It’s a well-known fact that not every entrepreneur has access to startup capital. The vast majority of startups are born well outside of established innovation hubs like Silicon Valley and New York, and they might not have access to any sort of support structure whatsoever.
If this is you, I don’t have to tell you that the odds are stacked against you. However, there’s one tried-and-true path that is always available, regardless of where you are or your access to resources: bootstrapping.
You may think that bootstrapping is fine for a small business – a mom-and-pop shop, a consulting firm, a local service provider. But in this competitive digital age, even a small business can’t remain a small business forever.
Mom-and-pop shops evolve into direct-to-consumer e-commerce ventures. Consultants join forces to become expert networks. Service providers morph into digital service marketplaces.
These days, a small business can become a high-growth business without a lot of up-front investment. Here are the top four ways I’ve experienced the service-to-product transformation, either with my own startups, those I’ve advised, or those I’ve worked for.
1. Automate a service or put automation around it.
Two of the startups I advise are transforming the way businesses hire. One is already funded, the other is bootstrapping.
Both startups are helmed by former staffing company leaders who saw massive opportunities in the shifting needs of the modern workforce. As their experience increasingly told them that the old ways of hiring were too slow, too manual, and were producing diminishing results, they both turned to technology and automation to add speed, remove friction, and provide better results at a fraction of head count, time spent, and costs.
This still takes time and money. Technology is still expensive, old habits can be hard to break, and there will always be one or more incumbents trying to crush you. The good news is, you can use your existing service income to fund change instead of using it to compete against the incumbents at their own game.
2. Create a subscription product.
Recurring revenue is a coveted alternative to the feast-or-famine periods that are always associated with service work. It can also help smooth out spiky customer demand, which in turn allows your company to scale and thus results in the higher valuations associated with product companies.
A simple way to create a recurring revenue stream (simple on paper, anyway) is to package your most requested services into a monthly subscription product, with pricing based on expected volume.
At my previous startup, Automated Insights, where we delivered automated content based on our customers’ data, we rolled up most of the costs of our customization and maintenance efforts into a monthly platform licensing fee. For instances where we had to go above and beyond to customize, we established a managed services team that we could dispatch at our old hourly rate.
This not only smoothed out our demand curve and provided reliable income, it also actually reduced the number of requests for customization, as customers realized that they could instead have “automated content in a box.”
3. Turn an expert service into an expert marketplace.
Most service providers have a referral network they turn to when a customer needs something that’s adjacent to their own expertise.
These networks can grow to be very large, and each member of the network usually has a network of their own. When all these networks are connected and exposed through an app, it becomes an expert marketplace.
Expert marketplaces are more work than they first appear, because expert marketplaces that are just vendor directories don’t provide any additional value, and thus rarely succeed. So use your service income to create that value by vetting the vendors and removing friction from the transaction.
4. Pivot from providing services to selling frameworks.
The first startup I ever joined was a technical consulting firm that built custom software. We used our feast-or-famine downtime to start building frameworks for development steps we had to take each time we built an application.
These frameworks helped us deliver better quality software in a lot less time. Eventually, we got so good using the frameworks that we stopped building custom software altogether and started selling the frameworks to other developers.
That pivot cut our resource costs, boosted our margins, and led to a much higher valuation when we were acquired a few years later.
Bonus: Bootstrapping with service income keeps your startup growing at a sane pace.
In every case, these service-to-product transitions use customer revenue to turn a valuable service into a revenue-generating product. It’s the opposite path of conventional venture capital funded startups.
When those VC-backed startups get traction, they often find themselves on a treadmill of constantly needing more investment to reach constantly increasing valuations. When they don’t get that investment, or they don’t hit their milestones, they fail.
On the other hand, the bootstrap path can turn an existing service customer base into a repeatable, sustainable, product customer base, keeping your startup off the VC treadmill and reducing growth risk as your valuation increases.
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