Note: in order to understand this article, you need to know the differences between bootstrapping your small business (i.e. funding it yourself) or raising venture capital. Check out this post from Tyler King about why we decided to bootstrap Less Annoying CRM, and how raising venture capital works.
If you’re thinking about bootstrapping, you’re probably wondering: how can you successfully operate under the constraints of self-funding and compete against VC-backed companies with seemingly unlimited cash and support at the same time? We talk about the constraints that come with boostrapping a lot on our blog, but we thought the subject deserved its own post. Even if you’ve done a ton of research on bootstrapping, you might not fully understand the challenges you’ll face or the VC-perks you’ll be forgoing. In this post, we’ll discuss what constraints you put your business under when you decide to bootstrap and show you how you can make self-funding work. We’ll also give you specific strategies and solutions that served us well over the years.
If you already have an idea for a business and want to see if bootstrapping will work with your startup, read on. If you know you want to found a bootstrapped startup, check out these constraints to learn about exactly what you’re in for.
Constraint: you can’t invest a bunch of money at the start of your business.
Let’s get over the biggest constraint that affects most business decisions bootstrappers have to make: cash. If you’re bootstrapped, you won’t have a pile of money sitting around to burn, and you won’t be able to go out and raise more of the money you do have. This means that you won’t have much money to invest in your business at the beginning. As a bootstrapper, you have to rely on the money you’ve saved up or received from family and friends as seed money; you won’t be fundraising millions of dollars like VC-backed startups.
What you can do: go with a business plan that becomes profitable quickly and doesn’t require major capital outlays early on.
Go for a simple business model that will allow you to earn money and support yourself during the sales cycle. A bootstrapper’s ideal customer is paying and on a short sales cycle; you need money, and you need it sooner rather than later. This usually means selling directly to the end user of the product (not a middleman or upper management) in order to cut time from the sales cycle.
What we did: sold to small businesses.
Small businesses are a great fit for us— they are paying customers, on a shorter sales cycle than enterprises, and often the person on the phone is the owner and the end user. What’s more, small business customers are mostly self-service; they come to us, so we don’t need to rely on huge marketing or sales teams. Often, they’ve identified a pain point (“I need to organize my business” or “Leads have been slipping through the cracks”), and they need a solution now.
Almost all of the sales or marketing we do is inbound; people come to us to set up a demo or a free trial, and we help onboard them onto the product over the course of a month. Customer service has remained the main way we interact with potential customers.
We specifically target small businesses with the construction of our whole product, from our pricing to the product descriptions on our site. We’re not an enterprise CRM with a cheaper tier — we charge $10/user/month for everyone — and we aren’t relying on big partnerships to survive. We’ve tried building partnerships with larger companies like franchises or MLMs, but we found that the sales cycle was very long, and the payoff was never as high as we were expecting. We still serve and create partnerships with these kinds of companies, but we don’t invest as much of our business development into actively seeking them out.
It’s possible to find this kind of selling sweet spot with consumers or enterprises as well. It’s also possible that your business idea wouldn’t work well with or doesn’t serve small businesses. Regardless of who you sell to and how, not having money at the onset will create other constraints on your potential business plan, which brings us to our next point.
Constraint: you won’t have the cash to leap over big initial hurdles.
Without cash or pre-existing expertise, bootstrappers will have a tough time with heavily regulated industries, passing gatekeepers, or hiring industry experts to help them push past these initial hurdles. In heavily regulated industries, often times you’ll need a lot of cash upfront just to become certified or make sure that your product pasess certain standards.
Similarly, if your industry requires any kind of special access, such as years of experience to be considered an expert (years that you don’t have) or special connections, this isn’t a good industry to be bootstrapped in. You’ll either need to be an insider already, or find someone willing to mentor you who already has status. This is easier for VC-backed startups because part of the benefit of having investors is having the connections of those investors. For bootstrappers, finding a good (and free) mentor isn’t as simple.
If you already have what you need in order to pass initial obstacles, such as machinery or a degree of certification, then this caution might not apply to you. The same applies to finding a good mentor or getting your foot in the door in a community with restricted access; if you have all the connections you need, then this isn’t a constraint for you.
