Episode 411 | Bootstrapping vs. Funding: 19 Questions To Ask

Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about 19 questions to ask when considering bootstrapping versus raising funding. This is Startups For The Rest Of Us episode 411.

Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products whether you’ve built your first product or you’re just thinking about it. I’m Rob.

Mike: And I’m Mike.

Rob: We’re here to share our experiences to help you avoid the same mistakes we’ve made. Where this week, sir?

Mike: Well, there is a book recommendation that you’ve given awhile ago called, The Hard Thing About Hard Things. I’ve commented it, I’ve bought the book, but I haven’t read it yet. I’ve been kind of diving into that a little bit. I find it fascinating probably more so from a historical perspective because Ben Horowitz, who’s the author, he’s talking about his journey through the startup after he had left PayPal, and running this other company, and they basically only had one customer that was providing 90% of the revenue and basically spun that business off into its own separate entity and got rid of a bunch of assets with it, and talks about he built up the company from there.

What I find fascinating about it is that the new company is called Opsware. I remember back in those days when I was doing sales demos and presentations and stuff, I was actually in some cases, competing against Opsware.

Rob: That’s a trip. That book–it is brutal. Have you finished it?

Mike: I’ve not, no.

Rob: I was so stressed. It’s a good book but I don’t know if I could listen to it again because what he has to go through to grow and keep his company from basically going under and then he sells it for $1 billion or multiple billions of dollars and then he starts Andreessen Horowitz—that part is not in the book but he talks a little bit about it—but he is the Horowitz of Andreessen Horowitz. I remember listening to it and being like, “Yup, I could not have done this. I would have imploded.” It is, The Hard Thing About Hard Things is a good title for it.

Mike: Yeah, definitely. I do not think that I would have wanted to go through all the stuff that he’s gone through especially just the financial challenge of trying to go public at the time that he did, right after the economy kind of cratered. What did he say? Like there was 200 plus IPOs the year before and then there was 6 or 12 or something like that the year that he did it. Wow!

Rob: It’s crazy. He went public, he didn’t get acquired, I forgot what…

Mike: No, he went public first and it was in a bad environment. The reason they went public was because they couldn’t get anymore investment capital from investors. Then it was a bunch of years later, like 2007 or something like that where they ended up selling to HP for, I think, it was $1 or $2 billion.

Rob: Got it. That was my memory, but I have forgotten they went public. It’s agonizing. It really is the shoot for the $1 billion exit. You don’t need to be a several hundred-million-dollar revenue journey raising venture capital and all that stuff. A lot of it just did not sound like something I ever want to experience in my life, even for payout like that. I don’t it’d be worth it.

Mike: How about you? What’s going on this week?

Rob: Well, you and I just had a conversation before this episode started recording. We are evaluating potentially having sponsorships on Startups For The Rest Of Us. If you are a company, whether you’re a startup or if you think that you would be interested in reaching the Startups For The Rest Of Us audience—it’s a lot of bootstrappers but it’s also a lot of people running six and seven figure businesses, drop us a line at questionsforstartupsfortherestofus.com and just put “Sponsor” or “Sponsorship” in the subject line, and we’ll talk about it.

Obviously, as a listener, we’re been doing this for eight years, and we appreciate the trust that you put in Mike and I to produce high-quality content and to deliver value to you. We have no intention of “screwing up” the podcast by adding a bunch of sponsorship roles in the thing and interrupting your flow, but we are at a point where it does cost us money and it does cost us time away from our businesses to do this, so we’re just evaluating it. It’s a preliminary thing, we definitely have not made up our mind about it, but we do want to explore this as an option.

Mike: Again, that email address is questionsforstartupsfortherestofus.com and just put “Sponsorship” or “Sponsor” in the subject line, and we’ll take a look at it. Again, we’ll just kind of evaluate how things go. To reiterate what Rob had said, we appreciate you guys listening and we don’t want to screw up the whole thing. I think like a lot of things that we’ve done at MicroConf every year I think is just kind of a play it safe approach, but at the same time, look for ways to change things to make things better.

