7 ways to bootstrap a VW business

There’s an old saying that 90 percent of new businesses fail within a year, and they fail because of a lack of capital.

Fortunately, that’s a myth. According to the U.S. Small Business Administration, 70 percent of new businesses survive at least two years, and more than half were still in business five years later. And those numbers include companies that shut down for a variety of reasons. In 2007, for example, the majority of companies closed for non-financial reasons — the owner sold the company, retired, died, decided to start a different business, or another reason.

That’s not to say that money isn’t important. Some 42 percent of companies ceased operating because of money. But saying that a company folded because of money is like saying that someone is dead because the heart stopped beating. It may be true that in every single death, the heart has stopped — but the actual cause of death can be almost anything. Similarly, a business can run out of money because of mismanagement, over-expansion, a sudden influx of competition, changes in the industry, and many other reasons.

In addition, just over 30 percent of all companies were founded with less than $5,000 in start-up capital in 2007, according to the U.S. Census Bureau.

So here are some tips on how to start a business for under $5,000 — or nothing at all. But you’re going to need something else to make up for the lack of money, such as connections, technical skills, marketing skills, or management skills. Of course, you can always learn networking, programming, marketing, sales and management. Plenty of idiots work successfully in these areas, it’s not rocket science. All it takes is a commitment to learn and practice these skills. But the more of these skills you already have under your belt, the better off you’ll be.

(Image courtesy 60 in 3 via Flickr.)

1. Start a service business

To do this, you need connections or marketing skills. Sell your service to your customer, get paid a certain amount up front, and use the funds to do the work. If you don’t have the technical skills to do the work yourself, use the funds and your management skills to hire someone as a contractor. Once the business is established and a certain amount of work is coming in regularly, convert some of these contractors into regular employees.

Always make sure to keep funds in reserve for expansion, or for sudden downturns. Keep growth steady, so you’re never taking on more work than you’re capable of doing and be extremely conservative about hiring full-time staff, because they have to be paid even if no work is coming in.

Some examples of services companies in the virtual environment space:

  • Helping companies choose the right platform and vendor.
  • Helping companies create immersive, interactive environments.
  • Helping schools, non-profits, or companies set up private grids.
  • Providing management and support for grids that can’t do it themselves.
  • Helping grids deal with one-off problems that are beyond their abilities, such as needing custom viewers, or migrating databases.
  • Helping schools and non-profits apply for grants to pay for virtual world projects.

How to promote these services on the cheap:

  • Start a blog where you share your expertise and customer success stories. Your potential customers will read your blog for advice and, when they need an expert to help them with something they can’t handle on their own — or don’t have time to — you’ll be top of mind.
  • Reach out to existing, established vendors and offer your specialized services as an outside contractor.
  • Monitor social media, blogs, and help sites like Quora and Ask.com for questions related to your area of expertise.
  • Write a book or how-to pamphlet or e-book.
  • Do a podcast or webcast.
  • Appear as guest on in-world talk shows, or write guest columns for related publications.
  • Submit your company as a service provider to directories, including Hypergrid Business.
  • Create a mini-grid promoting your service and list it with Hyperica, The Hypergates, and other virtual world directories. Have activities for visitors to do that will encourage potential customers to get to know you better.
  • Hold classes or webinars.

2. Let your customers pay your way

Say you want to start a grid, or launch a software product. Sell it first. You’ll need connections, or sales and marketing skills.

Ideally, you would have potential customers in mind before you start work on your product, and tailor the product to exactly what the customer wants. Start the grid or work on the software once you have a commitment from the customer, or, better yet, a down payment. Once the grid or product is up and running, find a second and third customer to pay for expansion or more features.

Say, for example, a group of cowboy poets is looking for a grid on which to hold poetry readings, and they’re willing to pay a setup fee to get it going. Set up the grid for them on the understanding that you’ll be bringing in other cultural tenants. Then, as you bring in musicians, art galleries, and book clubs, roll out additional features and facilities as revenues permit.

Linden Lab’s $1,000 setup fees make perfect sense when the grid was small and growing fast. The money was needed to buy extra servers, and hire additional staff. Once growth levels off, those setup fees can be put towards improving service, or you could give your customers a price break, instead.

As with service companies, you’ll need to be careful about managing growth and keeping expenses low.

3. Outsource anything you can

You might think that the owner of a start-up business had do everything himself or herself. In fact, the opposite is true. The more of the work of the business you can delegate to other people, the more opportunity you’ll have to grow. There are people out there who will happily run your grid for you. Promote your communities. Create your code. Write your press releases and blog posts. Some will even do it for free, for fun, for college internship credit, for a reference for their resume, or to promote a cause they believe in.

You can focus on the things you do best, and you won’t get burned out or overwhelmed with the day-to-day details of jobs that are outside your comfort zone.

