Bootstrappers Beware

Jun 19, 2008 Author: Tony Wright | Filed under: My Life, RescueTime, Software Dev, Startups, YCombinator

A lot of people are damn religious about bootrapping businesses. Especially nowadays when it’s so easy to start a software business– you just need a few hackers, Ruby on Rails, a cheap virtual server and you’re ready to roll, right?

Sure.

But just because it’s cheaper to start a software company, doesn’t mean that it’s that much cheaper to make it from when you launch a product to the point where you’re sitting back, drinking a margarita, and marveling at the recurring revenue machine you’ve created.

The way I look at it, there are three bars that matter to me.

1) Making enough money that the business brings in enough money to pay the overhead. Rent, servers, lawyers, whatever. Hopefully you keep this really lean.
2) Making enough money that the founders get an insultingly low (but still existent) salary.
3) Making enough money that the founders can take home roughly what they’d make if they went and got a real job.

Bootstrappers are woefully bad at guessing how long it’ll take to get over these bars.

Let’s look at everyone’s favorite example of bootstrapping: 37signals (whose products and philosophies I love, by the way). According to a recent post, it took them about 6 months to build Basecamp, with DHH spending 10 hours a week (they don’t mention how much time other folks invested, but let’s assume it’s 2 other people at 10 hours a week). It turns out that with a really popular blog, a very successful consulting firm, and all of the attention that they got with Ruby on Rails, it took them about a year to get to the point where they could give up consulting and work on it full-time. I assume that they were somewhere between the 2nd and 3rd bar (mentioned above) before they made the leap, though they might’ve taken a pay cut as a leap of faith in the growth that Basecamp was experiencing. DHH sez:

“It didn’t turn into a smash hit overnight either. We ran Basecamp for a year alongside our other obligations before it was doing well enough to pay all the bills and afford our full-time attention. Most good businesses didn’t become great ones within the 12-18 months that the poster boys of the startup lottery did.”

Amen!

I’ll give you an example closer to home. RescueTime (my baby) was on TechCrunch 3 times, LifeHacker twice, and add in a few thousand other blogs (of varying flavors and colors). We are a Y Combinator company, which gives us plenty of geek cred. We’ve been [edit for clarity] mentioned in an article on the cover of the New York Times, and have gotten mentions in PC World, US News and World Report, BusinessWeek, and more. More important than that, we’ve got happy users who seem to like telling their friends (the old fashioned kind of viral marketing!). I think most SaaS startups would feel very lucky to get this kind of attention– we certainly do. But for all of this attention, I really don’t expect to clear that second bar for many many months (we’re only a month or two into having an offering that people can pay money for, so give us time!).

Let me be clear about the type of startups I’m talking about– I’m talking about low-cost (or free) product companies with price points low enough that having a human being actually SELL the damn software would be inane. Whether it’s a payout of $.83 for an ad click or $24 bucks a month for BaseCamp– having a human being wandering around selling this stuff doesn’t scale, and chances are your founding team doesn’t consist of anyone who is a motivated (and skilled) software/ad salesperson anyways.

On the other hand, if your price point is high (generally requiring a more complex or premium offering) or if you have a services component (web development consulting, managed hosting, etc)– you’re golden… Or at least you have great potential to ramp up revenue fast (as you can justify a sales effort and fairly easily convert time into money). Of course, there are the obvious downsides– for enterprise software you have to build… enterprise software (capital intensive and damn ugly). And then you should expect to spend 60-70% of your cash on sales and marketing. If you go the services-heavy route, you’re simply selling time for money… You can make a nice business out of this (I ran a consultancy for 7 years which I eventually sold out of) but there’s virtually no equity to be built– no one wants to buy a consulting business.

In my opinion, if you aren’t prepared for 18-24 months before you actually get your first paycheck (either through savings, doing it part-time / half-assed, or seed funding) you’re setting yourself up for disappointment.

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jhancock

amen brother!!! My startup is http://shellshadow.com.
We are just coming out of what turned out to be a long R&D phase and will start aggressive marketing in a few weeks.
I fully expect a 12-18 month cycle to get enough users to reach the second bar. Sure, selling to a bigger software company that has enough foresight in your product is a nice dream. But you can't count on that. You have to slog your way through and be able to survive a long long time on your own.

jbyers

Great post, I think you've hit it dead on. Entrepreneurs are an optimistic sort, and the misestimation of how long it will take to get over the bar of profitability -- with salaries -- is a killer. I'd guess this above all else will scuttle a lot of small startups who are otherwise benefiting from very low costs.

