Before any startup can hit the ground running, it must answer a series of critical questions: Where and how should it generate funding? What its initial business model should be? How will it become profitable?
The first question seems the simplest to answer, especially with the current entrepreneurial ecosystem full of venture capital funds, crowd funding and angel investors. The obvious way to secure a cash infusion is from one of these capital pots. But even outside of the tech world, the decision to use outside capital to fund a business can have major implications on your ability to succeed. Whether it be money from friends and family, an investor or a loan from the bank, external funds generally come with equivalent increase in external pressures.
The rush to find investors can push entrepreneurs onto a path of no return that will eventually lead to yet another startup sob story. This is especially true when “The Bakery Model” exists as such a potent alternative. Let me explain.
When I, along with my other co-founders, launched our portrait-editing app Facetune, we debated how to generate the necessary capital to develop our app and grow our business, and eventually opted for what is surprisingly considered today to be an unconventional approach: generate profits from the very beginning. We dubbed it “The Bakery Model”: You make a bagel, sell the bagel, buy ingredients to make more bagels, sell those bagels and on and on you go. While this might be the standard model for small businesses, using it in our field was perceived to be something that required a great deal of confidence and commitment since a big chunk of our own ecosystem is based on raising capital (despite the ever lowering entrance barriers in this market), acquiring users and figuring out how to make money later on. However, sometimes even when trying to operate in a market filled with free and freemium products, the best way forward is to build a product worthy of being paid for and putting a price tag on it.
Here are a few reasons the bakery model may be right for you.
It might sound overly simplistic, but if you’re going to sell something successfully, it better be worth the price tag. When you charge for an app, the only thing that matters is sales, and the only way to sell is to create a product that effectively addresses a real need. Too often, startups release their minimum viable product (MVP) before its strong enough, under pressure to get it out there and drive users towards the app. Because we constantly needed to ask ourselves whether it was worth paying for, our initial MVP was especially strong. A paid app puts your eggs into the most effective, detailed and impressive basket you have to offer and the benefits can be huge.
But the same is true for any entrepreneur with a product-centric business, whether it be a lemonade stand or a new piece of sporting equipment. When a product sells you know that you’re on the right path and that you have something worth promoting and investing in heavily. When you focus on taking in investment before you have a product of sufficient quality or in utilizing a funding mechanism that isn’t based on the product, the results can be disastrous. You end up diverting attention to external issues that aren’t critical in the early stages wasting time and money, and you cloud the picture of what is or isn’t working with your product – making smart adjustments more difficult.
Data driven marketing is all the rage in mobile but one of the biggest challenges in marketing free apps is knowing which data matters most. The beauty of a paid app is that it simplifies the measurement process with a very clearly defined and easily measured goal – sales.
The same goes for other products as well. Assume for a moment that you have a restaurant that just opened its doors and you’re trying to understand how smart your pricing is. If you food the market with cheap deals through Daily Deal sites, you’re going to miss out on the critical feedback necessary to set the proper standards for your business. Those tactics may be beneficial down the road, but utilizing ‘creative’ approaches too early can reduce your ability to gain important insights.
Related: Ka-Ching: Making Money Online
While this is more relevant for the software and online industry, there is a growing focus on producing free products that rely on alternatives funding mechanisms. From publishers to digital products, freemium and advertising models are great for some businesses, but they frequently necessitate a higher marketing budget and a longer sales cycle. With the paid model, you experience a shorter sales funnel and have cash-in-hand upfront, ultimately enabling faster growth. The ability to reinvest money directly into the product allows you to channel initial feedback directly into product development to ensure you stay ahead of the innovation curve.
Promote good habits
Being cash-tight often means that as a company, you are lean. Growing manpower on a need-to-have basis pushes you to maximize your own efforts and make every hiring decision very carefully. The same is true for any time you decide to spend capital. Learning to spend within a budget dictated by your sales will help you build a mentality that will allow you to combine growth with the healthy habits necessary for long term success.
Most importantly, bootstrapping your way to success means that you can remain strategically independent, creative and wholly focused on developing the best product out there. Independence can be especially critical in the early stages of a tech company when the pressure to get a product launched can often compromise the quality of the product and the first impression you make on the market. Income gives you the capital necessary to control your own destiny, remain true to your own vision and to make smarter decisions on when to approach investors and who to partner with.
This approach is not for everyone and clearly has the greatest relevance in fields where the barrier of entrance are relatively low, like services and other similar sectors, but the lessons are applicable across the board. In our industry where the emphasis placed on raising capital has pushed us to forget the far more important goal of driving revenue. For many entrepreneurs, success may be far more likely if they adopt a path driven by the bakery model.