Bootstrap in Bangalore

Following up from last time, lets look at the implications. In a way, all the gyan about bootstrapping is an outcome of realizing the stark truth of cashflow.

An obvious thing ‘after’ one has worked with bigger clients is that a bootstrapped company can simply not afford to have them. Now big and small are relative terms but in general any company with an accounting department bigger than 1 person can be given a miss.

A fledgling bootstrapper will latch on to any lead coming his way and it is difficult to let go of this ‘big name’ company which will add a feather in your client list. There are some conditions in which a big client works

1. You have working capital for 3+ months
2. The work you are doing for the client doesn’t involve the whole company. Keeping it to less that 20% is a good idea.

Unless the above two have happened, working with big clients is going to be dangerous for existence. The key enemies are large number of stakeholders and processes which can kill. Let me list out the pitfalls

1. Closing the deal with a big client can take anywhere from 1 month to 6 months.
2. Often the people you are talking to change during the long time of deal closure, making you start all over again.
3. Big clients don’t pay an advance
4. Even after you get the deal, the deployment/execution of work will take much longer than expected due to large number of stakeholders
5. Even after work is done, people will take their own sweet time to send a green chit to accounts
6. Your payment terms will be 45 days after invoicing date. Which in reality means that you can only start following up after 45 days and hope to get the money in maybe like 60-90 days.

Now the above shouldn’t scare you away from bigger clients forever. Big clients are sometimes necessary to scale up, growing while keeping client base constant (hence saving on marketing cost) and making large sales. However, stay away till you build critical mass.

What if your offering is only for big companies? Its probably a bad choice for bootstrapping. Mostly, no investor will back you till the first customer. In case that’s your only route, start lining up investors while you are making the sale and get funded as soon as success strikes. Mostly it only works when you were working in the big company in a job where you identified the need for X. You start your own company and sell to your old boss/subordinate. This makes first sale easier and then funding is a possibility.

If you have an idea which would be great for a big company but are ruing your luck since you don’t have ‘connections’ – you aren’t the right person. Become one or move on.

If your target market totally excludes big clients, this post wasn’t for you!

Cashflow is the king is almost a guru mantra for start ups and bootstrappers. I wanted to explore this in a more practical fashion. Something like the corollary that renting is a better option than buying.

Lets again play with some simple numbers. Say you make 100 as your revenue in January and your profit is a nice 25% i.e your total expenses are 75. After paying your bills in first week of Febuary you are left with 25. Sounds simple and unfortunately is utterly false. This is what really happens

Revenue

Client A: 25, Client B: 20, Client C: 50, Client D: 5 = 100

Expenses

Salaries: 50, Rent: 15, Travel/Electricity/Phone: 10 = 75

Now as you know you have to pay all salaries by 1st of Feb, even rent and utilities will be paid by 20th of Feb. You will raise your invoices on 1st Of Feb. Let’s look at the possibilities

Date           Cash In         Cash Out        In Hand
Jan 1st           0                       0                        0
Jan 31st         0                       0                        0
Feb 1             0                       50                    -50
Feb 5th          20 (Client B)     15(Rent)            -45
Feb 15th        50 (Client C)     10 (utilities)      -5
Feb 25th        5 (Client D)       0                         0
Mar 1st          0                      -50                   -50

The above is probably an optimistic scenario. Usually it is an account like client C (the biggest) which pays the last. Here we have been benign and assumed only Client A’s payments spill into March. Obviously you might be earning revenues in Feb also but it won’t effect the cash flow on Mar 1st till which date we are tracking the above table. Also, some expenses would be incurred in Jan itself but this a contrived scenario mimicking reality only close enough to point a lesson.

Another very practical implication of this is the waste of time. You are probably already geared to be working overtime in January and got enough work to do that in Feb also. Now apart from doing the ‘actual’ work, you also need to be following up on payments with 4 clients. And if you don’t do that effectively, even the 3 payments in Feb won’t come on time. Anyways, you will slowly realize getting the money on time is ‘real’ work. All activities which lead to money coming in are the most important for a bootstrapped company.

Since life doesn’t follow simple arithmetic. How do you survive with a negative cash balance? The common way is that you would not start with a cash in hand on Jan 1st of zero. Given your projected expenses of 75, a seed capital of 150 is more likely. The other way to run a negative cash balance is to have an overdraft account with the bank. This is a facility no bank in India will offer to you in the first month and is only an option after 1 year of operation. If you have already completed 1 year and not asked your bank for an OD account – do it now!

Now that we understand how cash flow is working in practice, we will look at some implications on your business in a subsequent post.

update: Fixed the calculations (thanks Rohit!) and minor edits.