Bootstrapping Your Startup: Do You Really Need Early Investment?
blog.woorank.com
blog.woorank.com
It's possible we could have bootstrapped, but it would have been a very different kind of business.
Because if your product does something new, you can ALWAYS get PR.
What I've seen is that with funding, founders don't focus on the essentials anymore. They are not as careful with whom to hire, they don' think as much about what marketing channels to spend money on. However, without funding, you are basically forced to focus on the very core of your startup, every decision needs to be very thoughtful and you will need to understand every process in your startup in-depth.
A friend of mine once said, funding should never be a lifeline, - it should be motivated by a fast expansion opportunity.
Heh, that's a nice fairy-tale world you live in, man.
Yes.
In the UK, if you try to make a company which helps people travel overseas and arranges somewhere for them to stay then you are caught by all sorts of travel regulation. You'll need a £40K bond as well as all sorts of upfront costs just to get started.
So pre-traction you've had to spend huge amounts of money to enter the game.
Large regulatory costs are one of the ways big companies keep new entrants out.
The case of Everpix is a great example. With an early investment it's very hard to keep track of your startup's feasibility. And your startup is tied to the original plan (your promise to investors). So it's very hard to make changes when you discover the startup plan isn't working.
While there are limits on what we can do using profits from our main business and income from the app as it grows, I love the fact that we got the app off of the ground organically. I think spolsky said that when you bootstrap you can only grow the business in line with revenue - which is of course true and a difficult trick to pull off.
I think more importantly, the process of bootstrapping forces you to go about recruitment, sales, marketing, development etc etc in a way that is more innovative (as opposed to just throwing money at problems to make them go away). While you won't want to scale a company using these money saving techniques, they are still excellent tools and skills that can be applied to a business at any stage and put the founding team in to a mindset of sustainability.
I've been hearing of startups taking on client work as a means to fund products. Is that essentially what you guys did? I think It's a noble way to bootstrap but am curious of the implications that stem from splitting your time between client and product.
As for implications:
- Splitting development time between the product and the clients has been hard but gets easier as our clients get used to it. We book in sprints of work on Staff Squared in our schedules way in advance. I line up two solid weeks for the entire team every quarter and this time is sacred. No amount of customer complaints get us to move this time. The amount of time I block out increases with the growth of the app. There's a constant backlog of minor tweaks, so if any of the team find themselves at a loose end they always revert to the Staff Squared backlog (We use a trello/harvest combo for managing this).
- Managing sales - our office manager has stepped in to help the onboarding and sales but ultimately as CEO of Atlas I've done the lion share of this work. This has meant a lot of overtime on my part but tbh I enjoy the work. Given that our aim is to transition in to a product company that does a bit of consultancy on the side (as opposed to a service company with a couple of products) this is short term pain I'm more than happy to experience.
- Staff development - One of our programmers wasn't performing incredibly well in her position as a programmer. She's always had an artistic flair that a lot of programmers aren't blessed with, and so I decided to take a punt and move her on to Staff Squared full time to help me with marketing and UX. She's transformed beyond recognition and now my right hand woman when it comes to making changes to the Staff Squared app UI.
- Using the products as a sales tool. I hoped this would happen...we're not usually able to show/tell potential customers what we've worked on before to any level of detail as it'll breach confidentiality. Not so with our products (we also have www.fundipedia.com). If a potential client wants to see what we're capable of we ask them to sign up to Staff Squared and kick the tyres as it were. This has actually resulted in more Staff Squared customers too. Double whammy!
- We've had to drop any customers not willing to pay our full day rate (some were offered discounts back in the day which we haven't been able to readdress). With those customers gone, and Staff Squared out there as an example of what we're capable of, newer, bigger and better customers have arrived for Atlas and we're now fully booked for pretty much all of 2014. I have no doubt this huge upturn in customer work is as a direct result of our pushing our own products forward.
- The development team are happier than they've ever been. They get to work on an app they're incredibly passionate about (inbetween client work) and see the direct results of their actions in the form of more paying customers. It's a great tool to incentivise a team of people who are already very well looked after individually.
I hope that helps, if you have any specific questions I'd be happy to answer them.
Smart investing means balancing your portfolio. Very soon, the kind of oportunity cost these founders invest in their venture dwarfs the rest of the portfolio. Any bank account is a safer investment than most if not all startups.