To help pay for all this outsourcing, we have tip #4:

4. Charge high prices

Many entrepreneurs start out by underpricing their services. They want their customers to be happy, so they charge as little as they can, and sometimes even less than that.

But you wouldn’t start a retail store and try to compete with Wal-Mart — you can’t match their ability to buy in bulk. You’d focus on a niche where you can deliver added value.  The low-cost approach requires high volumes to succeed, and this is something very difficult to achieve with little or no startup funds.

And you might be surprised to find this out, but bottom-of-the-barrel prices aren’t the only things that make customers happy. Customers also want reliability, good service, unique features, supportive communities and much more — and they’re happy to pay for it. I love my pricey iPhone, my brand-name Diet Coke, and books by my favorite authors instead of cheap knock-offs.

In fact, given a range of product offerings, most people tend to pick something priced in the middle, not the lowest-priced one. So when you decide on the high price price you will charge for your goods and services, put an even higher-priced option on the menu, to give it context.

Remember the saying, “Nobody ever got fired for buying IBM?” Well, there’s a lot of fear about virtual worlds, too. Customers are worried that their vendors won’t be able to deliver, or will go out of business. You can be the IBM of your niche. Well, technically, IBM is already in many virtual environment niches, but with $50,000 for a small OpenSim grid, they’re currently pricing themselves out of the small and medium business market segment. Their loss.

Just remember to give a reason for your customers to pay more. You’re not going to go to a restaurant that proclaims, “We’re just like Taco Bell, but higher priced!” You’re not going to buy a diamond labeled, “We’re completely indistinguishable from man-made diamonds. But we cost a hell of a lot more!”  No, you would expect to see ads promoting fresher ingredients, better service, and certificates of authenticity. It also helps if you actually have fresher ingredients, better service, and so on.

Don’t promote the community feel on your grid if it’s completely empty. Don’t promote your grid’s shopping opportunities if all you have is the same freebie stores as on every other grid. Customers may be fools for brand names, celebrity endorsements and status symbols, but they aren’t total idiots. They’ll want to see those brand names, celebrities and status symbols before they’ll fork over their money. Offer something unique, something valuable — or something perceived as valuable — and market the hell out of it.

If you set prices too high, the worst that will happen is that you’ll have few or no customers, and you’ll need to find other selling points to attract them. Nobody suffers. They just don’t buy your stuff.

But if you set prices too low, the worst that will happen is that you’ll get a lot of customers — and you’ll run yourself into debt trying to support them. You’ll end up owing money on your credit cards, to the IRS, to your service providers, contractors, and other suppliers, to your employees, and permanently ruin your reputation in your market. Not to mention the accumulated sleep debt and possible loss of spouse. I’m not painting an unnecessarily grim picture here — I’ve personally been through it. Well, the loss of spouse may have been for an unrelated reason and simply happened at a bad time. But still.

You can always lower prices in the future. Lowering prices makes customers happy. Raising prices, on the other hand, can be a nightmare.

5. Replace fixed costs with variable costs

If you set your prices right, you will be able to replace your fixed costs with variable costs. Variable costs are typically a bit higher — consultants cost more than employees, rented servers cost more in the long run than ones you own outright. But variable costs are key to bootstrapping a business because they adjust automatically as your revenues go up and down.

Kitely is a great example of this. They have some fixed costs — their Website, accounting and legal advice. The founders are putting in sweat equity to minimize labor costs. Everything else is variable. Kitely bills customers up front for the time they will spend in a virtual world. Meanwhile, Amazon bills Kitely at the end of the month for the time used by Kitely’s virtual servers. As the number of customers goes up, revenues rise in sync with the hosting expenses and slightly ahead of them. Amazon allows virtual servers to be provisioned quickly, and with no setup fees, so expansion doesn’t require any up-front expenses.

Although Amazon is an extreme example of this, many hosting companies can quickly provision and de-provision servers.

Another example of variable costs is using contract workers instead of regular full-time or part-time employees. Contract workers, freelancers, and other types of temporary help can be brought in when needed. If business falls off, you don’t have monthly payroll to meet — and payroll can quickly drag your business into the red. Especially if you hesitate before firing employees, or keep them on in hopes that business will come back. Many businesses, startup businesses in particular, can have ups and downs. Without being able to scale back, a protracted down period will quickly kill a company. And a business trying to bootstrap itself to success doesn’t have spare cash lying around to keep unneeded employees on staff indefinitely.

In addition, firing employees is an extremely painful process. With freelancers, however, you simply use them less, and they pick up the slack from their other customers — a good freelancer will have a diversified portfolio of clients, just for that reason.

Other examples of variable costs include renting on short-term leases instead of long-term leases, or buying a building. Renting equipment instead of buying it. Using cloud services instead of buying software up front. Hiring experts only when needed instead of paying extra for an employee with all potentially needed skills. Paying sales staffers on commission instead of salary — though you may have a hard time here. Good salespeople will typically negotiate great packages for themselves. The kind of person who’ll settle for a commission-only payment structure is either going to be very, very new to sales or very, very bad at it.

