I was talking to a first-time software entrepreneur recently, as I often do. As I was trying to give him some useful counsel, it struck me how I tended to give certain pieces of advice over and over during these types of discussions. So I thought I’d try to summarize some of these nuggets that tend to apply pretty widely to software startups – especially those in the bootstrapping stage – into one article. Below is my attempt provide that advice in an organized fashion, so here goes!
Manically focus your efforts on a segment you can WIN
First and foremost, your job, as a startup CEO or founder is to make your company and product the only obvious choice for a particular set of customers. The previous sentence may sound straightforward, but it isn’t easy at all. And of course, this customer segment can’t be a market of one! But in reality, as a startup software company your addressable market size in the beginning matters a lot less then being a market leader for SOME specific set of someones, somewhere. That’s unless you’re in the process of raising VC funding – that’s a completely different story.
As a startup, you absolutely need to aim to be a market leader. You don’t absolutely need to be #1 in a market (although that’s highly preferable), but you better be at least in the top 2 or 3 players. Because if you aren’t able to do this, your chances of even modest startup success (which I define as making the company a going concern) are greatly reduced. You have VERY limited resources as a startup, especially if the company is bootstrapping. But being bootstrapped can somewhat perversely help this process of proper market definition. That’s because your resources are so limited when bootstrapping, it helps by forcing you to focus. Once you are able to focus your efforts on an “winnable” market segment, both strategic and tactical decision-making for the company becomes easier. So as soon as possible, absolutely define your market in such a way that you can and will be the market leader. This will simplify everything that you do at an early stage, reducing wasted effort and tangible resources. Most crucially, I’m thinking about those product and marketing decisions that often make or break an early stage business.
So choose your market segment very carefully
Here’s a controversial statement: “Defining your market as too big and too broad dramatically reduces your chances of startup success”. I hinted at this in the paragraph above.
I can almost hear some readers now thinking “What are you talking about???!!! This makes no sense, many readers are probably thinking. How am I going to build a big company if I don’t go after a big market? How will I raise money? Investors will demand it!”
Let’s talk about this for a bit. First of all, you are a startup with no brand, and little in the way of resources. Frankly, compared to established competitors, this will be true even after you get to the holy grail for most startups; funding from outside investors. But now, before you really have anything going for you, progress is essential. That’s true whether you intend to bootstrap all the way to an IPO, or want to raise money from VCs at the earliest possible date. Either way, you need to create SOMETHING that someone will want to buy, to attract either customers or investors. With few resources, this usually means a smaller rather than large at this early stage.
The perfect bootstrapping startup market segment
In my opinion, The perfect startup market is one that is well-defined and small right now, but will grow fast and explode into a much bigger market in the future. So ideally you jump in before other competitors are convinced that it will become a large market. This represents the best of both worlds for a bootstrapping startup software business: a market that you can get your hands around and dominate right now, but one too small for big companies to jump into quite yet. I’m not saying this is easy to do; it’s definitely not. It’s hard, and there is a lot of educated projection and a bit of luck involved. If you’re wrong, you’ll be stuck in what we call a “niche of no return” and will need to pivot – or die. But the rewards of picking and optimal-ish market segment successfully are immense for a startup. It gives you really the only realistic chance for most startups to establish their company as a market leader in what turns out to be very large market segment. If you wait until the market is more established and much larger, most startups will be locked out by the noise of larger players. Choose this type of market and execute successfully, and you won’t have trouble raising money when you need to scale (although you may not even need it).
Note that this doesn’t necessarily need to be a market for something that doesn’t yet exist. It is often a small, but recognizable emerging segment of a currently existing larger market. But it needs to be a segment that the current players in the market aren’t adequately serving, for whatever reason. One example is to attack an under-served vertical market segment with underlying technology that you know will be applicable to the broader horizontal market that this segment belongs to. A classic example of this is Amazon. They’ve built an infrastructure which now dominates the retail ecommerce. But they didn’t start there, with the horizontal offering that you see now. Had they done so, they very well may have failed. Instead, they chose a single vertical ecommerce segment (Books) that could be used as a beachhead into the overall horizontal ecommerce market. Only after they achieved that dominance in books did they then move onto other verticals, initially music and DVDs, using their disruptive approach. Once they succeeded there, they quickly added many other ecommerce verticals, at an accelerating pace as they grew and became better known. Before too long they became the ecommerce giant that we know today.
It’s REALLY important to reiterate that they didn’t start as a horizontal ecommerce company. Had they done so, they may not even be around today. That initial, tight focus on a single digestible market niche in the beginning mattered greatly in their success story, and this is true with most startup software business as well. That tight focus allows you to become the best at something to someone, as I discussed above. I believe that this may be the single most important key to startup success.
Almost everyone will be bootstrapping at some point
Now many entrepreneurs may feel this is doesn’t apply to them, as they intend to raise VC funds. But most startups in the world (including software-based businesses) never raise institutional investment capital (VC, PE, etc) of any kind, and can’t do so even if they try very, very hard. Frankly, most SaaS and mobile software companies don’t need to and shouldn’t. Unless you are a repeat startup software CEO with a track record of great exits, or you have TRULY GREAT intellectual property, you will need significant market traction to raise institutional investor money. That is the reality for the vast majority of early stage software businesses. So pretty much every startup (with the exception of these very select few that are funded from the absolute beginning) needs to bootstrap at the beginning. This is a very important period of a company’s existence, where a number of key questions need to be answered to set the stage for future success:
- What is your marketplace – which specific potential customers are you aiming to serve, at least in the near-term?
- A business model needs to be decided upon; how you are going to make money?
- What is your key differential advantage that will attract those potential customers to you over competitors?
- A company culture must develop: who is going to want to work there, what’s the work style, and what are basic values held dear by the organization?
- Finally, can you establish Product/Market Fit?
If you’re raising money thinking it will eliminate one or more of these questions, you’re probably already in trouble. Money is not likely to help you positively resolve any of the above. In fact, I’ve found that money can actually be an impediment to doing so. I’ve observed repeatedly across many startups that having money too soon can cause a company to “skip steps”; wasting that money that they are so fortunate to have at such an early stage. Some folks hire a huge sales force, or they invest in expensive marketing campaigns prior to having product/market fit before they even fully understanding the specifics of the market segment they are going to try to serve. This is generally disastrous.
Frankly, most savvy investors will rarely invest in your company without you being able to answer to questions above. And even it they do, if you waste your first round of money because you raise it too soon, you’re unlikely to get a second chance with another round of fundraising.
Raise money only when you NEED TO AND CAN
Above all, don’t raise money just because you’re struggling to get traction. I see many entrepreneurs lean this way when they’re struggling to obtain relevant market traction, and it always baffles me. It’s because the idea of having money, in most entrepreneur’s minds, will solve all of their problems as they struggle with the “hand to mouth”, bootstrapping stage of a company’s development. It won’t. Maybe a small seed round to finish up a very complex software product will be spent efficiently, prior to product/market fit – which I find to be the key swing point at which to rationally consider outside funding. If you haven’t found product/market fit, having more money will do very little to solve most other problems. Prior to product/market fit, I have found that in the great majority of cases the large amount of money found in typical VC round is usually wasted.
So especially for that critical first round, you need to be very careful. Don’t try to do it too soon – most companies don’t get more that one chance, two if they’re really lucky.
The above is my somewhat “stream of consciousness” advice that I have tended to give repeatedly to software startup CEOs over the years, especially those in bootstrapping mode. What do you disagree with, or what have I left out? Post a comment with your own viewpoint.
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