More capital raised initially means more salary and less risk to the founders. The founders can pass on the ketracel white ... uh... money to their troops. If some capital deal does not decrease your risk, then just don't do it.
Even more traditional investment arrangements put a great deal of focus on "equity compensation", i.e., only paying founders and employees the bare minimum for survival and "making up" the lacked payment with equity. Not a very realistic deal for an engineer with a family and mortgage who makes 120k-150k in the job market to take a startup gig for 60k (multiply numbers based on local cost of living).
The startup community is missing out on a lot of extremely useful experience and maturity with these cheapskate shenanigans. Of course, the investors are happy to lack this, because exploitation of naivety in founders is one of their primary mechanisms to maximize profit.
I've sought funding a few times myself and always backed out because I was getting offered a sucker's deal. Yes, it's much slower and much harder to bootstrap, but unless you're desperate, taking investment is not worth it, because investors are going to rake you over the coals. And that's the long and short of it.
Chances are you'll never find that problem. Most people don't. Those problems are rare, and solutions to them rarer still. But that's fine. If you have a business idea that you're keen on but don't want to give months away from your family or accept a huge drop in income for, bootstrapping is the right way to go. But that doesn't mean investment is always for chumps. For the few that do find a problem that they live to solve, making the tremendous sacrifices at the beginning is worth it, even if other people get rich off your efforts. Your friends, family, investors and humanity as a whole is better for it.
Do you have small children? If so, can you try to imagine how difficult could be to miss the first words or first steps of your baby? Can you imagine what could mean to simply drop everything on the shoulder of your wife? Your comment is so superficial.
Doing a startup instead of taking a stable job involves tradeoffs, like all choices. How much of a tradeoff you take depends on you. You can move your entire family to the Bay Area, with the tradeoffs that entails (uprooting family, more expensive housing). You can move to the Bay for 3-4 months with the intention of permanently setting up the startup back home, with its own tradeoffs (farther from investors, farther from mentors, 3-4 months away from family). Etc. etc. etc.
There is no false dichotomy. There is no free lunch. Stop making these narrow generalizations.
I guess it's hard to explain to someone who hasn't been in the predicament.
But you haven't seen, as I've seen (as an employee), the huge value of YC and the meetings I've had with YC founders who had families (including one with a young child).
You haven't explained why what you said is not asking for a free lunch. Why is it that there aren't/shouldn't be tradeoffs? Either you move to YC or you don't do YC. Tradeoffs ensue. You yourself are arguing that the tradeoffs aren't worth it. Okay, they aren't worth it for you. The tradeoffs just don't make sense for your personal tolerance level.
Having children involves tradeoffs at all levels of your life. Tradeoffs in working hours. Tradeoffs in social activity. Tradeoffs in mobility. You accept those tradeoffs, for a certain time period, when you decide to start a family. The fact is those tradeoffs exist. And we don't live in an idealized world with no tradeoffs.
I understand there are tradeoffs, and I acknowledged this. I do not accept the popular brogrammer philosophy that rootless 20-somethings are the only people worth investing in because they are the most easy to exploit and/or manipulate. I don't think that makes them worth investing in, but I accept that most investors do. I stated my reasons throughout this thread -- I think founders with families are more likely to have true maturity, seriousness, and realism, and to have superior mental health overall. I think these attributes are beneficial to investors and that they'd have an interest in investing in familied founders for this reason, even if it costs more money to invest a company led by that type of person. You and I are free to disagree, and it still doesn't have anything to do with a free lunch, and it doesn't have anything to do with tradeoffs. It's just two people disagreeing.
I don't really get what you want here.
It also pains me when you keep repeating the "investors only invest in 20-somethings who are easy to manipulate" line which is an overly cynical line that is usually repeated by a vocal subset of HN/the media in context with YC, precisely because YC ensures that you aren't manipulated, and also because it is simply not true. Older entrepreneurs have advantages. Younger entrepreneurs also have advantages.
I don't get what you want here either. I think you're wrong. That's it.
I have less respect for the man that lives to introduce the greatest SaaS platform ever built than I have for the man that lives to see that his home and family is well provided for.
Most grown-ups making grown-up wages can easily infuse 20k into their own businesses. Persons with that passion typically exercise a modicum of discipline and save up for a while before they decide to live on a shoestring. They don't need YC's help to do that, it happens among entrepreneurs the world over every day. And they get to keep 100% of their companies, and even get to continue living in their own houses!
