Poll: Would your start-up bootstrap instead of raising money?
Would your start-up take on a short-term contracting gig <i>as a team</i> to finance yourselves instead of raising money?
It's somewhat complicated by the fact that we don't live hourly, we live annually, so I do the following:
Let's say, to live comfortably, we want $60k a year each. There are some 220 work days in a year, with about 6 productive billable hours per day on average.
That means if I charge $100/hour then I get 2 days to work on the startup for every 3 days of contracting work.
You can pretty easily plug that into a spreadsheet and vary your hourly rate, then come up with an estimate on hours for a project and see how many days you'll get to work on your product.
If your goal is to have 4 spare days per day contracting, you need to charge a lot more per hour, so you need to find a market segment and service that will pay that amount.
Once you've decided this it gives you a really strong sense of "fixed costs" for your time so you feel much more comfortable saying no to work (because it's as simple as having bought something for $1 and therefore needing to sell it for $2).
The one thing that we consistently come across is that people often want to negotiate "partnerships" or cheaper rates in exchange for Other Value Proposition X.
The stock standard answer to this is, of course, we have no spare capacity for that type of proposition because all of our speculative investment is tied up in investment of our own products.
I've found I have more time and more money since I started thinking about things in this way.
But I am very much pro-bootstrapping - save your money while consulting or while working the corporate gig, get your health insurance in line, figure out a method of monetization that starts a good six months before your savings dry up, then quit all outside pursuits completely to focus on your startup.
(1) 50% of our time should be spent on our own products
(2) If we're spending more than 50% on average on client work, we either raise our rates or turn away the least reasonable clients
If you can't pay your bills with the above formula, there are two options:
(1) Promote yourself more, increasing demand and letting you raise your rate
(2) Cut your costs
It's simple, and has worked well for us.
You can also sell fruits and vegetables - but that's another story. So far both are working for me though :)
Contracting can be a good gig, but it's also a tar pit. I'd rather not contract. Instead I'd prefer to raise money and focus on developing the company's initial product. Contracting often distracts from the company's true product needs.
That said, I'd rather build a company using the founder's funds with no external funding or contracting distractions. To me, that's true "bootstrapping" and that's the best path for almost any startup to take.
(Of course investors and advisors can offer excellent advice and open up fantastic opportunities, so never completely dismiss the idea of external funding. Almost every company that wants to move beyond a "lifestyle business" needs to take on significant funding and begin building a powerful support and advisement network.)
You kinda get up in the morning SUPER bummed about going to the 9-5 shop and the motivation dies almost completely cause you just wanna make the side project (which i guess it is at the time) work.
If i was going to do some part time work i would probably look at tutoring highschool students or certain cs courses cause it pays ok for the day to day bills and i find that more fun anyway. Not at the super broke stage yet so dont need to go down that path at the moment :)
In another example, my hypothetical startup might be able to reach profitability via bootstrapping, but wouldn't be able to grow organically fast enough to prevent competitors with deep pockets from beating you to market dominance. In such a case, taking external funding to scale quickly might be a wise move.
So yeah, I'd bootstrap if my startup lent itself to it, since having more equity is great. Ultimately, though, I'll do what the startup needs.
I always remember that 100% of nothing is nothing. If you really believe in an idea - enough to spend time on it - raise some money, don't worry that you now own a smaller part of it, and change the world.
If you could spend a month on a short-term contracting gig and bring in the equivalent of a small angel round, wouldn't that be a worthwhile option?
You can almost treat your consulting side as a startup of it's own to make it as efficient as possible a provider to the bootstrapping effort.
Start-ups should focus on bootstrap if they really care about their product.
Will be like dools says - consult X days to increase runway by Y days on product. Ideally Y>X.
God only knows what we would have done with 200000$ extra :)
I started my consulting business to provide income that I could divert to the startups I wanted to do, but so far it hasn't provided enough excess to allow that. So, that's the potential downside: if you aren't careful, you can become a consulting company where consulting is your primary activity and there's no time or money left for starting up. I think PG has mentioned this too.
I don't think it's an altogether bad way to run things, though. It eventually comes together in many cases and you don't have to worry about pitches, sneaky or uncouth investors, diminutive equity, etc. Investors can really be dangerous and I think a lot of people take investment without understanding the potential consequences.
I knew a major local investor on a somewhat personal level and I've developed a deep distaste for him. I don't believe that he operates ethically and I want my businesses to stay as far away from him as possible. He is dangerous and sneaky, and I believe many investors are.
Bootstrapping yourself as a consulting company first and using excess income to finance startups is a viable concept and I think more people would be wise to consider it. It provides a lot of good experience in the technical and business side of things, and you have to do what you can to stay afloat.
Now divide that by the number of years, divided by 2000. For a $10M exit, working on the startup for 5 years, that works out to $1000 per hour.
If you really think your startup can be sold for $10M or more within 5 years then you should think twice before taking on any contract work for less than $1000 per hour.
a) Future value is not equal to current value.
b) $10M exit in the future is not set in stone. It'll take longer and be more painful than you think it will be. The chances that you'll have a $10M exit are low. You're doing well if you're pocketing $1M.
c) People won't fund you for free. You're giving up a chunk of your company. At 20% of $10M, that's $2M you're giving up. If you're getting more capital, you can expect to give up more.
d) Having full control and agility is more important than most people realize unless you have some really smart entrepreneurs who are your investors guiding you.
Also, building a $10M startup isn't exactly guaranteed. When you factor in the future value, expected exit, dilution and the risk, I think it'll work out to a lot less than $1000/hour. But I don't think that's such a bad thing. I'd bet if you talk to most founders, they'd tell you that they didn't start their company with a big number in their head - they started it because of passion, drive and the desire to make a difference. $1000/hour consulting doesn't equal that sort of lifestyle.
Really, if you don't think your startup is going to be worth even $5M at some point in the future, I think you have to take a hard look at what you're really trying to accomplish.
But even if we take your figures, assuming like the original question that you actually need the money, you're choosing between giving away time or giving away equity.
Assuming that delaying a couple of months doesn't diminish the value of your $10 million exit, then giving away even a only couple of percentage points in equity instead is giving away the difference between the ramen money and $200,000 in five years' time; that's the nominal gross return to the investor if you succeed.
Taking it further, if you take a ~$20,000 investment for ~5% of the company to save you ~200 billable hours of contract work at ~$100 per hour, in the event of a $10 million exit the opportunity cost of giving away equity instead of contracting (without any additional funding it's approx $500,000-$20,000 in this example) will have most likely been well in excess of $1000 per hour.
That's why people's chief motivation for joining incubators is seldom the seed money.