Rob: Yeah, we’ve experimented a lot with things at MicroConf over the years. Some have worked, some haven’t. But one thing that I think we’ve done a good job is recognizing when they work and don’t and basically changing it up when things don’t. Even if we try it, if it suddenly becomes a […] or something like that, I could imagine pivoting.

Today, we’re going to be running through an article by a listener and commenter name Don Gooding. The title of his article is Bootstrapping versus Venture Capital: 19 Questions to Ask. But what I find interesting about the article is it’s not just about venture capital, it is about angel investment as well. But before we get there, we have a comment from Adam on episode 406, and 406 was five episodes ago when you and I discussed, “Should bootstrappers raise money?” was the title of the episode. Adam said, “I’m so glad you jumped in, Mike, and said something about Rob hitting 21k MRR saying that it wasn’t a fair comparison.” Because I believe I was saying, “Drip hit 21k MRR quickly and if it took me four years to get there then I would’ve […] it down.” And you said, “Well, that’s not a fair comparison because you’re in a different place and if you’re building something on the side, maybe it is four years.”–to that point.

Back to Adam. He says, “I’m still trying to hit 21k MRR after four year, but I don’t think I’m failing at what I’m doing. Maybe an episode on what you think that growth is, that people should be aiming for, this was a good episode. A follow-up question to Mike would be, why have you or have you not fun strapped Bluetick?”

Mike: Oh, that’s a good question that I don’t have a good answer for.

Rob: It’s something evaluated, no?

Mike: Oh, yeah. I’ve looked at it a couple of times. I had a few conversations privately with people I know who have raised money, and just asked them what their take on it was, what their experiences was after going through it, what were the drawbacks, what would they have done differently. I got a sense that it was going to be rather complicated and time-consuming, and I didn’t have the time to spend on it. I continue to kind of look at it and continue to think about but it’s not something where I’ve said, “Yeah, I definitely want to do that. I’m all in. I’m going to dedicate the next X weeks or months whatever going out and raising funding.”

I’ve probably spent a lot more time working on getting Bluetick to a better place. I think I have been open about the fact that early on, I had hired a bunch of contractors to build a lot of the core infrastructure of Bluetick. Quite frankly, it was not done very well so there’s a lot of things that are generally screwed up and it makes it difficult to make changes. I would prefer to move fast if I can help it, but the problem is a lot of the architecture and the choices that were made at the time make that difficult. I have a hard time pulling away from those things and doing some of the clean-up work to basically make myself be able to move faster.

Because I feel like if I had like a pile of money, I would feel obligated to expand things a lot quicker and maybe even more than I’m possibly comfortable with, and I just know that there are certain parts of the app that if I were to dump 50 or 100 users on it all at once, it’s not going to scale very well. There are certain processes that need to run and it’s just not going to take a large influx of people very well. It can do it, I’d probably have to tweak a couple of settings to make it happen, but I’m not real comfortable doing that. I think it’s partly out of obligation, partly out of complexity and the time that I would have to spend on it.

Rob: You have technical debt already.

Mike: Yes. I think you have technical debt as soon as you write a single line of code.

Rob: Well, not if it’s fully unit tested, though. I think of […] there’s that, I don’t if it’s a joke or it if it’s truly the definition but it’s like, “Legacy code is code that is not highly unit tested.” Yeah, you have a little bit of technical debt but to hear that it’s hard to make changes, that’s a real bummer to hear given how early stage you are, and that you’re a technical founder. That’s the whole point of us being technical founders, that’s our skill set, we shouldn’t have that.

Mike: Maybe I should caveat that a little bit more. It’s not that it’s hard to make changes, it’s that I feel uncomfortable making changes to certain places because they’re not as well unit tested as I would like them to be. The software does a lot. There’s some changes I’ll just push out. It’s just like, “Hey, this is a frontend UI changes, it’s not that big of a deal.” But then when you get into things like, how mailboxes are stored and how the data is synchronized, I’m real hesitant to make changes to those because there is, in one particular case I can think off the top of my head, there was literally no way for me to unit test it whatsoever.

It’s hard to justify going in there and just making whole scale changes that would make things easier because I know that it’s working and if it breaks, it does a lot of work every second, and things could go seriously sideways very, very quickly. The new build server I put in place a couple of weeks ago would actually make rolling back pretty easy, but then I’d have to go through and figure out what in the code broke. Again, it’s not easy to unit tested that piece.

