How To Bootstrap Products Using Services

Raising funding for startups in Silicon Valley is a low probability game at which less than 1% who try, actually succeed.

Outside the Valley, the startup eco-systems are mostly immature, and the probability gets even lower.

The issue is that the bar to raise seed funding is getting higher and higher. Seed investors are mostly operating as growth investors, expecting that the entrepreneur will somehow manage to bridge the gap and bring a concept to realization. In fact, what these investors really want is to invest in businesses that have traction, not just validation.

In short, they want to come to the rescue of victory.

Well, as an entrepreneur, how do you go from concept to traction? How do you bridge the seed capital gap? What do you do if you are full of dreams, but stuck in the gap between concept and seed?

Because it’s often so difficult for entrepreneurs to obtain seed funding for their startups, bootstrapping is one of the best methods to self-fund their projects.

And offering a service is one of the best ways to bootstrap.

This, by the way, remains a controversial point of view, and most industry observers will take the position that companies get distracted if they try to bootstrap a product with a service. At 1M/1M, we take a pragmatic and contrarian position, and back it up with numerous case studies. From where we sit, bootstrapping products with services is a tried and true method.

Let’s look at examples.

AgilOne, a company that provides cloud-based predictive customer analytics, was founded by Omer Artun in 2006. Initially, the company relied entirely on services to get close to customers, understand and address their problems, and in the process generate revenues. Today, AgilOne’s product is a software-as-a-service platform. Much of what the company learnt about its customers in the services mode has been productized, although a good percentage of revenues still comes from services.

AgilOne’s platform is designed to make it easier for companies to see how their customers are interacting with their products. For example, a company’s online retail customers can be broken into different “clusters” based on their search and shopping preferences. These clusters then enable the company’s marketing department to more accurately target those users with specific promotions.

Omer bootstrapped his company from no revenue or employees in 2005 to about 45 employees and over $15 million in revenue by the time AgilOne partnered with Sequoia Capital in 2011. Silicon Valley’s top venture firm made a sizable investment at a high valuation in a company that was bootstrapped using services. [Case Study]

Andy Chou, a PhD student at Stanford, also bootstrapped his company Coverity, using services. Andy’s research was financed by DARPA at the university. The technology allows automated cleaning up of large code-bases, and was licensed back to the company by Stanford.

Andy recounts his funding story: “We talked to all of the VCs interested in this space and told them that if they wanted to invest in us, we would only consider certain types of deals. We presented them with our range of acceptable terms and indicated that if we did not receive offers in those ranges, we were content to continue bootstrapping the company as we had a solid clientele. We were in a sweet position where we had revenues (mid-20 million range) and did not need to receive additional investments to succeed. As a result, we got a good deal from Benchmark Capital. They invested $22.3 million in us in 2007.” [Case Study]

In our research, we have encountered numerous other case studies: Girish Rowjee who bootstrapped Greytip, a SaaS company in India, using services; Mike Mothner, who morphed his SEO services company Wpromote to include a substantial product business; Bill Loumpouridis, who built an e-commerce platform on top of Force.com; and Krish Kupathil, who bootstrapped a mobility product, both using services.

I will now share a couple of examples from the 1M/1M portfolio. In our incubation methodology, we actively encourage entrepreneurs to engage in services businesses. In particular, we encourage them to immerse themselves in customers, learn their problems, do some services projects that not only generate cash, but also generate customer intimacy and trust. Through these kinds of dialogs, entrepreneurs diagnose real pain-points in customers, and end up building products that customers are willing to pay for.

RailsFactory, a consulting and app development company that provides solutions for the web application framework Ruby on Rails, was co-founded by Senthil Nayagam and Dinesh Kumar in 2006. RailsFactory provides numerous services primarily focusing on app development for the Ruby on Rails platform.

