Chicken and egg, bootstrap-style

by stevew on March 20, 2010

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Prompted by a recent question on Answers.OnStartups.com, I’ve been thinking about the classic problem of building a business which requires some level of critical mass to succeed – the so-called “chicken-and-egg” problem. Although sometimes a new venture is dependent on network effects for its success (e.g., the telephone, Facebook, Twitter, LinkedIn, etc.), the more common problem occurs where there are two sides to the market: buyers and sellers, contributors and consumers, writers and readers, and so on – here having one without the other is pointless.

In an answer to an earlier question on OnStartups, Moluko‘s Hendro Wijaya gave the following wise advice:

Focus on satisfying one side of the equation first. Pick the chicken, or the egg. Make sure they can see the value early in time.

I think that’s the key – making sure you put value in the hands of one side or the other, at the earliest possible opportunity. Build one side of your community by giving them something they can’t get elsewhere. As Chris Dixon observes in his article Six strategies for overcoming “chicken and egg” problems, when the early manufacturers of video recorders (VCRs) released their first products, there was no Blockbuster to rent your videos from – in fact, there was no pre-recorded material available, period. However, the VCR provided stand-alone value by allowing people to record their favourite TV shows and watch them later, something that was sufficiently valuable to justify the expense of the device, without pre-recorded content. It seems likely that this was a market of early adopters, as during the Eighties and Nineties most normal people couldn’t work out how to programme their VCRs – doubtless this drove the demand for video rentals (the other side of the market) which followed on.

The nice thing about this approach, especially if you’re bootstrapping, is that you get to charge for this early value, and bring in some much-needed revenue. Even if you didn’t need to, this is a good discipline as Ash Maurya points out, as part of your customer testing means verifying that prospective users will actually pay money for your product or service.

Chicken-and-egg problems come in all shapes and sizes, and whilst it’s easy to see the sense in tackling one side of the market with a minimum viable product (MVP), it isn’t so easy to know what that MVP should look like. This is especially true when trying to build something new that your target users aren’t able to envisage – getting inside your target users’ heads is no use when they have no idea what they want or need. Sean Tierney has helpful insights on this challenge in his blog post sub-titled “bend one of the flaps“. He opens with this astute observation:

The term “bootstrapping” itself comes from a myth of a guy who found himself drowning in the sea and was able to grab his own boots an lift himself out of the water to safety- a physically impossible feat! Arguably though, bootstrapping a company from zero resources is an equally “physics-defying” task.

Sean suggests that in order to solve the problem, you have to mentally “bend the flaps”, in much the same way as you do physically when closing a cardboard box without sticky tape. For me, the solution to the question “what product to build for group of users X?” is to go and become one of them (for a short while, that is). In the enterprise software space, this doesn’t mean taking a job in your target field (although that works for some people) – you can achieve much the same thing by offering a consulting service that is specifically focused on your target user/problem. Once again, that has the added benefit of bringing in revenue whilst you learn all about your target users.

This approach isn’t for everyone. In particular, it doesn’t work if you need to get to market very quickly, before your competitors, but if that’s your situation, I’d argue you shouldn’t be bootstrapping anyway. And of course, if you are going to offer a consulting service on a specific theme, you’d better have some real expertise in that field to offer.

FIXatdl Jump-Start Launch

Attempting to stay true to the strap-line of this blog, here’s a brief update on the business. For the most part, I have been busy getting a new targeted consulting service ( ;) ) off the ground, something I call FIXatdl Jump-Start. Through a bunch of speculative development in the first couple of months of the business, and by participating in the relevant industry standards body working group, I’ve built up some handy expertise in the FIXatdl standard which currently is in high demand.

Recognising that the majority of normal people have any idea what I’m talking about when I refer to FIXatdl, I put together a Wikipedia article which provides (I hope) a pretty reasonable overview. (If you’re working in a niche area, creating educational materials on your site and linking to them from sites like Wikipedia is a great way to help get your company’s name out there.)

The Jump-Start service launches next week at the FIX Protocol Limited (FPL) EMEA Conference in London, but I’m delighted to report that I have my first customer for the service already, a tier-1 investment bank, no less. I’ll be on the FPL stand (or ‘booth’ for readers the other side of the Atlantic) next week answering questions on FIXatdl – do stop by if you happen to be at the event.

Seen other neat ways to tackle the chicken-and-egg problem in a bootstrapped world? Please leave a comment and let me know.

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{ 11 comments… read them below or add one }

Christian Bjerre March 20, 2010 at 8:45 pm

On bootstrapping – the origin is Baron Münchhausen – and I prefer the version where he pulls himself up by the hair.

And here I agree with what you write. Even if you don’t have the right chicken (or egg) working in the vicinity of a chicken farm can give you the right inspiration to move on. The value of being close to your potential market and customers can trigger that deja-vue feeling, where suddenly you realise what you have to bring to the market is. You sort of knew it all along, but needed the extra angles before the pieces fell into place.

Good luck with FIXatdl, Steve!

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Ole Klinkby March 21, 2010 at 6:55 pm

Congratulations with your first customer.

Good luck on your stand and then get some products over the counter. I like your idea with the Wikipedia whitepaper it’s a good way to position you and bring focus to your key advantages in the market.

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John Clark March 24, 2010 at 7:56 am

“In particular, it doesn’t work if you need to get to market very quickly, before your competitors, but if that’s your situation, I’d argue you shouldn’t be bootstrapping anyway.”

Interesting article. I’m not sure I entirely agree with this bit, though – in my mind, the situations where you need to hit the market quickly tend to be those where there’s a ‘scrabble’ for some perceived new market. ‘Perceived’ is the key: it’s untested, relatively new, unknown.

So, bootstrapping strikes me as the *ideal* way in which to assess a new market, as one needs to be responsive and lean in order to test a concept out. And testing it with a small feature set, early, is the classic model for the bootstrapper. Getting VCs on-board, taking on loans and so forth – these things place a huge burden on an idea which can compromise it, and of course The Man will want Paying, so your idea cannot afford to fail.
.-= John Clark´s last blog ..Pick your battles… =-.

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stevew April 2, 2010 at 5:41 pm

John – thanks for the feedback. It’s an interesting dilemma – you want to get to market before your competitors, so that means you ideally need plenty of resources – however, I agree that if you’re not too sure exactly what your business/product should look like, then you are in danger of wasting a lot of resources, and spending 5-6 months wooing VCs is potentially lost time too. There’s a lot to be said for being self-funded and taking your time to work out precisely what your customers need, which is where I am right now.

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