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
- You have working capital for 3+ months
- 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
- Closing the deal with a big client can take anywhere from 1 month to 6 months.
- Often the people you are talking to change during the long time of deal closure, making you start all over again.
- Big clients don’t pay an advance
- Even after you get the deal, the deployment/execution of work will take much longer than expected due to large number of stakeholders
- Even after work is done, people will take their own sweet time to send a green chit to accounts
- 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!
Ankit Jain said
In auto-component manufacturing setup, it is a common practice that when an OEM sees that a critical parts vendor is facing cash flow problems, it tries to bail the vendor out by providing advance payments. The advances are use by vendor for raw material purchases. If it is unable to procure raw materials, the assembly line of OEM may stop altogether. The OEM also helps vendor by exercising its influence in the ecosystem and asking raw material (steel ingots, forgings etc.) suppliers to go liberal on payment terms with a critical vendor.
If the bootstrapped business is a key component in the big client’s delivery schedule, maybe similar practices can be applied. Here “raw-materials” may mean hardware equipment and software purchases / upgrades. However, of course, one can argue that then the whole idea of “bootstrap” is lost.
It would be nice if you can also include a cost-breakup (%age) of expenses in a typical software bootstrap. The heads which amount to cash flow problems will be different among industries. Cash flow problems can become more daunting in a manufacturing setup, where raw material procurement is affected and thus production and delivery.
Saurabh Chandra said
I agree there is industry specific variance but the basic principle remains the same. Although cash requirements in manufacturing are more, it is also easier to raise debt since you have a physical collateral. My example is more tuned to service sector (including but not only software) but giving percentages will not add to the point I am making here.
The example of the customer helping the vendor with cash advance and other assistance is noteworthy. Toyota has been a pioneer in even assisting the suppliers with best practices and technology. I wouldn’t say it goes against bootstrapping because all the help you can get is welcome. There are no rules and all the cash is welcome