10 Reasons Why I Self-Funded My Startup and So Should You
March 17, 2014
This isn't a post to promote my company. I'm not even going to mention it by name. This isn't a post to promote some magical get-rich-quick scheme. There is no such thing. This post is simply here to remind some of you why we do what we do. A message that often gets lost, in this world of funding-hungry startups.
8 months ago I started my company.
It had one employee (me), zero revenue and no product.
Fast-forward to the present day and I now have a profitable software product with hundreds of customers paying a monthly subscription, revenue is growing month on month, and there's enough cash flow to comfortably pay myself and 3 staff.
And I never took a cent of outside funding.
Here's why I think self-funding (also known as bootstrapping) is the best thing a young startup can do.
1. You are forced to focus on revenue
You don't have a fat chunk of funding in the company bank account providing a year or more of runway. You only have a meager personal cash injection from your own savings, giving maybe 6 months of runway if you forgo luxuries such as eating.
There is nothing quite like the fear of going flat broke to give you a kick up the backside to start generating revenue. In the context of startups this means you throw away any idea that doesn't make money from day 1. No "aiming for user growth first". No "figuring out the revenue model later". You are forced to build something valuable, something worth paying for right now. For 99.9% of businesses in the known world, that's fundamentally how they function and that's what you should be aiming for too.
If you are starting a startup and you have no concrete revenue model, you have been reading too much techcrunch. Figure out how to make some money.
2. You don't waste time raising funding
Fundraising is a dangerous time suck for early stage startups. I've watched many startups get so consumed with meeting investors or preparing for interviews with accelerators that they lose focus on their product and customers. Every minute you spend talking to investors is a minute that you could be improving your product and delighting your customers. Realistically you'll need 50 meetings to get interest from 5 investors, which will result in 1 term sheet. If you're an early stage startup that has barely made its first dollar, I can't think of a more epic waste of time.
3. You don't answer to anyone
Giving up equity to an investor in exchange for cash is not a one-time transaction. A relationship is formed that will last as long as your company lasts. At the least, this will involve keeping investors in the loop about your progress and major business decisions. At the worst, this will involve more business overhead (meetings, futzing around in excel, getting sign off before you buy things), potential micromanagement or having to constantly justify your actions.
In other words it can be a lot like having a boss again. If you became an entrepreneur to be your own boss, raising large amounts of funding effectively puts an end to that.
4.You learn the value of money faster
When you don't have a chunk of funding sitting in the bank account, you spend money more frugally. In general I think this is a positive trait to cultivate as an entrepreneur. The opposite is extremely detrimental; frivolous spending on fancy office space / furniture / toys etc. Not all funded startups are guilty of this of course, but funding does enable this behavior.
5. Early stage investing is rife with dubious characters
Be wary of any accelerator whose only real business creds are that they have built an accelerator. Although some good accelerators exist, my opinion of many is that they are a meta-startup whose customer is you, the startup entrepreneur. You don't need an accelerator to get a cash injection of $20k for 20% ownership. For small amounts of cash like that, just get off your ass, do some consulting and keep your equity.
Mentorship is the much more opaque benefit, but again - a good mentor doesn't need to come via an organized programme. You can proactively find your own mentors.
6. You are free to grow organically
If you're doing what you love, your company is paying all the bills, growing nicely and has lots of fanatical customers you're doing pretty well right? Wrong. If you've taken funding your investors will want to see exponential growth. Your company growing "nicely" will not deliver them the return that their limited partners expect. In the worst case scenario even if your numbers are respectable for any normal business, your investors will encourage you to figure out a model with higher growth/risk even if that means changing what is currently working well for you.
For a certain size of investor it is preferable that you either get massive or just fail and disappear - the middle ground doesn't move the needle for them.
7. You learn what really matters
I'm a programmer. But I hate conversations about what "stack" I'm using. I love programming because it is a means to an end - creating a product that customers love. I'm not the kind of tech guy who experiments with new stuff for the sake of it. I view tech through the lens of customer benefits - can a piece of technology improve customer experience somehow (e.g. make the app run faster etc)? If so, great - I'll check it out. If no, but it's whizzy and new - I'll pass thanks.
