Guest post: What do the Tooth Fairy, Santa Claus and Bootstrapping have in common?

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This is a guest post by Iqbal Gandham (@IqbalGandham), a serial Entrepreneur, with two out of his last three companies having been listed on various exchanges. Currently he splits his time between his pet project Addpiks, due diligence for investors and mentoring the odd startup.

What do the Tooth Fairy, Santa Claus and Bootstrapping have in common? We are all told they are real, but with experience, we learn they are really figments of our imagination, and the sooner we accept reality the better prepared for the real world we might be, and that is the purpose of this article: a little reality check for 2011.

For the sake of clarity, the Tooth Fairy I am referring to is the one who was supposed to turn up when my molars fell out, and Santa, well the guy who was to tumble down my chimney a couple of weeks ago and leave an iPad, as opposed to the fat red guy or St. Nicholas.

Which brings me to Bootstrapping, again to avoid a flame war, I refer to the Wikipedia definition:

“Startups that bootstrap their business fund development of their company through internal cash flow and are cautious with their expenses”

Of course you’re not reading this for a discourse on Tooth Fairies and Santa, at least I hope not, so let’s bench those two for another post, and look at bootstrapping in more detail, and see if there is any truth behind the claims.

It’s pretty simple to debunk the Wikipedia definition, after all the startups that I have met do not have cashflow, if they did they would be a very rare find indeed, something Sir David Attenborough would be proud of.

But that would be too easy, so lets look at the wider definition of bootstrapping i.e ”Build it without spending much cash, raising money, and just get things done by asking for favours.”

Is this possible? lets see:

1. You will have people in your team, one man bands rarely work, and we are all told we need co-founders, so at a minimum, it’s safe to assume a two man team.

2. Your company may not be paying anyone a salary, but as humans we need to feed ourselves, and put a roof over our heads. After all, none of the startup teams I have met have managed to live off the land (if any have, please do write a case study).

Cost – (£1k/person/month) – I realise that some people can live in a box, but most of us need a good night’s sleep, which in London, which we’re told is the place to be, does not come cheap.

3. You need some hardware, I know, we can go to Amazon, or some cheap hosting company out of Germany, but they all want hard cash.

Cost – £200/month give or take.

4. You will need to get some external work done, no matter how many good deeds you may have done in your life, and how many karmic points you may have added, there is only so much your karmic deeds will buy you.

Cost – This is a difficult one, but lets assume no more than £100 a month.

5. Misc – the coffees, the tickets to startup/pitching events, the travel costs, meetings with clients, money spent on angel networks etc.

Cost – This again is difficult, but lets apportion £50/month.

The grand total being £2000 + £350 = £2350 a month.

Of course the big one is the £1k a month, and mum and dad could pick up this tab, and I know this is true for some, but for many of us we have rent/mortgages to pay, and perhaps even a few bills to boot. Either way someone somewhere is paying cash, and keeping you going.

So the next question is “How long will it take me to get my idea to a point where… “

1. I can raise money (a reasonable amount, not the 10k levels)?

2. [Or] … I can generate some cash?

Looking at some of the companies over the last two years, and from past experience, this could be anything from 12-18 months, if not longer.

Punching the numbers into my calculator, we get £42,300 over 18 months. Let’s round this up to an even £50k, after all we may need a holiday somewhere, have a major night partying or two, or have to pay for some additional development work.

The harsh reality for startups is that you need someone somewhere to pick up a tab for around £50k, which of course could be split over two people, i.e £25k a piece, but still that is just £300 or so pounds less than the average salary in the UK.

You could ‘raise’ this by consulting, but experience has shown that doing this at the wrong stage of a startup’s life leads to delays which end up costing you more in the long run. Again whether you go out and work, or parents pay, someone somewhere still needs to find this cash, which leads me to the following conclusions:

1. Tooth Fairies do not exist.

2. Santa never comes down the chimney.

3. Bootstrapping as a term needs to be consigned to folklore, and mentioned at bedtime to our children when we recite how we built our startup.