Like I said, if you have no permanent responsibilities and no dependents and think it'd be cool to live in an apartment in SF on $200/wk for a while, be my guest, that's totally fine with me if that's what you want to do. But it's simply not realistic for any adult with permanent responsibilities, no matter how passionate they are. If such a person allowed his "passion" to override his obligations to provide, there'd be a good abandonment case against him. This kind of irresponsibility is simply not allowed when you're an adult with dependents.
Please do not attempt to twist this into "anyone who isn't willing to abandon his responsibilities is just not a passionate founder!" That's typical investor FUD and it's not constructive. It's an absurd ad-hominem.
Perhaps the problem is that we have not all become as morally decrepit as the investors that would claim we lack passion merely because we seek first to care for our wives and children. I'd say the man who provides for his family while bootstrapping a business all on his own has a good deal more passion, in more important areas, than the man who abandons his dependents to pretend like he's 21 again and live off pizza and ramen in a SF loft on a one-in-a-million shot while his family is left without his emotional, physical, and financial support.
We can argue these points all day, but the reality is, unless you can provide evidence that founders with families possess these attributes in measurably greater quantities, and with statistically significant higher probability of success, whether or not having a family is an asset or not in achieving success with a startup is purely subjective.
On the other hand, the number of available working hours, and how more work will result in greater likelihood of success is pretty objective. There may be diminishing returns as the number of hours increase, but at least up to a pretty high point, those returns will still be positive.
Furthermore, family life teaches much more about delayed gratification than single 20-something life. If your argument is that entrepreneurs should show maturity through delayed gratification, the college kid really does not want to go up against the family man.
As to your point that the availability of excessive numbers of working hours and lack of work-life balance is superior, I think there are many who'd disagree. I don't feel compelled to cite a bunch of literature at the moment, but suffice it to say that slave-driving is not considered effective management, and workaholics are not considered healthy people.
Where are you getting that number? My impression was that YC had very fair deal with founder equity > 30% (unless they are funding beyond angel).
Beyond that it's just risk/reward equation. If you want same income as your stable job then you are not taking risk and hence should not expect reward beyond that. Good founders rarely however expect same income as the stable job they could have gotten because they strongly believe in their vision and success and are willing to bet everything they have. That's the first requirement to be founder, IMO. Nearly every successful founders from Bill Gates to Elon Musk have showed this most important characteristics. BTW, lest you think Bill Gates was just another college dropout with nothing to loose, consider the fact that dropouts are usually at great schools, have spent lots of time, money and effort to get there and a suddenly giving up all that to chase some idea is significant risk taking. Even to this day, Elon Musk had been willing to bet every single penny he had on SpaceX. Without this singular characteristic, your chance of becoming successful founder is very low.
I understand the impulse to have founders prove their commitment by living as paupers, but I just don't think it's a good way to judge the competence of an investment. I think there are other meters for passion that are more accurate than "Yes, I'm willing to take a 50-70% pay cut".
1. Most YC founders are not college dropouts. Quite a few are in every batch of YC, but nowhere near 20%.
2. YC isn't in SF. And most YC companies don't stay in SF during YC. Lots of companies stay in Mountain View, Palo Alto, Menlo Park, etc where you can rent out a 4-6 bedroom with your co-founder(s). Housing is even cheaper in other areas like Sunnyvale, Santa Clara, and San Jose, where you can potentially have a house to yourself.
3. If you expect to get paid for starting a startup, then obviously starting a startup is not for you. By definition there's nobody there to pay you except yourself. By definition you are exchanging equity for salary.
4. YC gives you $100k: $20k directly and $80k in convertible notes (well, SAFEs now) at the best possible terms (you'd never see elsewhere). The additional value of YC is that as long as you build a product with some users, you have an extremely high chance (not guaranteed) of raising 1M+ at a 5M+ valuation. Other companies that don't raise can go on to raise more convertible notes. In fact, going through YC is one way of guaranteeing that you don't end up being offered a sucker's deal.
2. As someone who's not from SV, everything in that area gets lumped into "SF" for me. My apologies if this is considered obtuse.