But maybe you are your company’s best salesperson. In that case, you should consider trying #6:

6. Send work to your competition

Many vendors are happy to offer “white label” products. They do all the work, you slap your own label on them. Why would they agree to this? Because they get paid. They get a whole new distribution channel that they don’t have to do anything for. You can probably even negotiate a bulk discount. You might even be able to negotiate free trial periods out of them, and delayed invoicing — you get paid up front, they get paid a month or two later.

All you have to do is find customers. And, before people start griping that slapping a fancy label on the same old thing is deceptive and evil, let me point out that finding customers and tailoring a product to fit those customers is just about the hardest thing in the world.

You will need creativity here. The ability to imagine new markets where other people see nothing but empty desert. You will need to convince people that they need the product by playing to their emotions, to their bottom lines, to their need for recognition — people buy for all sorts of reasons. Many of those reasons don’t make sense. Good marketing helps customers recognize a need they might not have known they had, buy a product that fills that need, and then be happy enough afterwards to buy again, and to recommend the product to others.

(Tricking customers into buying something they don’t need is bad sales practice, and can quickly destroy your company.)

If you don’t have creativity, the ability to copy can serve you instead. For example, convincing the first school district to roll out a private virtual world is a major undertaking. But once one school district rolls out their grid, every other school district on the planet becomes a much easier potential target — unless they want their students to fall behind and be unemployable when they graduate, that is! Once one language school starts offering immersive virtual language lessons, other language schools will have to step up to stay competitive. Once one supermarket design company starts offering customers virtual walk-throughs, everyone else will look stupid by comparison until they catch up.

Either way, whether selling into a brand new market or expanding an existing one, the distributor is providing significant value.

The technologists who start up most virtual world companies are often lousy at managing brand identities and marketing their work. A good salesperson can help bring them reliable, steady flows of business that will enable those technologists to improve their products, to hire more staff, to invest in new equipment.

In the end, everyone benefits. The customers are happier. The technology gets improved. The market gets bigger for everybody.

Including the suppliers. Which brings us to #7:

7. Supplier financing

Getting your suppliers to pay for your new business can happen in a number of ways. The key thing is to convince your suppliers that you have a workable business plan. A good track record, excellent references, and a strong team all work to your benefit here.

You will also have to demonstrate that you will be able to open new market opportunities for that supplier.

We’re already seeing some examples of this in the virtual worlds. Intel, for example, is donating the time and efforts of its programmers to the OpenSim project. Their contributions help increase its chances for success and thus help build demand for faster processors and smarter chips. After all, with even the cheapest computers now being able to easily stream movies and music, customers need new reasons to upgrade. Virtual worlds could be one of those reasons.

Non-profits can ask for outright donations. For-profit businesses typically negotiate discounts, delayed payment terms, revenue sharing or equity deals. For example, you might give up a chunk of your startup company to a key supplier in return for a certain level of support during the early years of growth. The supplier is taking a big risk, since you might go out of business. But you might also strike gold, and they’ll benefit from your success as you grow.

Employees are also a kind of supplier, and can be paid in stock options if your company is likely to scale up rapidly and have an IPO. Other options include profit sharing or partnership agreements or stock shares if your company is incorporated.

Be careful how you structure these agreements, however. You don’t want to give up half your company to a business partner who’s great the first week on the job, but then starts slacking off and finally goes off to do something else leaving you stuck with all the work — while he keeps half the company. If a partnership is structured badly, often the only way out is to close down the company and start over again with a new one. And that’s not good for your reputation or your brand recognition.

If you’re going to hand out equity to employees, have a graduated schedule in place with clear deliverables. The dot-com companies popularized stock options, which would vest after a certain amount of time on the job. As virtual worlds continue to explode, I expect to see a resurgence of such agreements.

The joys of bootstrapping

Bootstrapping can seem lot a lot of work. Wouldn’t it be easier to convince some investors to hand over a large chunk of money, and then not worry about meeting payroll or having to scrimp and save on every little thing?

The thing about bootstrapping, though, is that it teaches your company to be a lean, mean business machine. You’re optimized for success from day one. You don’t waste time and effort on projects that lose money — you can’t afford to. You don’t keep useless staff around. You don’t buy more equipment than you need, get fancy offices, or blow millions on Superbowl ads.

A boostrapped business has to be immediately profitable. That means you’ll have a history of success from the start, which will be good later when you need to bring in partners, sell the company, or get a business loan to fund expansion.

Plus, you’ll retain the maximum equity in your startup, instead of giving it all away to investors on the first day. The longer you wait to bring in outside investors, the more of your company you get to keep, and the longer you get to do things your way. You can focus on your products, your services, and your customers, instead of on having to make your investors happy.


Maria Korolov