I wrote this article not to dash the hopes of any entrepreneurs, but to bring home a little reality, in the hope it will result in more successful startups, simply by being more realistic before they start out.

The question is: how many startups agree/disagree with these numbers?

  • Andy Sinclair

    Interesting analysis. I agree with most of the figures, although living in London can increase the £1k a month considerably, especially if you have a family to support!

    However, I am surprised that you say give it 12-18 months to get to the point where you either have some cashflow, or can raise some investment. I would say you need to get to a point where you can test whether your idea is worth pursuing, and this should, in most cases, be less than 12-18 months (according to the lean startup movement this is the aim of version one of your software). At this point you either carry on (the product shows potential) or get a job! Granted, you need funds to cover this period, but if you can demonstrate that the idea has traction then raising investment should be easier, and who knows you may even be able to generate some income from that basic first version.

    There is also the “opportunity cost” which is the salary sacrifice that you are giving up to work on your startup – however if you think about this too much it may depress you!

  • Nick Pelling

    Hi Iqbal,

    Genuinely nice post! Even so, I’d perhaps double all the figures to £100K, because 12-18 months to develop an innovative product *and* a set of paying customers while surviving all the inevitable development disasters would be going some. =:-o

    Th other issue is whether the Tooth Fairy and Santa Claus are any more real than lead angels, for without those particular mythological beasts, most startups will never get to market. Oh well! :-(

    Cheers, ….Nick….

  • Iqbal Gandham

    If you double it to £100k, I think you may end up killing the dreams of many a person :-).

    What I would really like to be able to do is to build a distribution curve showing the money spent across number of startups across europe.

  • Ali Ahmed

    Great post Iqbal. I’ve always had difficulties with the concept of bootstrapping and the lean startup mentality, and I guess now I know why :P

    Let’s hope for a 2011 full of investor promise and rebounding venture activity.

  • Tim Panton

    The only way I know of to bootstrap without ~100k is to have a decent customer order before you quit your day job.

    You hack together a proof of concept, convince someone in a big company that you can solve an expensive problem for them for (say) 50k.
    Now the really tricky part, convince them to pay in advance, or at least on frequent milestones.

    A couple of great businesses I’ve worked for started this way.

    • Si

      To be honest my own startup experience is probably too “small” to be relevant here.

      I bootstrapped a service business on my own. Grew it to 10 employees and a decent turnover and have recently sold the business on. We were not the next google by any stretch but I learnt some awesome stuff, had no boss, got to indulge my creative side and loved every day of it.

      Without the hype and fawning appreciation of the tech media I guess it wasn’t actually a start up. Maybe it was the fact that we had a business model from day one that made it not special.

  • Paul Johnston

    I totally agree with the sentiment. However, I would say the figures are a lot higher if you have a family (as I do).

    I think the idea of bootstrapping and the idea of lean startups originate in a world that doesn’t exist in the UK – namely the US collegiate system and it’s times between terms etc. Also, the boostrapping process works superbly if you just don’t have a family.

    I get really pissed off with people who think that it’s just a case of asking for favours and making a salary to support you. It’s just wrong.

    You have to commit to a project – and that’s always been the hardest thing. Having a big customer order before you start is a great idea, but I would suggest this isn’t necessarily the kind of startup mentioned here.

  • Daniel Tenner

    I’ll pitch in to agree that while some startups may be able to get a customer order to fund themselves, those are the exception rather than the rule, and include none of: Twitter, Quora, Facebook, Google, Ebay, Skype, Paypal, … or, in fact, almost _any_ big web business out there.

    The only kind of startup that can go without any funding is a classic large-company B2B play where you already have a very chummy relationship with clients so they’re willing to start paying you early.