What you can do: avoid regulation and start small.
Avoid heavily regulated industries, industries that require special access, or relying on specialists. If you’re not already an expert in your field (and most of your competitors are), become one before you start your business. Take classes, get certified, or build experience in your industry working for someone else.
Another thing you can do here is start small. Pick one service (and maybe even one industry) to build up your credibility and experience. If you’re upfront about what you can do and you’re offering a polished product or service, customers will begin to trust you more and more. Then, you can begin to expand your services or product offerings to match new projects you want to try or other skills you have.
What we did(n’t): build an email marketing tool.
In the CRM industry, there are a lot of different add-ons or services you can offer customers: integrations, building your own internal tools for accounting and invoicing, charging for customizations, and more. Initially, we considered building an email marketing tool inside our CRM to help people email in bulk. It was (and still is) something we really want to have in our CRM, but we decided against building it because that would get us into complexity that we aren’t big enough to handle just yet. We need to build more than just a way to email people, including tools that would prevent users from spamming and give recipients a way to opt out of emails. This requires time, manpower, and some expertise that we are working on acquiring.
In the meantime, we offer our customers an integration with MailChimp, a reputable email marketing tool. We hope this gives our customers what they need (a way to send targeted campaigns out to their CRM contacts) while we figure out a way to improve upon the email marketing tools already out there.
Constraint: you can’t hire people until your business becomes profitable, and there’s a lot of work to be done beforehand.
This constraint is really about time; if it’s just you (and your cofounder) running your business, how can you get everything done, and how should you be spending your time? In the beginning, your bootstrapped startup is you: not your mentors, investors, specialists they recommend for you, or anyone else you can’t afford to hire or bring in. You’ll probably need to work on creating your product or service while also holding a day job, or make sure that one founder can support the other while this is happening. You’ll also need to be able to get technical, do customer service, hire people, and keep on top of your sales or marketing initiatives by yourself or with your cofounder.
That’s a lot to do, and there are only so many hours in the day. You’ll need to already know how to do these things or be willing to learn how to; you won’t be able to hire people to do customer service or create your product right away because you won’t have the money. Essentially, don’t start a shoe company if you can’t make shoes because you won’t be able to hire the guy that can do that job right away.
What you can do: make sure you (and your cofounder) can execute the core functions of your business.
A huge part of making bootstrapping your own business possible involves a willingness to learn as you go and the knowledge to create your own product. Think of what it takes to sell your product: what do you need to make or provide, and what is your channel for getting your product or service to customers? Now, ask yourself if you can handle this process by yourself or with your cofounder. Everyone has skills, but you need to make sure that yours cover the creation of your product or service, possibly the only core function of your business before you have customers and employees. Running a business involves a lot of work, but you’ll save yourself time if you focus on what you need to do now and reduce or eliminate tasks that aren’t directly contributing to your core purpose; if you’re a founder without employees, there’s a lot of stuff you can afford not to do.
As for learning how to run your business and the core functions that come after that first sale (and first employee), time is a bootstrapper’s best asset. There’s a lot of “stuff” that founders have to learn as they go; just keep the focus on what actually makes the business work, and make sure you can handle that by yourself or with your cofounder. If you do this early on, you can focus on growing your company and worry about the other “stuff” when you get to it. Check out this article from Tyler about how to simplify your business and make bootstrapping more manageable.
You also need to figure out how you’re going to support yourself while building your business — which will take a lot of time and energy. Will you quit your job? Will your cofounder? And when? You can even consider hiring an employee before you officially “hire” yourself.
What we did: created our app and parred down our definition of “core functions.”
Between our two cofounders, we knew how to build our entire product: design, app code, and hosting were taken care of. Tyler and Bracken didn’t need to hire any freelancers or consultants while building Less Annoying CRM. They did this all while working other jobs, too. Tyler and Bracken’s original plan was to work side gigs while working on the product, which is a very common way to bootstrap software. When they realized they needed help on the customer support front, they hired their first employee before either of them had quit their jobs! Although Tyler was working 40+ hours per week on LACRM, it’s still fun to say that he wasn’t our first full-time employee.
