Visions of entrepreneurship often start with someone raising $10 MM in venture capital on the back of a clever idea and a snazzy PowerPoint deck.
Most real stories of entrepreneurship don’t involved venture capital at all. They start with a modest self-funded effort or a small capital raise through friends and family.
My wife and I started a publishing business during graduate school. We self-funded it with $4,000 from our savings account. Actually, we had $6,000 in the business account, but managed to hold onto the extra $2,000 in case of emergencies.
We grew the business and ran it for seven years before selling it to a larger publisher. Most businesses don’t need millions of dollars to get off the ground.
There’s lot of advice on evaluating business ideas in the popular press. Most of it involves important questions and complex considerations around target customers, unmet needs, market size, product-market fit, etc.
All of these can be helpful at times, but they’re not enough. In consultant-speak, they’re necessary, but not sufficient. From the perspective of a bootstrapped entrepreneur, I’d add two to the list:
First, how quickly can your business be cash flow positive? The faster the better, as that lowers the initial capital you need.
This is about finding ways to generate revenue quickly. If your product requires half the country to adopt it before you can monetize, you’re going to run out of money. Facebook has enviable revenues and margins, but most of us can’t bankroll years of expenses for the off-chance at a payday a decade away.
This is also about minimizing early expenses, to lengthen your operating runway (the time between when you start and when you run out of money) as much as possible.
Second, can you build a moat? In other words, as you succeed, does it make it harder for others to enter your space? The goal here is to avoid being one of 10,000 anonymous third-party sellers on Amazon.
This can happen a lot of ways – by building a strong brand and reputation, locking up partners or distribution channels, crowding out others from a small niche, etc.
In our business, we owned 100% of a small, specialty niche which allowed us to build a strong brand and discourage entry. This strategy absolutely limited our upside, but it made for a viable, healthy “lifestyle” business. Absent some element like this, you’re unlikely to build meaningful, sustainable economic value.
The interesting thing is that lots of potential business ideas do one of the other. The set of businesses that can do both is much, much smaller. When you find one, you may be on to something.