Over the years I have been approached by thousands of people who want to start their own company. In most cases, my advice is they shouldn’t do it. Even if they have a great idea and even if they can raise capital from friends and family, starting a company isn’t easy. It requires long hours and a lot of hard work. If it is done right, the rewards can be significant. But even when you do it right, most new companies fail says Peter Decaprio.
The laborious and often expensive process of starting a company is something that has always bugged me. It’s such an obvious barrier to entry that I’ve been surprised this is how we still do business in the 21st century. So about four years ago, when my friends and I had an idea for a product we wanted to sell on the Internet, I decided to try doing things differently: We would start a technology company with no employees and no outside funding.
We would use only our own products and services (in this case, our software) to build and market different versions our website until we had enough customers to pay for our own salaries explains Peter Decaprio. I had never heard of anyone doing it this way, but I figured if we could make it work, the model would be extremely scalable and would allow people to start companies quickly and inexpensively.
And it works! After about 9 months (spread over 2 years) of working on our website in our spare time, we had grown large enough that all three of us were able to quit our day jobs and dedicate ourselves full-time to running the business. We are now seven months into that experiment, with 10 people working for me (including my two co-founders), most part-time.
Here’s how you can do something similar:
The Foundation: Your Own Products & Services
Many entrepreneurs start businesses by selling products and services to other companies. While I’ve met some great entrepreneurs who have built large, profitable companies by doing this (e.g., the guys behind Omniture), my view is that it’s extremely difficult to scale such a business beyond 100 or so employees. So if you are like me and prefer not to work for someone else, I think it makes sense to use your own products and services as the foundation of your company.
You don’t need an original idea—just figure out how to take something that already exists and package it into your own unique offering says Peter Decaprio. That is what we did with our website, which is organized around an online calendar that lets users coordinate group activities. We didn’t invent calendars; we didn’t invent the idea of planning activities; Also, we didn’t even invent online calendars. We just took existing ideas and packaged them into an offering that no one had ever seen before.
The best part about using your own products and services to build your company is you can start small and not worry about financing your operations in the early days (we’ll talk more about this later). You will be able to launch quickly, get customer feedback, iterate, and improve your site without having to invest a lot of capital upfront (although at some point you will need cash for servers, software licenses, etc.). Plus, no outside funding means no dilution—which is why this method works particularly well for entrepreneurs who don’t want employees. If you do want to grow, you can hire people who are enthusiastic about your product and service.
The Hard Part: Bootstrapping Your Way to First Customers
Although starting a company with only your own (and potentially your friends’) products and services are easier than trying to find outside funding, it is still extremely challenging. It takes time to build the kind of product or service that users will pay for; those payments have to cover all of your expenses; and those expenses mostly rise as revenue starts coming in (e.g., as servers need to be replace). The problem is compound by the fact that most new entrepreneurs underestimate how long this process takes and overestimate what things should cost. When we started our company, we thought we would launch quickly; we thought our hosting fees would be less than $100 a month; and we thought the site would attract enough users to cover those costs quickly. We were wrong on all three counts explains Peter Decaprio.
A business can’t run without money, so my best piece of startup advice is to bootstrap as long as you possibly can. The good news is that you don’t need a lot of cash to get started—and since your costs will be low and you’ll be iterating quickly, it’s unlikely that they will skyrocket out of control before you have a minimum viable product or service that user’s want. If I had followed our original plan and brought in outside investors at the start (which some people advised), we would never have been able to survive for 9 months while working on our website in our spare time.