Rob: Yeah, I feel like, “Next time, should we just build, I don’t know, simple project management that just pulls things out of databases. It’s that no connections to any external sources and no queues. I don’t want any queues, I want everything synchronize.

Mike: Honestly, that’s part of it is the queues and stuff that I have to deal with. Queues processing, storing data, being able to filter certain things out and, “Oh, somebody deleted this piece of data.” It kind of sucks to have things moving while you’re also writing the code on it. I’m sure you went through this with Drip. There’s so much…

Rob: That’s SaaS though.

Mike: I know. It’s like open heart surgery–it feels like sometimes.

Rob: Yeah, every time we did anything meaningful to scheduling or, I mean there’s all kinds of stuff that’s so easy to screw up. If you can figure out a way to smoke earn—not smoke test—but to get you in a test on that stuff because the fact that you don’t feel comfortable making changes to a part of your app, that’s going to be a hindrance forever. It’s not going to get better, it’s only going to get worst especially if it grows, if you start hiring people, that’s a big red zone there that I think you need to think about remedying early.

Mike: Yeah. […] is there’s a component that I’m using where to get into the technical details of it, there’s a C# Class and I have to serialize it. In order to do that, in order to store the data. The problem is they’ve marked it as sealed which means I can’t inherit from it, which means I can’t really do anything with it. I’ve been working with them to try and figure out like, “Is there a way I can get an interface for this or something like that so that I can create it?” Because they don’t have a public constructor for it because it’s a sealed class, it’s encapsulated in the assembly, I can’t narrow from it either. I really don’t have any other options other than faking it which is what I’ve done so far. I basically have my own object that very, very closely mimics theirs, but it’s not perfect, and that’s the problem. I’ve found a few edge cases here and there, it’s kind of scary. I’m hoping it will come up with a solution sooner rather than later, but I’ve been working with them for probably six months on it.

Rob: One minute while I update my spreadsheet. Let’s see, apps to not start as an unfunded single founder, email marketing for writer, cold email outreach–the list is getting longer and longer. It’s like, these things don’t seem that complicated when you look at it from the outside. “I want to build an ESP. This is going to be a piece of cake.” said Derek and I before we wrote code.

Mike: I think anything where you have an outside dependency that you don’t completely control or have complete access to, that’s where it gets hard. Or you’re relying on events coming in to the system and you have to do data processing on.

Rob: Alright. Well, let’s keep moving on with this episode. Our second comment on episode 406 was from Don Gooding. He linked over to a few articles he’s written and one of them which we’re going to discuss today. His comment was, “I write a lot about bootstrapping versus venture capital or angel funding. They’re definitely a bunch of issues to consider both early and later. I hope you’ll consider the following posts helpful and not spammy.” and I do consider them helpful. He links to three different articles. His blog is fourcolorsofmoney.com. Don, if you’re listening, register the 4colorsofmoney and also, redirect that over because I tried that as well and it just goes nowhere.

He linked to the first article which is, Bootstrapping Versus Venture Capital: 19 Questions to Ask–we’re going to talk about that today. He also linked to another article called, The Bootstrap to Funding Pivot Playbook which is about bootstrapping first and then raising funding later. He talks about revenue financing in that one. Then his last article is, Revenue-Based Financing: Five Different Options and he walks thru them which is pretty interesting.

His site is called Four Colors of Money because he looks at bootstrapping, he looks at grants, he looks at grant and equity–those are the four colors. He’s obviously—having read through it—pretty knowledgeable about this stuff. Again, we will include those three links in the show notes. You can always go back on those comments on episode 406 if you wanted to see his full comment.

But today, we are going to talk through his article Bootstrapping Versus Venture Capital: 19 Questions to Ask. We won’t have time to go through all 19 question, but the idea here is to think about whether you can and should bootstrap or whether you need to raise funding.

His first question is, “How much of your own capital do you have. Do you have a way to self-fund it?” Self-funding and bootstrapping sound like they’re the same thing, but they’re different. Bootstrapping is truly having almost no money. A few hundred dollars, a thousand dollars, a couple thousand dollars, and then growing a business based purely on its revenue and profits.

