This post is part of the Bootstrapped Startup 50 series. The goal for the BS50 series is to cover everything that matters when bootstrapping a new startup. The posts are sequential, so it wouldn’t hurt to read from the beginning if you’re just joining in.
There are many different types of companies out there, from large multinational corporations to mom-and-pop general stores in small towns to Joe Blow’s handyman service. All are valid, and all depend on just one factor for staying in business: profitability. And yes, I’m purposely excluding non-profits.
Profitability Is The Goal
Personally, I don’t think that you should ever consider bootstrapping a startup company if profitability (strong profitability) isn’t your top priority. You will most likely fail if you can’t find a path to profitability within the first few months of your existence, unlike venture-backed startups who can meander toward their goals unprofitably for a couple years. If you’re thinking about bootstrapping then most likely you’re already in the right mindset; wanted to put the profitability caveat out there just to be sure.
Estimating the Profitability of An Idea
First off, everyone knows it’s impossible to correctly estimate the revenue or profitability of an idea. That’s the stage we’re at now, just an idea or a few potential ideas. You can do a very rough and quick assessment of your idea’s potential by looking into the following variables:
- Estimated monthly expenses excluding marketing and advertising. You most likely won’t have much salary and payroll expense at the beginning, so this is really the cost of doing business. Expenses like servers, software, computers, etc. should go here.
- Advertising monthly expense. This is often the make or break expense category for a business. All businesses need to advertise somehow. Your marketing and advertising skills are often the difference between success and failure. The cheaper you can advertise effectively then more profitable you will be.
- Revenue. This is the hardest variable to predict. So my best advice is to guesstimate how much income you can make in your 2nd month (I’m assuming you won’t make any money at all in month 1) and count on realizing just 10% of that revenue. I’ve always been known to severely overestimate initial income potential, so assuming you’re 90% off should be a safe projection. After month 2 you can assume a small monthly growth factor, something like 3-5%.
Once you’ve got the variables somewhat figured out just plot out a spreadsheet. Total revenue minus total expenses equals rough profitability. Don’t worry about anything other than the big picture items at this stage. You can always fill in the detail once you’re actually moving forward with the startup.
Next up we’ll revisit your skillset. What do you think of the series so far? Comments appreciated!