    There is an alternative, which is to build something so minimal that it really only takes a weekend or two, but that carries many other risks (for a start, anyone can copy you in a weekend or two). You can’t make an ambitious consumer web startup without any funding, and we all know seed funding in the UK is right there in the line-up with Santa and the tooth fairy.

    • Tim Panton

      Agreed, neither of the customer funded startups I was thinking about were in the consumer space.

      I do worry about the current obsession with consumer facing startups.
      Would it be so bad to have founded Linkedin or salesforce (or arguably Google)?
      Even Skype is trying to move into business communication to drive up ARPU.

      The other advantage of customer-funding is that at least you know early on it is a saleable product.

      A network-effect business needs to get the magic ‘traction’ and you can spend a long time getting to that point – if you ever do.

    • Paul Johnston

      Agree that seed funding options is a MASSIVE hole in the UK startup community.

      And I don’t care what people say – this is *the* area that needs focus. It’s the bottom layer of the pyramid and is the reason we have very few large internet based companies in the UK.

    • Daniele Beccari

      E-bay was actually bootstrapped, in fact it was a free service with customers so happy that they started sending spontaneous cheques in. They went for VC funding later on to scale up faster, but not to start.

  • Iqbal Gandham

    Interesting replies. I know its a bit early to presume, since feedback/actual data is in short supply, but if this is the case, then are the only people who have the ability to build a startup sitting in University, i.e have time and an environment which supports this type of entrepreneurship.

    I am forever hearing “When will the next google/facebook come out of the UK” Personally I will be more than happy to place a bet with Ladbrokes to say “not in the next 5-10 years”, the reason is because of the maths above.

    I guess instead of the millions VC’s in the UK are putting in, I would just gamble 100K of 10 startups with an idea instead, once they have done the first say 6-12mnths of hardwork

  • Fundraising & Startups « We Klik > What I see, hear & think <

    […] Before you start entering into such conversations, let’s look under the hood a little first, just to make sure your approach to business will not scare off investors upon first sight. Are you operating a lean operation by ‘bootstrapping’ your business and keeping your operating costs as low as possible? Here is a good article (from a new media/new tech perspective) by ReadWriteWeb on Bootstrapping. Then there’s this article too from Doug Richard on how to survive a downturn (it’s mainly for established businesses but has some good general nuggets that can be applied by startups and established businesses alike). Guy Kawasaki of Garage Ventures shows why taking a bootstrapped plan b to VCs is much better, here. And finally, some good nuggets here too. For an alternative (anti) look at bootstrapping, see here. […]

  • jonathanwthomas

    When I think of bootstrapped startup – I think of someone who has a full time job and spends their evening hours late into the night working on their ‘next big thing’ – turning it into a going concern and growing it to the point where they can quit their job one day.

    A bootstrapped business makes money from day one or you work for free for it until it makes money. You don’t spend all your time and put all your resources into one basket and think that a startup with no business model will make you a living.

    Have a living from day one with no outside investment – that’s a bootstrapped startup.

    It happens, I’ve seen it. But they don’t make waves like all the hot startups who ride a wave of hype.

  • Misae

    For all the comment about VCs leaving shortages in funding, I’m inclined to think that it’s the cost of living in the UK that’s the biggest obstacle to start ups. The UK government stance of “tax you so hard, you can’t stop to think” supports big big businesses in this country, not just through their tax the poor to fund the bankers initiatives, but because it suppresses innovation. You can’t stop to dream up the next big thing in this country because your local council’s heavies will come and take your home!

    Why should VCs be expected to pay for people’s living expenses when nothing may come of it? They’d be employers not investors if they did that. As Iqbal rightly points out, it’s the cost of living that is the most expensive part for most start ups. If you can live off of £25k for 18 months and build a company in London, you’re clearly a genius and I’m sure whether you’re into tech or any other sector, you’re bound for glory someday.