3. Isn't this kind of part of the point of seeking investment? Aren't you saying, "I can't do this all on my own, I need some help with the finances, and will cut you in if you'll hook me up"? Somehow I don't see that as the same thing as "please pay me a pittance". As I stated in another reply, if the founder could live on a pittance, the chances are he'd save up a little bit at his cushy corporate job and enter conservation mode with that, rather than seeking external funding.
4. I haven't looked for a few years, but I was not aware that YC offered an additional $100k in financial instruments. This is somewhat better, but I'm not sure how those instruments work in this specific case so I can't make a complete evaluation. As far as follow-on investments go, these all have their own separate terms, yes? Unless YC is officially brokering all of these, how can being a YC company prevent you from getting suckered by YC copycats?
3. If you're an exec earning $300k at big corp, you are not going to get $300k at a startup, because the startup obviously does not have the revenue or cash of big corp. Ditto for an engineer earning $150k at a tech company. But who said anything about a pittance? It's up to you to set your own salary. You can still pay yourself $100k/year, if that's necessary. The larger point of raising money is not just for paying yourself, but it's for hiring other people.
4. http://ycombinator.com/ycvc.html I made a correction to my post: the amount is now $80k, which is still good considering the assumption is that the money only holds you over until you raise money after Demo Day (say, 6 months). The link is a bit outdated because YC uses SAFEs now. But the notes had no discount and no cap, which are the best possible terms for notes, and that carries over to SAFEs. YC is brokering these. They have their own separate terms, but the terms are available publicly online and are the same for every YC company.
YC targets the young male college student demographic, partly because that demographic shares the different components that you two are arguing about. This isn't really relevant though.
If they were targeting suburban boomers that vote republican, it's silly to point out that some of their investments are actually women that voted democrat.
cookiecaper's point is that the effect of targeting a particular founder profile means that there are a lot of other high potential founders that are under served by the "Aquire Funding, Kill Yourself, Profit!" model. I would tend to agree with that, particularly when you see that across the spectrum, most businesses are started by people that are 40+ and have over 10 years of experience in an industry.
YC was started particularly because the "college dropout" demographic was under served. Now, at least when it comes to tech, they have become the norm and the "career switcher" has all but been ignored.
I don't think YC needs to address this in any way, but as a tech community I think we're missing an opportunity by not tapping in to what has traditionally been the strongest segment of new entrepreneurs.
However, what YC presents is a series of preferences and options that everyone knows appeal much more to a certain personality and - in this case - stage of life, than others. Jumping across a country to live in temporary stasis for three months (or whatever) isn't something a 45 year old woman with two kids and a career is likely to do. It's something a lot of 20 something college kids will consider though. Are they targeting college kids with that stance? Not particularly. Does their offering appeal to one demographic much more than another? Most certainly.
Overall though it's irrelevant, as I said. YC can target or not target as they choose.
The bigger point is that it's pretty hard for that 45 year old woman to gain traction in the tech world right now, and there could be an opportunity cost there that may be pretty large, considering how the demographics of entrepreneurs spread out over other industries.
Like my professor use to say, owning 100% of nothing is nothing.
On the other hand, you have no downside. For you, it's pretty much the change of job because you get to keep same income as before. In fact, it's much better than a change of job because now you get to work on stuff you want in your pajamas in your backyard of your 4 bedroom home. Come next year, there is 90% probability that your startup would have failed. But you would have zero loss in any material respect. Instead most likely you are just going to move on with your life and find another corporate cushy job with minor or even major promotion given that now you can brag about having tried your own startup and claim that experience.
So you see, we have a transaction where one party has 90% chance of loosing everything and other party gains 110% always. Anyone fantasizing about such transaction would have to find a great fool or own a casino. This is why you can't expect any competent investor funding your startup so you get to keep your "cushy job" income.
PS: Betting your "name" and "reputation" is meaningless to investors unless you are Evan Williams or Kevin Rose.
PS2: If you think investors are still getting fair deal because they have chance of hitting a jackpot, know this: Average VC fund has less returns than S&P 500. Rate of failures of startup takes away pretty much everything but small slice of big pot.
2) If an investor wants to give you $200k seed money, and you can make a justifiable case that you need $200k to maintain a reasonable lifestyle based on your family's needs, then you're going to need more than $200k.
That said, I don't argue that most founders need $200k, I just argue that they should be given reasonable allowances to provide some basic decencies for themselves and their families, instead of ending each pay cycle with less than ten bucks left in their pockets.
