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by • September 5, 2010 • Business models, UncategorizedComments (0)41

Cheaper bootstrapping with transitional business models

This is a followup to the last post, approaching the same topic from the perspective of the business model instead of the product.

Business models are powered by your team’s key activities — the handful of core competencies that keep the machine whirring. For Apple, this is hardware design. For 37signals its blogging and web design. These are the activities so precious, you would never consent to their outsourcing. In the digital world, where the marginal cost of new users is low, your key activities tend to correlate pretty closely with your recurring costs.

Beyond these ongoing activities, product-centric businesses also need an up-front investment to build something. As the price of this initial development increases, full-on savings-burning bootstrapping becomes a lot more dangerous.

Mantras like “launch early, launch fast” and the concept of the minimum viable product are intended to reduce the initial product cost by shaving off frivolous features. This is good! However, you may still find yourself staring up at a “smallest version” that remains quite large. Even small periods of development become awfully scary when your bank graph is pointing downward. Once “make the idea smaller” is no longer a useful option, you’re left with two main strategies for reducing your bootstrapping risk:

“Nights and weekends” is one workaround, which reduces the cost of development by declaring that your time is worth nothing between the hours of 7 and 9pm (or whenever) and on days beginning with ‘S’. This option is good if you have no savings, if your job is hard to replace, or if the market is stagnant.

The second option is a transitional business model, which is a mini-business that pays for itself while also creating helpful by-products that scoot you toward your final goal. The by-products are important. If something makes you money and is otherwise unrelated to your eventual “real” business, then you’ve just taken the long road back to the nights & weekends scenario.

Side pursuits like consulting are a great option when their by-products are useful for your main business

Steambirds (previously discussed here) is a great example of a transitional business model. To summarize: Andy eventually wants to create a seriously big game. It would be painfully expensive to make all at once and atrociously slow (in years) to work on part time. So he’s breaking the development into small chunks and releasing each milestone as a standalone mini-game that pays for itself. He’s then able to recycle the code, art, and gameplay. It’s like selling a car for full price while also getting to keep the engine, frame, and wheels.

Each time he loops through the mini-game business model, it shaves a couple months off the upfront cost of the final vision. Assuming players remain excited by what he makes, he should be able to build a game with an 18 month development period without ever going into the hole for more than 3 month’s burn.

The usefulness of a transitional model entirely depends on how helpful its by-products are. If you can reuse everything you put into it, then it’s a no-brainer. If you’re only getting back half of your work, then you’re moving twice as slow compared to if you were going straight for the goal. The point when it becomes too slow depends on the particular business and the founders, but at some point it starts making sense to shift back up to full-speed by either increasing your risk (through self-funded, full-time work) or decreasing your ownership (through external investors).

The choice is fuzzy, especially when the by-products don’t have an obvious relation to money. It’s fairly clear what an hour of code is worth, but what about an extra rss subscriber, a touch more industry credibility, some domain expertise, or a new client contact?

Thinking about transitional business models can be useful for understanding how successful businesses got to where they are, and why so many startups fail spectacularly when trying to copy the final product. Even the humblest of plans (and the simplest of business models) will be shattered when it bumps up against reality, so it’s unlikely that you’ll be able to plan deep-blue-style into the future. Nevertheless, it does lead us to two helpful questions:

  • If you’re currently supporting your main business with a secondary pursuit, can you alter something to create more useful by-products?
  • And if you’re currently bearing a lot of risk by charging straight for the dream, can you find an activity that will pay for itself while moving you forward?

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