Mike McDerment was still hanging out in his parents' basement at the age of 30. But he was no slacker reluctant to leave the family nest.
Instead, McDerment was a CEO leading a seven-person team in building a web-based invoicing service called FreshBooks. And his team was operating from the basement as part of a plan to keep costs rock-bottom. McDerment's ultra-frugal approach protected FreshBooks from running out of cash even as it scaled up dramatically. Five years later, the firm has 93 employees and more than 1.6 million users worldwide.
Today, more and more startups are bootstrapping, as FreshBooks did: launching with no external capital and almost no internal funds. That's partly out of necessity, because investors have been more cautious since the recession. But there also are more opportunities to start a business on a shoestring, thanks to the availability of inexpensive or free online business tools and price cuts by suppliers facing fierce competition amid sluggish demand.
Still, bootstrapping isn't easy. Launching a business with hardly any money requires becoming a hard-core cheapskate. Here are seven effective ways to get the job done:
1. Cultivate allies who'll take a chance on you:
David Simpson, who lectures on entrepreneurial finance at the Richard Ivey School of Business in London, Ont., advises finding suppliers and retailers willing to extend credit. This will minimize your costs until you land some sales.
"If they extend you supply credit, in exchange, you can sign a contract to make them your exclusive supplier," says Simpson. And with a retailer, "If you can get them to place a pre-order based on your prototype, you can give them an exclusive for six months. Get them onside early."
A supplier or retailer with a solid base of creditworthy clients can afford to take the risk that you'll stiff them—knowing that if you succeed, you'll generate a soaring volume of business. And other service providers, such as accountants, lawyers and web designers, also might be open to the same deal, says Simpson: "That allows you to save thousands and thousands of dollars."
2. Understaff and outsource to the max:
Never hire an employee until you have to. And use stock options to induce the few you do need to accept punishing workloads during the start up phase.
But these few can't do it all. You also should take advantage of the wealth of outsourcing options. Assigning tasks such as PR to outside professionals lets you tap into skills that you lack in-house and to pay for only what you need.
3. Declare war on overhead:
"Why do you need an office?" asks McDerment. "You don't, unless you have clients showing up. We knew we needed phone lines and servers, so we didn't skimp on those. But everything else didn't really matter." For many startups, cafes or co-workspaces are viable alternatives to conventional offices.
Once you start asking what overhead is really necessary, you'll find plenty of other cost-cutting opportunities. Adam Epstein, founder of Huddlers, a social network for intramural sports teams, initially offered its service through a website. "We had 1,000 users," he says. "Some were active and some weren't. But it was costing us $200 per month to keep it going."
Epstein realized even this modest outlay was an unnecessary expense for his Toronto based startup. So, Huddlers shut down its site and is now spending what Epstein calls a "negligible" amount to develop a mobile app version of its service.
4. Do dirt-cheap marketing:
From social media to YouTube, this is a golden age for DIY marketing. But other start ups also have realized this, so you'll need a fresh angle to ensure that your marketing stands out while still costing peanuts.
Vincent Cheung —CEO of Shape Collage, a developer of software for creating photo collages—came up with such an angle to boost his Toronto-based startup's profile. He knew that although tech bloggers are key influencers in his sector, it's tough to get coverage from the most read blogs because they're bombarded with PR pitches. So, using Technorati's search-engine ranking of the top 100 tech blogs, Cheung targeted ones at the lower end of the list, then worked his way up.
This yielded so many posts by second-tier blogs that the top-tier ones took notice. When Lifehacker—a popular blog with "tips and downloads for getting things done"— wrote about Shape Collage, 20,000 people downloaded its software in a single day.
5. Don't try to be all things to all clients:
It's tough to say no to a prospect, but to keep costs down, you need to resist the temptation to offer a full product range.
Toronto-based 4ormat, which develops templates for creative-portfolio websites, has built a client base spanning more than 90 countries since its 2010 start. And that's despite narrowing its potential market by refusing to develop templates compatible with Internet Explorer (IE), the most widely used web browser.
Lukas Dryja, 4ormat's CEO, says his company opted to avoid the development costs of making its portfolio-building interface compatible with IE, which 4ormat considers outdated technology. "Nothing upends developer velocity like spending days in a virtual machine painfully debugging an issue with Internet Explorer's woeful dev tools," says Dryja.
Rather than craft a version of 4ormat's template that gets along with IE, the firm has targeted users of the two other leading browsers, Chrome and Firefox. And many IE users have become clients after all, heeding the suggestion on 4ormat's website that they download Chrome or Firefox so they can use 4ormat's interface.
6. Live on the cheap in a hatchery:
Almost every big city boasts at least one startup incubator, such as Vancouver's GrowLab and Ottawa's Exploriem Entrepreneur Network, to help entrepreneurs turn promising ideas into real businesses. Although these hatcheries are best known for offering budding businesses mentoring and connections, they also can save you a ton of money. For instance, many offer free or low-cost space and shared reception services, meeting space and office equipment, as well as advice from other entrepreneurs on how to run ultra-lean.
7. Pay your lawyer as little as you safely can:
How can you get the legal help you'll need without blowing all the money you've saved elsewhere? Start by using downloadable templates for legal documents, such as founders' agreements and intellectual property assignment agreements. Because there are major differences between the Canadian and U.S. legal systems, be sure to use templates that are valid for your location. Toronto's MaRS incubator, for instance, has developed templates for Ontario-based firms, available at ipoint.to/udqwkk.
But, cautions McDerment, you'll still need to pay a lawyer. Use the templates to create draft documents, then have a lawyer spend a few hours reviewing these for errors and ensuring the wording would hold up in court.