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Seven tough lessons from ten years in bootstrapped business

date Dec 20, 2018
authors Alex Balashov
reading time 12 mins
category blog

7 Lessons:

  1. Consulting is not a scalable business model or a good funding strategy
  2. Good cash flow is more important than revenue
  3. Everything takes a lot longer and is harder than you think
  4. Figure out what actually motivates you
  5. Don’t neglect proper tax planning
  6. Lay off the success porn
  7. Only hire the right people, and don’t be reticent to fire

Moderately successful

At present, my business retains a mixture of product and consulting revenue, though with a renewed focus on product following a few tumultuous years. It is what one might call a “moderately successful” business; it’s still around ten years later, and it makes a respectable, if hardly ostentatious, living for its owner, but it has not significantly grown beyond that.

Baseline for starting

I suppose lesson #0 is: don’t start a business like that. If I were doing it over again, I would certainly live cheaply, save money, and capitalise the business with at least a year’s worth of runway.

Why is consulting so alluring?

That means the initial conditions of my business were: do whatever generates cash ASAP. In tech, that naturally pushes one into consulting. Of all the things one can possibly do, service work pays the quickest.

What is required of consulting?

To make an adequate living as a consultant, you have to be rather good at many things and possess specialised skills and knowledge. Proffering relatively generic IT skills won’t work; at that point, you’ll be competing with volume operations who have made a process of this, and with offshore techies on oDesk with whom you cannot compete on price and make a “First World” living.

Consulting is not a business model

This seems like a blessing, but for anyone trying to build a business bigger than themselves, it’s a curse because it’s not a business model. It’s a glorified job for yourself, with all the downsides of a salary but none of the upsides, including the “steady paycheck” bit.

Time == Money is the limit

It’s near-impossible to hire anyone who is not of an identical profile to help you with that and grow the business beyond yourself. There are only so many hours in the day, and only so many hours you can bill. That is the limit of your business model and your compensation.

Perils of customized work == linear business

The second problem with consulting is that it’s custom work. The market has a seemingly bottomless appetite for custom work, but you don’t own it, and it leaves you with no residual intellectual property or, in a broader sense, capital. Yes, charging a lot can compensate for that to some extent, but there’s only so much you can bill. In that sense, it’s a profoundly linear business, no different to a barber shop. Want to make twice as much money? You’ll need to cut twice as much hair.

All business models - find replicability

All businesses with a headcount greater than one have something in common: a real business model requires devising easily replicable workflows and business processes at decreasing marginal cost.

Examples of existing lucrative consulting businesses: accounting and management consulting

But all of these businesses have solved the problem of the replicable business model. At the professional services majors, they’ve figured out how to write a three-ring binder of procedures — so to speak—that a fresh-faced Comparative Literature graduate six weeks out of school can follow just well enough without accruing years of deep expertise in a particular industry vertical.

Challenge of consulting

Consulting is, entrepreneurially speaking, the laziest possible option; it pays now, but it doesn’t generalise the process of how to get paid repeatably.

Consulting as a means to an end

Consulting is often seen as a means to an end, a short-term funding strategy until we can get the product off the ground. The idea is to do consulting at the same time as developing and marketing a product until it becomes self-sustaining.

Consulting part-time while product building?

Still, an incredible landscape of obstacles is arrayed against you in this paradigm: consulting has a way of taking up 85% of your time for 40% of the revenue. In my experience, it takes nothing less than a supernatural Teutonic discipline to properly compartmentalise consulting, and even then, by the very nature of the sort of thing that it is, it has a way of spilling outside whatever neat boxes you try to shove it into. Consulting customers are demanding and have a habit of calling.

Consulting short-time and then product building?

Another widespread belief is that one can do consulting intensively for a while to build up cash reserves, then operate off that runway and focus on your real mission. This might be arithmetically possible if you’ve dialed down your personal burn rate to exceptionally low, but, if you find a way to make lucrative consulting projects arise spontaneously, exactly when you need them, and disappear precisely when you don’t, with no effort required on your part to get them, please let me know.

Consulting sales is hard

Critically, the friction and complexity of doing niche custom work also makes it complex and frictional to sell, particularly for someone who is not you. Sales cycles for this sort of thing are long and involve patiently nurturing consultative sales relationships which underscore you as an industry expert in the eyes of the prospect. As with business processes for employees, sales needs to traffic in simple, easy-to-understand concepts with as few moving parts as possible. It is hard to package custom work and niche expertise in a form consumable by otherwise capable and motivated salespeople.

Non-recurring unpredictable revenue

For my first years in business, I did only project-based consulting work and had neither a product nor significant recurring revenue otherwise. That meant I’d sometimes go more than a month without getting paid. This is the period in which I most substantially wrecked my credit and paid personal bills notoriously late, the consequences of which remain with me now.

Cash flow » Revenue

Bad cash flow at higher revenue is worse than good cash flow at lower revenue. In fact, bad cash flow can sink even a notionally profitable and viable business. This is a well-known fact in economics, but the usual countermeasures are rarely available at an individual scale.

