By Vik Patel, CEO of Detroit-based Future Hosting.
How do you build a business? If you’re a regular reader of media aimed at entrepreneurs, this is what you’ve been told: Start with an idea, find a co-founder, build a minimal viable product, raise an angel round, grow as quickly as possible, raise money from venture capitalists, embark on another round of fundraising, grow even faster, raise a lot more money from venture capitalists, become a paper billionaire, then, maybe, start to think about making a profit.
That is not the only way to build a business. It’s not the way most businesses are built. And it’s certainly not the best way to build a business for the majority of entrepreneurs. Historically, most businesses were bootstrapped or funded in the initial stages by the founders or bank loans rather than cash injections from venture capitalists in exchange for a chunk of the business.
Bootstrapped businesses don’t typically grow into unicorns (a mythical animal). Their success is measured differently — in terms of revenue and profit rather than growth. A successfully bootstrapped business makes a great product and is profitable enough to support itself and its employees. Most importantly, a bootstrapped business remains under the control of its founders.
I did not build a unicorn, but I did contribute to the building of successful businesses that employ dozens of people and make a profit every single year. Here’s what I have learned.
Heedless Growth Is Not Your Friend
Businesses must grow. Every company should have a healthy stream of new business. That’s how profits are made. But too much of a good thing can destroy a bootstrapped business. Demand for infrastructure can outstrip revenue to pay for it. Demand for new staff can outgrow the company’s ability to hire and integrate new team members.
If your intention is to grow a profitable business that is sustainable over the long term, you may have to learn to say no to customers. The silver lining is that you get to choose your customers and clients. If you’re profitable, you can afford to say no.
Jason Fried, the CEO of Basecamp, is one of my favorite writers on the topic of building a profitable business. He has this to say about profit: “Profit is the ultimate flexibility because it buys you the ultimate luxury: time. As long as you remain profitable, you can go in any direction you want and take as much time as you need.”
For as long as you’re profitable, you’re free to build the company, its products and services and its future according to your vision.
It’s All About the Customers
Freedom doesn’t come without limitations. If your business doesn’t create something of value, it won’t be profitable for long. When you spend time with startup founders, you notice that they spend a lot of time thinking and talking about where the next venture capital round will come from. If you run a business that focuses on profit, your time is spent thinking about your customers and how to make the products and services they want.
If you’re looking for role models for bootstrapped businesses, there are many to emulate. GitHub was bootstrapped for years before it took outside investment. In 2015, Markus Frind sold the bootstrapped dating website Plenty of Fish for $ 575 million — Frind didn’t take venture capital and owned the company outright. GoPro’s first funding was generated by the sale of Nick Woodman’s bead and shell belts. Walk down any Main Street in the U.S. and you’ll see any number of bootstrapped and profitable businesses.
What’s the secret to building a profitable bootstrapped business? There is no secret. Build products that people want, focus on profit over growth, keep a tight rein on costs (understand how the business works and spend money carefully) and hire slowly. Don’t take on new staff more quickly than you can afford.
The logic of building a profitable business is not complex. Make something people find valuable (product), tell them about it (marketing) and ask for money (profit). That’s not how you build a unicorn. But it is a path you can walk to build a sustainable, profitable business you can be proud of.
Vik Patel is a prolific tech entrepreneur with a passion for all things cloud and the CEO of Detroit-based Future Hosting.