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

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?