    Students and entrepreneurs are an important part the country’s future economy. Students can defer grant repayment till they are making over a certain threshold. Why can’t the government make a taxation system that allows those that show active involvement in entrepreneurship to defer tax payments till they reach a threshold? After all, you’ll learn a darn sight more of lasting value in 3 years of trying to make a start up work than you will in 3 years studying theory at Uni.

    I do believe that it’s possible to make a bootstrapping startup work. It cost me more than the figures Iqbal put forwards with a huge input in time. However I’m not genius and I’m sure there are gifted people out there who could do the same quicker/cheaper/faster than I. What I do however particularly object to is that the bar for entry is kept so unnecessarily high in favour of old wealth. Iqbal is right. The current climate favours moonlighting students whilst the seasoned veterans with the skills to make a difference are marginalised in a seas of taxation and inflation.

    Final slight digression – how guilty are we on an individual basis of supporting the status quo rather than diversity? Do the majority of us unflinchingly Google everything whilst other innovative search start ups get ignored? Do we prefer to shop at high streets names or support independents? My thoughts on the enterprise vs start up markets is that the UK is even more polarised towards dominant players than the US. Maybe we’re all too busy working to pay the bills to explore others or maybe we’re actually more sheepish than we like to think of ourselves? Whatever the case, if we as individuals aren’t prepared to put our wallets where our mouths are and become the customers of start ups, why keep expecting more UK successes and why expect VCs to find those that are putting in the effort? Whether it’s groceries or technologies, maybe we should all be trying to buy local?

  • Iqbal Gandham

    Misae, great thoughts. When I wrote the article I thought £25K would be too much, ironically most people have been saying that it’s much more than that. If this is the case (deep down I think it is), then in the UK we do not stand a chance of launching the next Google, or some business with some serious IP.

    Investors want:

    1. Experienced team – most of these guys have a mortgage to pay somewhere

    2. IP – takes a long time to build good IP

    3. Traction – Again this takes time, rarely happens overnight, and if it does somehow you need to support that traction

    Combine these three and you have to pour some serious cash into a hole to build something great.

    What is really interesting is your last paragraph. This is something that I have been thinking about also, we as startups do not support our startups.

    We all talk about the ecosystem, but this ecosystem stems from the entrepreneurs themselves, each one who possibly has a network of over 100 people. Combine this with the PR guys like Techcrunch (UK), and Guardian, Telegraph, WSJ (Europe), and you could build a fantastic channel to ramp (promote) the startups.

    Maybe we should pick one startup, and try an experiment to see if we can get everyone in all verticals interested in it…..

  • OoTheNigerian

    My idea of bootstrapping is working on your stuff Nights and weekends while working full time.

    Joel has another strategy called working in waves.

    School is the best time to start especially when you do not have pressures and responsibilities.

    Out of school is hard but not impossible. We surely will not give up now :)

  • Phil Gainley

    Great Post Iqbal

    Im really interested to see what the breakdown is of this group as im getting started

    Ive created a little survey of 10 questions for bootstrapping inspired by Iqbals post, can you guys help if your a bootstrap startup? I will share the results of the survey with everyone

    Many Thanks


  • Lasse Koivisto

    Hi Iqbal,

    I agree with most of the things, but I think you are only thinking about a few types of startups so the conclusion is worng for cases you didn’t thought. I’m telling this, because in my family there is a true case of bootstrapping.

    My uncle took some money borrowed from the bank, small money. Rented a small place in the city center in a city here in Brazil, took this money to make some small reforms. Bought frozen food and negociated to pay in 30 days and the rent he also negociated to pay in 30 days. In 15 days the reform was finished and in the next 15 days he worked hard to re-sell this frozen food to make enough money to pay the first debts and to have something to live.

    It worked. Wasn’t easy, not at all, but it worked.

    Something he tells me every time. “Commerce is quick, so try to start something in this field if you don’t have enough money to star something bigger”

    Like Jimmi Hendrix sings “With the power of soul, everything is possible.”


    Lasse Koivisto

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