Senthil and Dinesh bootstrapped RailsFactory themselves, starting with about $1,250 in seed money. When they needed to, they each utilized other personal resources: Senthil reached into his savings, and Dinesh turned to his parents. But they started generating revenues fast—thanks to the services they offered, they were generating revenue by their second month, and they’ve been growing since. To date, RailsFactory has executed over 100 projects and has worked with clients in the US, Canada, India, Australia, Singapore, and the UK. Their services revenues have crossed a couple of million dollars, and the company has recently built a product that they have started validating with those 100 services customers. The productized offering enables them to offer a support package to the small- to medium-sized enterprise segment based on packs of trouble tickets.

Similarly, Mansa Systems is a SaaS-based IT company, founded by Siva Devaki in San Francisco in 2006. Siva founded Mansa Systems to focus specifically on cloud computing. Currently, Mansa publishes a number of apps to be used in conjunction with Salesforce.com through Salesforce’s AppExchange app marketplace.

AppExchange allows partners to create apps to enhance Salesforce for business, and Mansa Systems currently offers eight different apps for Salesforce. Each of the apps is designed to address a limitation with Salesforce; for example, cloud storage app Cloud Drop gives users additional cloud storage space, MassMailer allows users to circumvent Salesforce’s bulk e-mail limitations, and EaglEye provides Salesforce users with secure, trackable document filesharing. Mansa Systems remains entirely self-funded via the company’s service business, and there are currently no plans to use outside funding. The company already has achieved $2 million in annual revenue, and enough profitability to be able to develop and launch its apps at a steady clip.

I have often heard that capital intensive businesses are difficult to bootstrap. There is some truth to this observation. However, Finisar offers the counterpoint.

Finisar produces optical communications components and subsystems and was founded 25 years ago by Jerry Rawls and Frank Levinson. Jerry and Frank bootstrapped Finisar by first providing consulting services while doing product development in high-speed fiber optics for computer networks. They searched for a need in the computer industry that wasn’t filled, and discovered that need in the early 1990s when they pioneered a low-cost gigabit optical link that made optical drives more affordable. By 1994, their product had changed the fiber channel standard, and sales of their optical components doubled every year after that for seven years in a row.

Even while Finisar was taking off, the company remained fully self-funded. Jerry and Frank bootstrapped Finisar for the first 10 years of its existence and received no outside funding until 1998. In 1998, they were approached by TA Associates and Summit Partners, two private equity firms who bought 20 percent of Finisar in anticipation of an IPO. Jerry estimates that the company’s sales pre-IPO were in the $30 million range in 1998 and, by the time the company went public in 2000, sales were around $67 million. Finisar went public at $19 and closed the first day of trading at $86.

Optical communications components and sub-systems, for all practical purposes, are considered to be extremely capital intensive. Yet, Frank and Jerry, obviously, managed to bootstrap their venture using services almost all the way to an IPO. [Case Study]

Each of the companies I have introduced you to bootstrapped to profitability via services. Not only is this a viable method of getting your startup off the ground, it’s a proven method of reaching profitability, as well. In some cases, it can take you to the enviable position of having VCs like Sequoia or Benchmark knock on your door. In other cases, you could even have investment bankers come calling, wanting to take you public, and a whole slew of late-stage investors wanting to shower you with funds.

All those are desirable outcomes!

[Excerpt from my Bootstrapping Using Services book]

Looking to Get More Hands-On Advice?

I receive many emails from entrepreneurs who want to discuss their specific businesses. I’m very happy to discuss your situation during my free online 1M/1M Roundtables, held almost every Thursday. During each roundtable, up to five entrepreneurs can pitch their businesses and receive my immediate and straightforward feedback.

To give entrepreneurs all over the world access to Silicon Valley’s knowledge, methodology, and network, I founded the One Million by One Million (1M/1M) global virtual incubator. 1M/1M aims to nurture a million entrepreneurs to reach a million dollars each in annual revenue and beyond, thereby creating a trillion dollars in global GDP and ten million jobs.

For those still testing the waters of entrepreneurship, I’ve written my Entrepreneur Journeys book series to inform and inspire.

If you are interested in entrepreneurship topics and my writings, you can follow me here. I hope to publish two articles on LinkedIn every week.

Photo: Albina Tiplyashina / shutterstock

Remix: LinkedIn