Self-funding is if I have $1000 in the bank or $200,000 in the bank, or I had another business that was throwing off money or another income stream that was throwing off money that I could then take and start my next business from.

Self-funding is a lot of what I did. In the early, early days, I bootstrapped everything right out of consulting revenue but spent very little money. Then the more business revenue I had, I stayed consulting during the day full-time, and I took that business revenue and used it to self-fund the next thing, and the next thing, and the next thing, and each of them got bigger and bigger. It took me a long time to get from having .net invoice doing $300 a month, 10 years later, even longer, 11 years later, it’s Drip doing seven figures a year and having exit.

I didn’t have to raise during that time because I self-funded, but it took me a lot longer than if I had come up with an idea and just raised funding early on. That’s kind of how I think about the trade-offs is I believe it takes longer if you’re in a self-fund unless you do have a rich uncle or a trust fund. But his first question to think about is how much capital on your own do you have that you can invest in the business?

Mike: I feel like this is more of a runway question because the money itself, you either have to when the business itself is generating money, how much is left over for you to leave versus how much are you going to be able to put back into the business. If you’re running a business on the side or on nights and weekends and stuff like that, then you presumably have a full-time job, and that is keeping your self alive and your family fed while the business is getting the rest of the profits. But at some point, things are going to transition, and you have to make some choices about like what your future looks like, do you have enough money to be able to spend $1000 on ad words or something like that to test out a market? You may even need that money early on.

That comes down to the fundamental question that he’s got here is, how much of your own capital do you have? Can you afford to run experiments early on? Do you have more time on your hands or do you have more money? This is getting more at the money side of the equation. If you have plenty of time, if your timeline is five years, you can take as long as you want to do most things. Certain industries of course will move very quickly, and competitors will swoop in, not ideal if you’re trying to take five years to do it but certain ones you can do that.

I think Patrick McKenzie, with Bingo Card Creator, he slowly built that up. Nobody else wanted to get into market because there wasn’t a lot there. But he was still able to make a pretty good business out of it. He just took a really long time to do it.

Rob: His next few questions look at ways that if you don’t have the money to self-fund, ways to look around and see if you can essentially raise funds but not from venture capitalists or angels. His second question is, how likely it is you can raise funds from family or friends. Third question is, “Can your product support a Kickstarter style campaign?” which I believe a lot of people overlook. Info products and even some software, not B2B, but have to really be B2C in general can use Kickstarter as well as obviously physical products would be a great way to do it. His fourth one is, “Will customers pay you well in advance of you delivering your product or service?” Can you essentially pre-sell it? His fifth one actually is, “Does it qualify for a grant?” I don’t think that applies to most of our listeners nor any business I’ve ever started, but it is one of the colors of money that he talks about.

Mike: You know, I’ve thought about this kind of crowd funding. I’ve heard people gone down that path, not on Kickstarter, but someplace else, I can’t remember the name of it.

Rob: Like Indiegogo or something?

Mike: I think, yeah, it was Indiegogo. The general consensus was people are much more willing to fund individual ventures and things where there’s a physical product. But when it comes to software, people are not particularly interested. Maybe that’s just because it’s kind of self-selecting where the people who are building those generally are targeting them at businesses versus if you’re going to do something where it’s like, “Oh, this is a way to organize baseball cards,” or something like that, if it’s something that has a wider appeal and it’s a non-business use, you’ll find the hobbyist into that or the people who are prosumers, so to speak, they are going to be into it, and they would probably fund it. But if you’re going to try and create a CRM or something like that, who’s going to fund that? I can’t think of anyone who would want to willingly throw in money unless it was for their own business at which point, it’s not really for the greater good so to speak.

Rob: Totally. When I look back at the 173 Kickstarter projects that I’ve backed. Mike, did you hear what I just said?

Mike: Oh my god.