Bootstrapping forces you to take this view. There's simply no time to experiment with things that don't immediately deliver increases in customer value.
8. You're in good company
Bootstrappers tend to gravitate towards other bootstrappers. This will reveal a previously invisible subculture of folks running successful businesses, killing it, and just enjoying life. No media circus, no questionable value propositions, no mysteries as to how they make money (they have customers who pay them) - just a group of people who found a market niche and are delivering value in that niche.
9. You work on something that truly interests you
With funded startups often founders get into business purely because there's a big opportunity. Some growing market in need of a solution. Or perhaps a model is copied from a successful startup in a foreign market, and executed in a home market. Personally I can't imagine working on a problem that I am less than fanatical about solving. I can't imagine coming into work every day trying to solve a problem that is alien to me just because of a potential pot of gold waiting somewhere. That's not why I'm running a business.
When you self-fund you are on a crusade. You're working on something because you believe in it to the point where you're willing to take on personal risk. It's not a place for random opportunists. I'm running a business because I love making software, I love the problem space we're in and I love the solution that we've built. There's nothing else I'd rather be doing.
10. You increase your leverage for future fundraising
They say the best conditions to raise funding are when you don't need it. If investors want to invest in your company when you're bootstrapped, profitable and growing - you have all the leverage. You can name your terms and walk away from the deal if you aren't happy. There will be other interested investors.
You see, bootstrapping your early stage startup doesn't preclude the possibility of you raising funding in the future. For example after having validated a market and grown to your first 1000 customers, perhaps you'll want to accelerate growth and raise funding to grow to 100,000 customers. That's a path many bootstrapped companies have taken. Your conversations and resultant deal terms are going to be significantly better having bootstrapped to 1000 customers, than running round town having investor meetings with 0 customers to your name.
Your mileage may vary.
Capital-intensive businesses such as ecommerce / hardware will often need startup capital. Not all types of businesses can be bootstrapped. But if you're just a few people with an idea for an app or piece of software, you can and should bootstrap.
But what if I don't know how to program?
Learn to program. I'm completely baffled by entrepreneurs with all sorts of ideas for apps, whose major obstacle is that they don't know how to code. It's like wanting to be a race car driver but not knowing how to drive.
Programming is not voodoo. It's the total opposite, it's logic. Conservatively, I believe you could go from zero knowledge to being able to prototype your own Ruby on Rails apps in 6-12 months. But the length of time is immaterial. Whether it takes you 6 months or 2 years to get to grips with programming, it is probably the single most important skill you can have if you're an entrepreneur with software or app ideas.
But what about salary?
Money is probably one of the main reasons why more people don't bootstrap. People are afraid of going broke. Or they are afraid of taking a pay cut.
If you are afraid of taking a pay cut then you don't want to be an entrepreneur. You want to be rich. These are two different things. I was prepared to not take a salary for as long as it took to get my company to profitability. I believe this is the right mentality. Wondering how to replace your $150k corporate salary is the wrong one.
I had about 6 months of runway from personal savings when I started out. I drastically reduced my monthly expenditure, put myself in a do or die situation and set about building my way out. When I launched my software product, I had paying customers on day 1 because I employed Lean methodology and focused on a problem where customers were willing to pay for a solution. You don't have to follow this "all in" method, but I think it was particularly effective at focusing me on customers and revenue.
What happens now?
If you're reading this thinking "hmmm maybe I'm not ready to bootstrap just yet" then perhaps you aren't. Bootstrap when you are mentally ready to bootstrap. For me, at the beginning of this whole process there was a very clear feeling of determination that I wanted to build a software-as-a-service company without raising funding, on my own terms. That's what I was going to do with my life. There was no possible alternative that would tempt me, I would say no to any and all job offers and funding offers.
I knew that what I wanted to do was write code, create a product, solve a problem customers would pay for and enjoy life while doing it.
And that's how things have turned out.