Cash liquidity is most important

The devil is all in the details of what you have liquid at any given moment. It is likely to be the case that $100k of unsteady income can only support a $35k lifestyle once appropriately discounted for volatility.

High income and High expense == low income

being high-income with high expenses is about the same as being low-income. Your decisions and priorities will resemble those of low-income people… Sizable income does nothing for you when it arrives in episodic, unpredictable chunks. You may have money once that payment clears tomorrow, but that does nothing to help you here, now, today. I can’t count how many times that has literally been true.

Constant financial stress and distraction

In addition to deteriorating one’s ever-important personal financial history, the constant stress of poor cash flow is a major distraction from your business, and therefore an existential threat. Don’t do what I did; live cheaply and bide your time. Don’t mortgage your financial future with shortcuts.

It always takes longer

Developers are famous for grossly underestimating how long it takes to just, you know, write the code real quick. That’s not a new revelation. The real revelation is in what else you have to do to take it to market.

Prototyping vs MVP

Prototyping something is fairly easy for many minimally viable iterations of product. The real work, the dark matter of the entrepreneurial universe, is in what is sometimes called “customer development”; deploying it in the real world, painstakingly learning what works and what doesn’t, incorporating that market feedback and iterating it. Then there’s the troubleshooting of bugs and fixing of problems which only arise in production and at large scales.

Task switching cost

“Programmer’s block” is a thing, and I’ve learned that fighting it with brute force and will power alone simply leads to burn-out. Moreover, we’re simply not robots; one does not simply do consulting from 9 AM to 1 PM, then switch one’s mind to product coding at 1:01 PM and carry on until 5 PM. The mind needs time to unwind, recharge, adapt, and get in gear.

Motivating at a sustainably long periods of time

To even stand a fighting chance, you need to figure out how to keep yourself plugging away at it in a sustainable and enduring way. In my experience, generating real drive within yourself comes down to a bit of willful sleight of hand, some mental tomfoolery to trick yourself into doing work even when you don’t really want to.

Productivity and motivation

If you can more or less accurately deduce what really makes you tick and can find a way to cater to that in your business decisions, the returns to sustained productivity will not disappoint.

Don’t neglect tax and company admin

One of the worst things about bootstrapping is that you’re always living check-to-check, leaving little time or energy for “stepping back” and thinking “deep strategic thoughts”. The strategy is “make money, pay bills”. This is also why most business advice rings hollow in this world; it’s a luxury one cannot afford. Set aside the time to research and fully understand, with the help of a CPA and perhaps an attorney, every implication of a given business entity/incorporation structure. Don’t be like me; get ahead of it before it’s too late.

Social media and mental health

By now, much has been written about research findings that social media use gives rise to depression and anxiety. This is largely explained by the fact that people selectively curate the portions of their lives they put online, leading to the impression that everyone else’s life is amazing and full of neverending vacations and rich, vibrant experiences, and you alone are struggling with the drudgery of everyday life.

Keep your head down

Since then, I’ve found general agreement among bootstrapped business founders that it’s integral to one’s mental health to tune this stream out, keep one’s head down, and focus on one’s own work.

Altruistic hiring of entry-level at the start

I’ve met people who were sincerely interested in learning more about technology and, in many cases, I perceived, rightly or wrongly, that they could have used the job. I have been idealistic over the years about my ability to introduce someone to this industry and “raise the floor” on their skill set, slowly but surely, until they can take over some routine business functions. If I’m being honest, there was probably an egotistical desire to disprove conventional hiring wisdom and demonstrate a civically minded alternative that spoke to the social purpose of employment.

Unproductive employee == unhappy employee

In addition to burning cash I simply did not have, I neglected to consider how bummed out people feel when they know they can’t be useful. Far from being lazy, most of these folks were quite motivated to do a good job, and it was no moral failing on their part that they simply didn’t have twenty years of broad-based IT experience that matched my needs. That did not change the reality; an unproductive employee is not a happy employee.

Delusional keeping of unproductive employees

I think the most damage was done not by my choice of who to hire, but my tendency to keep them on payroll far beyond the point at which it became apparent, if tacitly, to both of us that this isn’t really going to work. I invariably blamed myself, believing it to be the responsibility of the manager or the entrepreneur to devise workflows and systems in which one could put other people to use. Earlier years were spent labouring under the delusion that given the right tools, technology, process and training, I can make anyone into a gainful contributor to the company’s work.

First few employees

As a small, bootstrapped company, not only can you not do that, but to achieve any sort of “escape velocity”, your first few team members have to be exceptionally productive. Otherwise, the result will be that you will work three times as hard as you already do to keep the lights on and make sure everyone’s salaries are paid, while your employees feel useless and dejected. This is one I seem to have had to learn over and over.

Where is the shuttering point?

Nevertheless, the cold, hard truth is that “moderate success” is a vast chasm that is difficult to cross. Unless you explicitly declare bankruptcy or wind down the company, nobody comes along to tell you that you’ve failed and shutter you. If you’re doing service work such as consulting in particular, you can tread water and still pay the bills almost indefinitely. You need to decide where the shuttering point is for yourself.