'People can feel like failures if they don’t raise a seed round'

THERE ARE LOTS of ways to build a startup. But in tech it can seem like the only way is to raise money first to build a product and then raise again to start scaling your business. This is a well-trodden path – and a proven one – however it is not for everyone.

There is another way and one that can be more advantageous to building a longer term business: bootstrapping.

That’s the approach where you eschew raising money in the early days of a startup and instead fund the business by selling something to real customers.

Of course, this wouldn’t work for a business idea like a social network where there is no possibility of earning money until you have built up millions of users or an idea like Uber where the first to market probably wins the whole market.

But for a substantial number of business ideas, particularly business-to-business products, it can be possible to start earning revenue from customers very early on, even if the product changes significantly later.

As a founder of Phorest, I have been lucky to experience both worlds. We bootstrapped for the first seven years before raising an investment round of €1.2 million in 2011.

However, because we had bootstrapped for so long, it brought a lean mentality which is still alive and well in the company today. Here are a few notable things I learnt about bootstrapping along the way:

1. You can build a big business – not just a lifestyle company

Believe it or not, 60% of the Inc. 500 were not funded when they launched, so why does it feel like you have to get funded to be making progress? Bootstrapping doesn’t get the coverage it should because it is sexier for the media to talk about how company X just raised $10 million or was bought for $40 million.

The downside of all this funding coverage is that people starting out think it’s the only way to start a company, and hence they feel like failures if they don’t raise a seed round.

Phorest's Ronan Perceval

2. It gives you more time to hit a home run

If you want to build a company to last for a long time, then bootstrapping can give you a much better shot at doing it. The reason? Once you take on funding, then you have a responsibility to make a return on that investment for the investors within a set time frame  – usually five to seven years.

If you become hugely successful (like say Facebook or Uber), you will probably have opportunities to replace your existing investors with new ones who will extend the time you have to reach an exit.

However if you are just moderately successful in the early years, you will come under pressure to make a return and that may force you to pivot away from opportunities that haven’t appeared yet (see point two above) or to sell the company before it has reached its full potential.

3. It can be the best way to figure out product/market fit

Product/market fit means you have built something that lots of people are willing to pay money for. This is actually one of the hardest things to do because people usually build something they want themselves as opposed to what customers want – although of course you are sometimes the ideal customer.

If you are bootstrapping, you have to build something people are willing to pay for very quickly or you are out of business. This forces you in the early days to really listen to customers.

You have to figure out how to provide something with real value immediately – whereas with funding in the bank, you can go down rabbit holes developing things that aren’t really useful because there isn’t the same pressure to get customers early on.

Another way of looking at is that it can take time to figure out or truly understand a market and thus see the real opportunities. This is particularly true if you are a young founder who has no real experience of an industry. This applied to me.

I was only 24 when I co-founded Phorest. Neither I nor my co-founder Jamie had any experience of the beauty salon industry. While we quickly came to understand the basic dynamics of the business – through a stint working as a receptionist and from visiting lots of salons – the real insights only started coming many years later.

We were able to launch a basic product that sent SMS appointment reminders for a salon, cutting their no-shows by 70%. This provided value straight away, and we signed up our first 100 paying salon customers on this premise.

However it took seven years for us to understand that getting clients back in more often was more important than helping the salon get new clients. This wasn’t something that salon owners would tell you if you asked them, but from years of visiting salons and data coming back from the system it was very clear.

And it was the tools we built off the back of that type of insights that had a much more significant impact on the growth of the company.

Ronan Perceval is CEO of Phorest. He tweets from @ronanperceval and blogs at www.nothingventured.rocks.

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