Roots and Boots: The history of sociomantic labs, Part 2

This is part two of our three-part series Roots and Boots, which tells the story of sociomantic labs. Part 1 told how the labs came to be, and we return today to explain a very important aspect of our company that is integral to the way we have operated from day one: bootstrapping

Bootstraps of a different sort

Why boostrap?

Tech news sites these days seem to be chock-full of stories singing the triumphs of venture capital investments in the technology sector. There are “pitch your startup” events popping up all over, in which young entrepreneurs gather to compete for the chance to land some much-needed funding for their big ideas. It’s very exciting stuff to read about, and the industry surely would be less vibrant without such initiatives.

But with the economic circumstances of the past few years, the amount of investment capital available to startups has become increasingly limited, and a growing number of entrepreneurs are competing for a shrinking pool of funds. In light of this change, many young companies have decided to stake it out on their own by bootstrapping their venture.

Bootstrapping means that the startup’s founding members take it upon themselves to fund the company from the ground up, without any external investment funding. When they started to lay the groundwork for sociomantic labs, our founders had to answer the big question of how to finance the idea. Because they were driven by a broad vision instead of detailed business plan, and because it was their first experience as founders, they decided that their time and resources would be better spent developing their ideas than developing a business pitch. Bootstrapping allowed them to grow their skills while providing them with the time they needed to develop their vision organically without the restraints of a predefined direction. On the other hand, bootstrapping also meant they had to come up with a way to generate revenue in the meantime so that they could have the resources they needed to pursue their vision.

Although bootstrapping can be a tremendous challenge, there are a lot of great things that come out of being a self-financed company. The first major advantage of bootstrapping is something that every human wants and needs: the element of personal freedom. In the case of a company, this financial freedom affects many different dimensions and decisions — everything from what time employees come into the office to which projects the company decides to pick up. As a bootstrapped company, we can devote time and resources to our product that otherwise might have been spent preparing plans and propositions to present to investors or shareholders. Because our belief in the unmatched quality of our solutions is what made us decide to start a company in the first place, that’s where we want to be focusing as much of our energy as possible.

Another big advantage of bootstrapping is the opportunity to let your products and services develop organically, instead of based on an investor-approved business plan. Because sociomantic labs grew out of research at the University St. Gallen, it wasn’t clear from the start what the “final product” would look like. There are many different applications for the technology on which our company is founded, so we’ve had to spend a lot of brainpower evaluating and re-evaluating what’s the “best use” for that technology. In our little bootstrap greenhouse, we were free to allow the company and the product to grow and change as we saw fit.

It’s important to note that having no investors doesn’t mean we haven’t had some great advisers. Our very existence is a testament to the power of social networks. We’ve had the benefit of feedback and guidance along the way from myriad sources — academic, professional, and personal. People like zanox CEO Thomas Hessler took the time to introduce us to Silicon Valley, while companies like our office neighbors servtag (a technology startup one year our senior) are much more than role models for things like business processes and procedures.

Bootstrapping is a balancing act

How it Works

Our founders will be the first to admit that bootstrapping is hard work. Sometimes extra hard work, to be sure, because it entails the careful balancing act of dividing resources between development of the core project and the development of fringe projects that will keep the company’s head above water financially. According to our managing director Thomas Brandhoff, sociomantic labs has been through three distinct stages of growth in our bootstrapping journey.

First, the founders had to create a financial buffer that was substantial enough to cover their living costs. For most bootstraps, this means that the founders accept a restricted personal budget for the sake of company growth, and for sociomantic labs it was no different. They initially supported the company by taking on projects that were specially tailored products for individual companies. These projects ranged from one-off solutions to ongoing services, but at this first stage the main purpose of our work was to make enough money to keep the company afloat and the dream alive. The core vision of sociomantic labs had to stay on the back burner for a bit so we could set up a financial cushion.

If you’ve got a truly great core product, the miscellaneous projects of the first stage will naturally propel the bootstrapping business to the second stage, in which the company focuses on projects that have long-term involvement, thereby providing the company with permanent revenue sources. Instead of creating “moment in time” snapshots of a company’s customer social graph, we began providing ongoing insight on constantly changing social graphs. By acquiring several long-term client contracts, we were able to begin forecasting our revenue, which in turn allowed sociomantic labs to start employing staff beyond the founding team.

This is the stage when a bootstrapping company can really take flight, but the challenge is to make sure that the core vision is never pushed out of sight by the prospects of funding from fringe projects. It’s easy for the company to stagnate by accepting too many individualized projects that are not directly promoting the development of the core vision, and when funding is staring you in the face, sometimes it’s pretty hard to turn down the offers.  The biggest challenge of bootstrapping is keeping your eye on the prize.

“The most difficult thing is when people come back, they are happy with your service and they want something more, something special for their business,” explains Brandhoff. “But at some point you simply must reject some of these projects to invest your time in the future of your main project.”

Needless to say, progression to the final stage of financial development takes a healthy dose of discipline and great deal of discretion. To accomplish this, sociomantic labs had to have a firm and dedicated belief in our product above all else. In the third stage, the company’s only projects are directly related to the core business – a collection of permanent customers benefiting from the product we set out to deliver. Because we’re a bootstrapped company, we’ve had the freedom to develop our product as we envisioned it, without having to dilute or alter our ideas for the sake of investors.

All in all, the world of a bootstrapped startup is a world of many careful checks and balances. It’s a process that takes a lot of time (after all, you’ve got to grow your funds organically), and a method that needs attentive oversight (without a smart financial monitoring system, emotions can easily get in the way of progress). But the hard work pays off when you begin to see your idea take form in reality.

Next week we’ll complete the Roots and Boots series by sharing a little bit about our “stage three” developments — what’s next for the labs!