Chris Ritke

Great post. Everything rings a bell, although that last paragraph might be better served with 24-36 months - well, whatever - who knows. But there's one thing that bothers me: why is RescueMe "only a month or two into having an offering that people can pay money for"? If you're going to bootstrap - shouldn't you have a revenue model from the get-go? Uh - em - ehem - shouldn't there be a revenue model - period?

webwright

probably worthy of another post. We started free to work out most of
the bugs and because it started out as more of a project than a
business...

Timothy Ritchey

I can definitely concur with your numbers. We are about 18 mos into the launch of our low-cost SaaS application, and have just recently hit our stride with a small, but regular stream of new subscriptions.

Jason Grimes

I love your sincerity and great info!

Erik Dungan

Good post.

I co-own a small web/saas firm and we've cleared all 3 bars at this point (we're about 4 years old).

One thing I'd like to throw in–if you're trying to bootstrap a startup, you can go a long way by focusing on a niche market and need. That's what we have done, and its worked great. I'd even argue that 37signals started this way with their first product (Basecamp was built for designers and consultants). If you find a niche market with a need, it makes it easy to define your requirements and promote to your target market.

Building a consumer-focused or horizontal saas startup is a nice idea, and getting written up in TechCrunch is a nice ego-boost–but its really hard to turn a profit, especially if your self-funded.

Spencer Fry

I like how you divided it into three bars. The different levels are widely neglected by people bootstrapping their own company. Simply having revenue doesn't equate to being able to pay the bills AND pay yourself.

Jerrnej

Thank you, Tony! It's so true. Looking at the "startup- rockstars" many of us are too much focused on buying a ticket to Gran Canaria in 3 months after the launch of the business rather than on focusing on the business itself :)

Steve Cospolich

Excellent post. So much of that hits home. All four co-founders of my startup are working a full-time 'day job'. Hitting bar #3 will be the eureka moment for sure.

Steve Huson

Tony - Great depiction of the financial challenges and personal investment in bootstrapping. I had the good fortune of being in one successful, bootstrapped company, coming into the business after it had cleared the 2nd bar. It had the benefit of being focused ona vertical market with large clients, where clients would pay for customization and consulting as a part of the mix initially, with software as a service the end product. I've seen many fail at that model - never successfully developing the product, only delivering the consulting - but this one did succeed with that model.

Nick McKenna

First off, I'd like to applaud your company being mentioned in the New York Times. That is quite an accomplishment.

However, I feel you are sullying this accomplishment by being dishonest and saying that you've "been on the cover of the New York Times" when you weren't. On June 14 there was no picture or story about RescueTime itself on the front page.

Your company was mentioned in a few paragraphs of the article titled "Lost in E-Mail, Tech Firms Face Self-Made Beast" on that day. While that article may have started on the front page, it ended in the middle of the paper (page A14 I think?) and RescueTime was mentioned on the middle page and NOT the cover.

I understand why you said it, actually being on the cover of the New York Times carries a certain amount of prestige, but for a guy who did an excellent job at cutting through the hype about bootstrapping, it's too bad to see you hyping up your own company through dishonesty.

webwright

Good gravy. No, it wasn't a profile of RescueTime, but it was a front
page article above the fold. Our mention was indeed deeper in the
article. You can pick nits, but the point was (in aggregate) we've
been crazy lucky on the PR and word of mouth front... Sales have been
solid but we STILL have a ways to go.

Brian Fioca

Jealous much? ;)

Nice troll attempt, btw. My response doesn't do it justice.

Mark Maunder

Besides nytimes, rescuetime has been well covered by several (arguably more relevant) publications. Kudos to Tony and Team for the amazing progress they've made in a relatively short period of time.

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Tony Wright is a founder and front-end generalist at a venture-backed startup in Seattle. He blogs about conversion-centric design, SEO, PR, fundraising, viral marketing, and occasional other geeky topics.

I've been featured in these fine news outlets. Surely that means something!

Tony Wright dot com

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