Financing Should you bootstrap a software startup business? The pros and cons
Let’s go through the thought process to decide if you should bootstrap your software startup.
What is bootstrapping?
Bootstrapping in the business world is the practice of starting your business without any external capital (money). The business is forced to operate with very minimal expenses and uses its own revenue to grow.
How much money do I need for a software startup?
Software startups are different from other startups because you have to build a software product (probably an app, maybe a website/platform and maybe even an installed client or server software). For your software to solve an interesting enough problem (and not be trivial) then it is probably going to take somewhere between $180k to $1m USD of software development (say roughly $90/hour for an engineer working full time for a year or more). At that amount of effort, you will probably have a decent product that solves the top 2 or 3 customer pains. It won’t be amazing but you might be able to get some interest and a few raised eyebrows from a customer (maybe even a paid pilot project with a customer or even your first sale!). If you or your co-founder (BTW – avoid co-founders) have programming skills then you could do the work yourself. You could keep your day job but doing it part time will be really slow. If you work full time then you still need some income to support yourself. This is the challenge with bootstrapping.
Note that it may be possible to build something decent (thinking of “minimum viable product”) in your spare time in a few months – do this if you can before quitting your day job – but most good software usually takes significant effort to build especially in the B2B and enterprise software space.
What is my opinion on bootstrapping?
Let’s start off by saying that I am biased because I decided to bootstrap my software startup. I built my software business by bootstrapping it with revenue from my consulting business. My consulting business was a services business which can be easier to start since you sell your hours for money (say $100 per hour or more). So a services business can make money from day one. My consulting business had over $1 million USD in annual revenue (around 10 employees) and about $200k per year in profit. This provided a solid base to fund my software startup.
As an aside, I had also recognized that my services business was limited in its growth potential due to needing to hire employees and being dependent on the number of hours that they could bill. And it is a linear relationship. I don’t like that type of business since it is slow to grow, very people intensive and therefore carries a lot of overhead and risk. Whereas a good software business can often double in size (revenue and customers) while only increasing headcount by a much smaller number of people. Therefore a software business has the ability to scale exponentially.
So should you bootstrap your software startup?
This is a tough decision and will depend a lot on your personal skills and resources, your connections, the market opportunity and your timing. I speak to many small companies through my mentoring and the bootstrapped companies have more time to consider their options as they grow the business. However the funded companies are often struggling to find time between fund raising and selling to customers. Let’s compile a list of pros and cons to help you answer the question – should you bootstrap your business?
You do not have to spend any time with investor decks or fund raising. You can spend all of your time talking to customers, learning from them and building the best solution to their problem.
Be your own boss and your success or failure will be totally on you. You don’t have to listen to anyone but yourself, your customers and your cash flow.
Take your time and only take outside investment when and if you want to. Assuming you have achieved break-even (your income is equal to greater than your expenses) and are cash flow positive. I didn’t take outside investment for 10 years! And built my company to $10 million in annual revenue before doing so.
Less distraction. When bootstrapping, you can focus entirely on revenue and minimizing expenses. There is just no runway for something that doesn’t work out. For example: you can’t afford to spend time perfecting that feature before shipping it so it will have to be good enough. I think many well funded companies fall into this trap where they have too much capital. They spend their time dabbling with things that are either non-essential or are just poor decisions. (See the book Dreaming in Code for a good example of this problem)
Bootstrapping is usually slow. If you want speed to tackle your market opportunity quickly, then investment capital will be needed. When bootstrapping, you can’t hire a sales team of 10 people to ramp up sales. But you can hire them slowly as your revenue grows and you learn to scale.
Bootstrapping can be a lonely road since not having investors means less opportunities for advising, access to talent and potential partnerships. You can certainly mitigate this by involving advisers and mentors. Consider creating an advisory board with the skills and experience you need in exchange for small amounts of equity.
Some businesses just require too much capital and it will not be possible to bootstrap. If your business requires brick and mortar locations or hardware development then outside capital will probably be needed. For example, you are unlikely to be able to develop and launch a new gaming console without large amounts of capital.
My decision was to bootstrap my software startup but what will you decide to do?