3) The risk should be appropriate on both sides. If $200k is a risk that jeopardizes the welfare of an investor, he shouldn't be investing it; "never invest more than you can afford to lose". And if taking a job at a startup is a risk that jeopardizes the welfare of a founder and his family, he shouldn't be risking it, for the same purpose. A good founder is worth a good salary. He probably shouldn't be rolling in the dough, but most investors seem skeptical if the founder isn't living off of ramen. This is not acceptable if you have a family to support.
What does a VC really lose if a company goes under? Not that much. The founders are pouring years of their life into the development of a product. They are asking their friends and colleagues to trust them to build something great and join them, transferring responsibility for their livelihoods as well. Founders have a legal and moral obligation and fiduciary duty to output the best product possible with their investment. Most founders take this responsibility very seriously. The failure of this venture is a major emotional loss to the founder. And what's the loss to the VC? Oh yeah, a rather insignificant portion of their total play, because it was specifically engineered to be that way. In fact, most of them hardly notice when these failures occur, unless they begin to occur en masse.
I find the argument "VCs have everything to lose if you don't take a 50-70% pay cut!" despicably shallow. VCs never have anything to lose except money, and certainly make sure never to jeopardize that in a serious manner, so what do VCs have to lose? Almost nothing. What does a founder have to lose? Oh, a few years of his life, emotional health and well-being, reputation and trust among his family and friends, etc. Just petty stuff compared to the $200k check an investor will write and instantly forget about.
The founder should be made to put even more on the line! He shouldn't be allowed a salary that's commensurate even with a cruise-control corporate position for all that responsibility. He shouldn't even be allowed a salary that will afford him a few basic privileges like a decent mode of transportation, decent living quarters in a decent neighborhood, or a bit of leisure every so often. No income to fiddle with new gadgets or experiment. No room to breathe. On top of the stress of the company, he must endure the stress of barely meting out enough to make his mortgage, which several people rely upon for shelter. He should do all of this because he needs more to lose, so that the VCs are satisfied.
The founder's only way to make any decent income backported over those years of indentured servitude is to make the VCs a billion dollars first. Seriously. And if anyone doesn't like this, then the VCs try to shame him and lecture him about the stakes. Remember how I said VCs depend heavily on the naivety of founders to maximize profits? Here you go.
That's if you value the actual participation in YC (and later in their mafia) at nothing. I'd personally suggest, on the basis of numerous reports by founders I find personally credible, that it's a really good network to be in if your life plan includes doing a funded trajectory sort of company.
Incidentally, I've got a wee bit of experience with the boostrapped software business thing, and unless you do the consultancy to product route (which has plenty to recommend it) you're most probably going to take a dip from $120k to $150k for a couple of years at the outset. I know people who paid themselves that in year 2, but that's not incredibly common, and I'm coming up blank thinking of any bootstrapped product companies which made their founders that right out of the gate. (It's doable in consulting -- aggressive, but clearly doable.)
If that's a huge problem for you, I recommend a job at AmaGooFaceSoft. They're all good companies, they cut quite steady checks, and there is nothing wrong with taking their money if your family situation demands an iron floor at $120k.
Perhaps the SV Startup Community is but as far as the Midwest and East Coast goes; 90% of the founders I interact with have a house and kids. The biggest difference in business is that most of these companies actually have mechanisms for generating revenue. Aside from the fact they are solving 'real world' problems, not just building iPhone apps that delete the picture after you take it...
You should rather say: "I suppose it depends on your type of business. If you are a B2C and you need lot of traction before charging customers, the answer may be yes."
Family and Mortgage should not affect your choice for bootstrapping.
So if you do have family and mortgage, the best route for you is a long slow crawl. This means, you do your regular job and then burn midnight oil to do a single person startup. With 2X more determination as well as 4X longer time than typical startup, you might find yourself in a year or two with a product that is compelling and convincing. By this time lots of risks had been absorbed by you and VC/Angels would be far more in favor for the terms that allows you to continue your income levels.
Larry Ellison started Oracle pretty much this way and so many other founders who started out later in life with lots of financial obligations hanging on their heads.
Good investors won't take board control after a seed financing and will understand if someone with a family takes a $100k+ salary.
Now, if you're a 20-something who can survive on ramen, a mattress on the floor, and internet, investors will be very suspicious of you taking a $150k salary.
Expectations shift.