Everyone already knows and trusts you so you can get that big partnership.
And honestly, it took a while for me. My first company I consider a write-off. So that was four years of my entrepreneurial career just thrown away because I hadn’t been thinking long term. I’d thrown everything into that one opportunity. Then after that I’ve been doing companies for eight more years. It probably took two or three years for these investments to start paying off and then suddenly everything I did felt easy. It felt like, “Oh, it’s just working,” and I don’t think it’s because I started getting lucky. I think it’s because I now had these things on my side.
Manage Downside Risk
And after reading the Black Swan and Nassim Taleb’s other books, I got real focused on downside risk because I don’t want to blow up. The worst situation for me would be to have to go get a job. That’s the only thing I would consider a failure. A company failing, I don’t mind as long as I don’t have to go get a job afterwards. [Rob’s note: and I’m assuming here that I can make an effort to find good opportunities and new jobs for the folks who have chosen to work for me, which has always been possible.]
So I view downside risk as a combination of three main factors:
- How many months will it take me to either reach break-even profitability or decide that I know enough that it’s a bad idea and I can quit.
- Multiplied by my personal burn rate, which I try to keep low
- Multiplied by the uncertainty of the idea
Risk = months_until_breakeven_or_quit * burn_rate * uncertainty
So something like a new social network has a really long period of time until break-even or quit and it has huge uncertainties. So that’s very high risk.
And what I found interesting is you can control this formula. Lean Start-up tried to control this formula but I feel like it only goes halfway. Lean Start-up helps with speed and certainty, but it takes your starting point—the business idea or vision—for granted. Lean Start-up basically says that you have a vision, and given that, let’s help you make the best of it. But I think that’s only half the battle, right?
Execution and search are obviously part of it. But the other part is, with good insight and good connectedness, you’re able to choose a much better starting point, a much better idea. You’re able to choose a starting point that instantly saves you six or 12 months of work because it’s leveraging these resources that you’ve built up through the earlier portions of your entrepreneurial career.
So that’s basically it. Obviously not everyone is going to want to invest in all of these resources because it is a time tax and not everyone has them. And of course, cash is the other hidden resource which makes everything easier. But before you have a pile of cash, what I found really powerful, is basically taking an honest look at which resources I have and don’t and then trying to think through which ones I’m willing to invest the time in building over the long term because I want them to help my businesses 10 years from now. And I think that’s a very helpful exercise.
Related Blog Posts
- The Startup Toolkit: Unfair Advantages Grow From Irrational Habits
- The Startup Toolkit: I prefer Effectuation to Lean Startup (Sorta) which includes this summary of Effectuation:
“To look for Effectual ideas, ask yourself which resources you have:
- Who are the people who would help you, even for a small (but important) favour?
- Which companies take you seriously enough that they might partner?
- Which industries do you know or have credibility in?
- Which important skills do you have (or have access to)?”
- SKMurphy: “Saras Sarasvathy’s Effectual Reasoning Model for Expert Entrepreneurs“
- Bootstrapper Breakfast: “Rob Fitzpatrick to Brief on Founder Assets and Safety Nets Fri-May-1“
- A Smart Bear: “Vetting Startup Ideas: The Systematic Birth of WPEngine“
Photo Credit “Rob Fitzpatrick” from robfitz.com/about/