Our founders also parred down the “core” functions of our business to creating the product, managing employees, and providing good customer service. The company didn’t take on a million other initiatives — a big salesforce, a marketing team, or a group of analysts — that we couldn’t handle and didn’t really need early on. We didn’t really get into sales and marketing until recently because we relied on the good word of mouth from our customer service.
This worked for us, but for other companies and business models, sales and marketing might be really important, so think of what core functions apply to your business.
Constraint: you won’t have enough money to quickly scale your team even when you do start hiring people.
If your business plan relies on a huge salesforce, marketing team, or customer service team, you won’t be able to pay for those people on a bootstrapper’s profits while your company is starting out. Once your team grows a bit (along with your customer base), you need to be able to scale the major functions of the business; if you need to outsource things like customer service or software development because it can’t be handled by your small team, you might not have the right business model for bootstrapping.
What you can do: make sure your small team can accommodate your company’s growing needs.
Just like you wore many hats as a founder (designer, customer support, sales), your small team will have to as well. While you have more people, you also have more “stuff” to do now (employees create “stuff,” as well as a larger customer base). There is more that will fall strictly on your plate as a founder (managing employees, being the face and leader of your company), but also more that your employees can help handle (customer service, HR, recruiting, marketing, and more).
What we did: created “20% time.”
A final note about growing and cashflow constraints: bootstrapped companies eventually hit a point where they do have the resources to grow the way VC-backed companies can, but it comes much later in the game. For example, a bootstrapped company making $50 million per year isn’t constrained by cashflow, and they can play by many of the same rules a VC-backed company can. At over a million per year, we’re still feeling this constraint, but it’s better than it was a few years ago.
You’ve probably heard of this before from companies like Google, but we do it a bit differently. In a given week, 80% of an employee’s time is spent doing their main job, programming or customer service. The other 20% goes towards another chosen “hat” and other side projects, like marketing, copywriting, graphic design, hiring, planning company events, and more. While we don’t have the resources to hire a full-time HR person, recruiting manager, or blogger, we accommodate those roles with existing employees during 20% time.
If you haven’t already guessed, part of my 20% time is blogging. I write and edit pieces, post them on our blog, and share them via our social media channels. I like 20% time because it allows me to change up my routine, learn new skills, and flex the talents I've been working on for years. This system ensures that I get to try new things and get involved in different areas of the business that I’m interested in, which is more of an entrepreneurial experience than I might have had at a different company.
Constraint: you won’t have the mentors and the connections that come with being a VC-backed startup.
VCs are considered the thought leaders and gatekeepers of the startup community, so they can feel like necessary friends if you’re trying to make it in a big startup community. VC-backed companies get more than just cash from investors; they also receive mentorship, a foot in the door at their investors’ companies, and access to exclusive ecosystems of VCs and other funded startups. Having lots of money also gives you the opportunity to operate out of expensive startup hubs like Silicon Valley and hire well-connected employees or even business coaches.
Why are VCs so important? Well, they can connect you with venture capital and investors, so it’s on you to impress them with your business. Plus what they say will be the next big thing often is, if only because they chose to invest in the idea. There are a lot of great venture capitalists with very shrewd advice for those running VC-backed startups. But having one kind of person as the exclusive thought leader in a community means that there isn’t a lot of diversity of thought when it comes to how people think a startup should be run— particularly one that isn’t funded by outside capital.
As a bootstrapped startup, you won’t have investors. You might have a few folks you consider mentors, but officially, you’re on your own, and you won’t be hiring any industry insiders or coaches any time soon. Plus, you won’t have a foot in the door the same way many VC-backed startups do.
What you can do: locate in a physical area or industry that doesn’t require community to thrive.
Successful bootstrapped startups: Clicky, MailChimp, Qualtrics, and other big bootstrapping names were started outside the major startup hubs. You could attribute this to cost of living, but it's also a smart move because bootstrappers are less likely to be excluded from the ecosystem in mid-tier cities where VC presence isn’t as big or important because there are other things driving community: grants, city initiatives, startup spaces, and more.
