7 ms·

Bootstrapping Your Startup: Do You Really Need Early Investment?

50 points by ndemoor 13y ago

wellboy 13y ago
I've been thinking about this a lot, too. Is there any startup that inevitably needs early investment? Except for biotech or massive big data startups of course. 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.
- cookiecaper 13y ago
  >Because if your product does something new, you can ALWAYS get PR. Heh, that's a nice fairy-tale world you live in, man.
- lhnz 13y ago
  >> Is there any startup that inevitably needs early investment? 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.
jnardiello 13y ago
One answer: No.
troels 13y ago
I suppose it depends on who you are. If you have a family and a mortgage, the answer may be yes.
- cookiecaper 13y ago
  Many investors are not very kind to founders with families and mortgages. YC itself is a horrible deal for anyone that's not a college dropout. Move out to SF for 3 months, leaving wife, kids, and property behind to fend for themselves, shack up in a tiny apartment with a co-founder, and get paid nothing for $20k and 5-7% of your company? That's alright man, pg can keep focusing on his college dropouts (of both sexes!). 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.
  - onion2k 13y ago
    A few months on a very low wage (that is what the $20k is for..), away from your friends and family, living in a tiny apartment is nothing compared to working on something you feel exceptionally passionate about. 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.
    - jnardiello 13y ago
tomblomfield 13y ago
There are lots of startups that simply couldn't exist without early investment - anything with high upfront costs combined with economies of scale. I founded a payments processor 3 years ago - this is a good example of such a business. It's possible we could have bootstrapped, but it would have been a very different kind of business.
alien3d 13y ago
Before i need some investment,but finding investment quite hard,most wanted stable company and resources.So i'm no choice working normal freelance job rather focussing to be next software in the market.Don't focus getting much customer but focus getting 1 to 10 customer then go big for investment.. 20k if somebody said bellow is so not much and can finish a few month operation..
ohwp 13y ago
The book "The Incredible Secret Money Machine" (ISBN 0672215624) is my resource for bootstrapping advice. And I have to agree with Don Lancaster: try to bootstrap without early investment. 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.
simonswords82 13y ago
We bootstrapped our app www.staffsquared.com. 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.
- ryanSrich 13y ago
  I saw that staffsquared was built by Atlas, which looks to be a client services agency. 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.
  - simonswords82 13y ago
    Atlas is my consultancy business and spawned Staff Squared as a way of scratching our own itch (I needed an app to help me better manage my team). We hunkered down for 6 weeks and got something horrible but workable out of the door 2 years ago... 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.
jwblackwell 13y ago
Whilst I think the need for speed is often overestimated, it's definitely important in some industries. If you need to move quickly and get a decent product to market first, cash is essential.
bayesianhorse 13y ago
One big reason early startups take on investors is to let the entrepreneurs spread the risks. When bright coders (or other high-salaried individuals) forego a high salary in favor of founding a startup they are raising their investment in the business month by month. 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.

50 points by ndemoor 13y ago

I've been thinking about this a lot, too. Is there any startup that inevitably needs early investment? Except for biotech or massive big data startups of course. 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.

cookiecaper 13y ago
>Because if your product does something new, you can ALWAYS get PR. Heh, that's a nice fairy-tale world you live in, man.
lhnz 13y ago
>> Is there any startup that inevitably needs early investment? 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.

jnardiello 13y ago

One answer: No.

troels 13y ago

I suppose it depends on who you are. If you have a family and a mortgage, the answer may be yes.

cookiecaper 13y ago
Many investors are not very kind to founders with families and mortgages. YC itself is a horrible deal for anyone that's not a college dropout. Move out to SF for 3 months, leaving wife, kids, and property behind to fend for themselves, shack up in a tiny apartment with a co-founder, and get paid nothing for $20k and 5-7% of your company? That's alright man, pg can keep focusing on his college dropouts (of both sexes!). 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.
- onion2k 13y ago
  A few months on a very low wage (that is what the $20k is for..), away from your friends and family, living in a tiny apartment is nothing compared to working on something you feel exceptionally passionate about. 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.
  - jnardiello 13y ago

tomblomfield 13y ago

There are lots of startups that simply couldn't exist without early investment - anything with high upfront costs combined with economies of scale. I founded a payments processor 3 years ago - this is a good example of such a business. It's possible we could have bootstrapped, but it would have been a very different kind of business.

alien3d 13y ago

Before i need some investment,but finding investment quite hard,most wanted stable company and resources.So i'm no choice working normal freelance job rather focussing to be next software in the market.Don't focus getting much customer but focus getting 1 to 10 customer then go big for investment.. 20k if somebody said bellow is so not much and can finish a few month operation..

ohwp 13y ago

The book "The Incredible Secret Money Machine" (ISBN 0672215624) is my resource for bootstrapping advice. And I have to agree with Don Lancaster: try to bootstrap without early investment. 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.

simonswords82 13y ago

We bootstrapped our app www.staffsquared.com. 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.

ryanSrich 13y ago
I saw that staffsquared was built by Atlas, which looks to be a client services agency. 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.
- simonswords82 13y ago
  Atlas is my consultancy business and spawned Staff Squared as a way of scratching our own itch (I needed an app to help me better manage my team). We hunkered down for 6 weeks and got something horrible but workable out of the door 2 years ago... 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.

jwblackwell 13y ago

Whilst I think the need for speed is often overestimated, it's definitely important in some industries. If you need to move quickly and get a decent product to market first, cash is essential.

bayesianhorse 13y ago

One big reason early startups take on investors is to let the entrepreneurs spread the risks. When bright coders (or other high-salaried individuals) forego a high salary in favor of founding a startup they are raising their investment in the business month by month. 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.