Assuming that you believe the compensation for this contracting gig will be enough to sustain the company for a time as if you had been funded: absolutely. At the end of the day, you still walk away with 100% equity and no potential for meddlesome investors.
If you do already bootstrap your start-up as a team, where do you find the gigs? Referrals? Craigslist, or another contracting site like Monster or oDesk?
It depends on the startup. If I were starting a company that needs a critical mass to be profitable (eg a social network), and therefore needed more cash up front that could be produced without external funding, then no, I probably wouldn't try to boot strap.
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'd rather my startup made money! This is all very much possible. Sure i'm all for raising a fair amount of money (not too much) and being lean. Then making money from the get go.
I'd rather raise money. For me, startups are all or nothing. I believe focus is critically important to an early stage startup. While splitting time between consulting and your startup gives you a broader view of the world, it spreads you thiner, and means you make less progress with your startup.
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.
Agreed that focus is critically important to an early stage startup. However, raising money can sometimes take 3-6 months (longer in some cases) and that can distract the team just as much. I know startups that have died from spending too much time on fundraising and not enough on product.
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?
Raising a small ($25k-100k) friends and family round shouldn't take you more than a couple weeks. I guess it depends on your startup, team and financial situation, but I feel it makes sense to take the dilution, and get going with your startup rather than putting it off while doing consulting.
Depends what you're doing, but the #1 cost in some startups is the paychecks (check this for example : http://dl.dropbox.com/u/345057/DIASPORA%207312011%20Profit%2...) . If you find a way to survive while coding, you don't need to raise much money (that's what me and my roomate have been doing for 1 year+)
God only knows what we would have done with 200000$ extra :)
One of the issues I've seen with startups that do this is that they end up being consumed by the consulting work and aren't really able to crunch on their own thing. Whether it's demanding clients or the cash, your attention gets sucked away from your startup...I've seen people go years without releasing their own stuff when that was their intention from the very beginning, just got caught up in consulting.
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.
I've been in the situation you describe for roughly the past 3 years. You and your team must be successful at consulting _and_ the startup, and many people spend their lives without succeeding at either.
Ask yourself how much money your startup could eventually be sold for. $5 Million? $10 Million?
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.
That's just completely faulty logic for so many reasons:
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.
Agreed, and chances are that you won't create a $10M company on your own. Include a reasonable ESOP, a chunk for investors, etc., you're at a lot less than $10M.
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.
But it gives you a basis for further consideration. Surely nobody will pay $1000/hr for your services. If they pay $100/hr and you think you have a 1 in 10 chance of exiting for $10M then maybe that's break even.
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.
As others have pointed out, a $10 million exit will tend to require a lot more man hours and dilution for a much lower effective hourly rate
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.
Years / 2000? I recall `yearly_salary / 2080 = hourly rate` for 8 hours / 5 days. I think running a start up typically takes more than a 40-hour work week.
I have done so, am doing so and will do so again. At the end of the day, I'm a coder. If I can avoid dealing with investors and still make a good product, I will. It's hard, but at the end of the day that feeling of 'we built this from nothing, all on our own' is very much worth it.
Yes, absolutely. As a rule of thumb, you should only seek investment as the last resort. Also there's a big difference between business angels and venture capital. Imo too many new startup goes thru the rounds just because "it's what you are suppose to do to become legit".
Needs to be a "Yes and No. I would raise money. From employers and customers. So I retain 100% of equity, take on no debt, and minimize legal bullshit and risk."
I suppose the term bootstrapping in the poll title could mean your startup is self funded from previous savings. But I'm referring to finding a short-term contracting gig to keep your startup afloat rather than raising money.
TBH, the only time I've ever heard anyone use the word bootstrapping was to describe raising funds from friends and family, and in most cases, it was also in the form of loans, not equity investment.
I've been doing this for the last three years or so -- I wanted to launch a startup but realized it just wasn't the kind of startup you could bootstrap as a side project (i.e., without significant financing). I had already written almost all of the code needed for an initial launch.
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.
I don't know what the "market rate" is there. The way I determine if we can take on consulting gigs is to look at the hourly rate and figure out how many days we get "off" for how many days we work.
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.
To me, that's not "bootstrapping" -- that's "founders funds."
Bootstrapping, to make sense, means that you go cash flow neutral ASAP and then grow the business organically.
Its the very difficult 80/20 ratio. I have tried this with my team and failed. Initially you start 80% time consulting, 20% your-own-product, with the intention to reverse the ratio and finally to 100% product. But sadly for me it went reverse direction.
I think you can get a certain distance by doing short term work and during that time flesh out the idea, write V1 of the code, even release it to users. But as the user base grows and the urge to iterate faster and faster starts to burn it becomes hard focusing on contracting or part-timing it (which i was doing)
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 :)
I was prepared to vote an unequivocal "YES!" to the question until I clicked through and saw the additional terms regarding contracting.
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.)
I'm glad to see most people are willing to work for money rather then take money from someone who is going to want to take away some of their ownership.
Start-ups should focus on bootstrap if they really care about their product.
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[ 3.5 ms ] story [ 47.5 ms ] threadYou can also sell fruits and vegetables - but that's another story. So far both are working for me though :)
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?
God only knows what we would have done with 200000$ extra :)
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.
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.
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.
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.
Will be like dools says - consult X days to increase runway by Y days on product. Ideally Y>X.
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 :)
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.)
Start-ups should focus on bootstrap if they really care about their product.
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.