Bootstrappers can still benefit from community, but it’s important to understand which cities have VCs as gatekeepers. Community is more accessible to bootstrappers in cities with a weaker VC presence, even if the community itself isn’t as robust.
If you already have connections or you’re a well-respected member of the startup community in a given city, then you’re probably going to be just fine. For a lot of bootstrappers, this just isn’t the case. The point is, if you need to be an insider to thrive, then you should become one before you start your business.
What we did: moved to St. Louis, Missouri.
Our company started while our founders were in San Francisco and Boston. While the San Francisco side of our company began to grow, we eventually decided to move to St. Louis, MO for a few reasons: our founders are STL natives who also went to college here, STL is a more affordable place to live, and we received an Arch Grant. The grant gave us equity-free money and pro-bono services like recruiting and legal counsel. Because of Arch Grants, we felt connected to other startups in STL and were eventually able to get our own office space downtown!
Another benefit of moving to St. Louis was the community. Arch Grants was able to introduce us to the community and local leaders, and our first office in T-REX, a coworking space and startup incubator, put us in close contact with other startups. We feel that we can have a meaningful voice in St. Louis’ tech scene, even as a bootstrapped startup, because it isn’t that investor-focused. Here, we’re not alone in the bootstrapping space and can participate in tech events and meetups while holding our own.
Constraint: on a limited budget, you simply can’t have it all.
In addition to a large, experienced workforce, a lot of the things that VC-backed companies consider no-brainer expenses – robust sales software, an office in the heart of Silicon Valley – are too costly for bootstrappers just starting out. I’m not going to even touch on the extra fun stuff that companies with money to burn purchase (think ball pit conference rooms and indoor tree houses).
What you can do: get what you “need to have,” and be patient about things that are “nice to have.”
Today, deciding whether or not you need a brick and mortar office space is a real question entrepreneurs needs to ask themselves. So much of your business can occur online, but there are benefits to having a dedicated space for work, meetings, and more. The same goes for a lot of other business-related expenses: do you really need costly, automated CRM software? It can help you automate your sales and marketing processes, contact more leads, and potentially alleviate some of your work. But, at this stage in the game, do you even have enough customers to merit buying a program that will set you back hundreds each month? And, would too much automation kill one of the benefits a small company can offer against a big, VC-backed competitor: a personal touch?
What we did: worked from home, even after hiring real employees.
Our whole company worked from home for the first few years, and we had employees in San Francisco, Boston, and St. Louis. After relocating to St. Louis and receiving a grant, we eventually got our own space. We didn’t jump the gun and get an office right away, in part because we were a small team and didn’t need that much space, but also because it was an unnecessary expense. Now we have an office that fits our team and budget, but also gives us enough room to grow a bit each year.
This might sound like a small tip, but it helped us stay afloat during the early years when we weren’t turning a profit. Plus, it makes having an office all the more awesome because we know we need it and can afford it.
The bottom line
If you’re going to be bootstrapped, you need to figure out how to make money, make it quickly, and avoid the need to spend it in big chunks. We recommend a few ways to make that happen above — sell to small businesses, locate outside of big startup hubs — but there are other ways to make bootstrapping work.
If the recommended solutions don’t sound possible to you — your product won’t work if you can’t spend a few years without making money, your service wouldn’t be valid without picking up a few big ticket items early on, or you’d rather have investors than have to wait for your company to grow — then maybe you shouldn’t bootstrap your company. After all, not everyone can be bootstrapped, and bootstrapping isn’t the best choice for everyone. To us, the benefits of bootstrapping, like maintaining control over our company and freedom with the product, outweigh the perceived negatives of the constraints we outlined above.
Like this post and want more like it? Check out other bootstrapping articles on our blog. Want to continue the discussion? Tweet at me @Julia_Zasso
Bootstrapping — funding a business without the help of outside investors. This normally means that the founders use their own money to pay for expenses until the business is profitable, at which point the business is funded with its own revenue.
Constraint — a limitation or a restriction on the way you do business. Not all constraints are bad, but they need to be accommodated in order to be successful.
VC — can stand for venture capital or venture capitalist. The former refers to a type of investment that startups often raise to fund their growth. The latter refers to the people who work at the venture capital fund.