Rob: Oh, no. That’s the number of successful projects I’ve backed. I’ve 185 Kickstarter projects. Oh, the humanity, Mike. It’s so embarrassing. I just love Kickstarter. But I don’t think I’ve backed a single piece of software. My taste, it’s a lot of graphic novels, it’s a lot of table top games, it’s a lot of little tech gadgets. There was a Kano–the open source computer that I could teach my kids how to put computers together and do that stuff. A lot of it is some learning, some teaching, and some gadgetry and stuff. I think that my gist is that my taste are not uncommon. I do agree that in trying to launch a project in Kickstarter would be hard. But there are a lot of listeners who are not just trying to do B2B software as we’ve talked about.

I’m going to skip over a couple of these questions. But another couple of questions that I think are interesting to ask because they imply that you should probably raise some type of at least angel and potentially go after venture funding. One is, “Do you think it will take more than $100,000 and/or longer than one year to develop your product or service to the point that it is generating revenue?” Another question is, “Does your business have network effects where only one or two companies will end up with 80% or 90% of the market?” because that’s a super protectable. There’s a moat around that product or around that business. That is something that can very likely be fundable.

Another questions is, “Do you have large capital equipment or other fixed investment needs that aren’t debt financeable?” those three would obviously imply that you probably need to raise some kind of funding.

Mike: Well, I look at those things as potential disqualifiers as well because if it’s a network effects type of business where only a couple of companies are going to end up with a large percentage of the market, to me, that’s kind of a disqualifier unless you’re going to go raise money, and which I guess is kind of what he’s saying, but you have no idea if other people are going to answer in there who have a lot more clout than you. That’s why you should probably go raise funding if you’re going to go for something like that. But you’re also going to look at that particular thing and say, “This is a disqualifier for me. I’m not just going to go in that direction because I don’t want to raise money.”

Rob: Another good one I like that he asks is, “Do you have potential customers that will see your small sizes of risks? For example, a potential career–a limiting decision.” In other words, if you’re selling to banks, large institutions, they’re going to require that you have some kind of backing, right? I shouldn’t say require. They’re going to be unlikely to go with a single founder building software out of his/her garage.

I remember talking to someone at Gumroad actually, because Gumroad was kind of bootstrapped early on, and they raised a big round, I believe it was 7 million if my memory serves me right. I was saying, “Why did your raise the round?” He said, “Well, we wanted to become a credit card processor.” And to actually process credit cards, you need a bunch of money in the bank. They just won’t let a bootstrapper do that, or a self-funded company do it. I think that’s definitely a case if you’re trying to start a Stripe or even a Gumroad which seems it could be a bootstrappable company, there maybe a case where you need to pony up and raise a little bit of money.

Mike: That’s just a social proof of creditability factor. You’ve got people who have been willing to invest $7 million in you than it serves to the banks as like, “Oh, these people have convinced these other seemingly smart people to give them $7 million. Clearly, they’re onto something and they know what they’re doing.” Doesn’t mean that that’s true, it just means that that’s what their perception is. You’re really just playing off their perceptions.

I think there’s certainly situations where you can either skirt that or use it to your advantage for a relationship or something like that. If the […] that you’re getting after like you get an introduction into them. That way, you’re not going in completely cold. If you can get those introductions from somebody that they trust, then that’s going to help out a lot. That’s a place where if you go into different reseller channels, and there’s tens of thousands of resellers across the world, that their sole business is to go in and sell software to other businesses.

There’s a bunch of large value-added resellers like Dell and HP, in companies like that where they have entire channel programs set-up such that they’re going to and work with small businesses or they will escort small businesses into a deal in order to provide the credibility, and then everything goes down on their paperwork.

That’s how Dell and HP have, like massive services businesses, it’s because they have all the relationships already, they have sales fields reps, they walk in because they have a relationship or they can just make a phone call and say, “Hey, I’m your Dell rep and I’d like to come in and talk to you.” And then they talk to you and find out what your problems are, and they escort a small partner in the door.

If you can get some of those relationships, you can basically get escorted in. You don’t need to have that $7 million in the bank or you don’t have to hire 300 sales people or call center in order to do outbound cold calling in order to find your leads. You can leverage those partners to help walk you in.

Rob: His last few questions are really surrounding this topic of, “Are you a fit for angels and VCs?” One is, “Will your business support growing sales by 50-100% annually for 5-7 years? Will annual sales reach $15-$50 million with that timeframe?” high-growth, right?

Another question is, “Are you comfortable selling your business in order to provide your investors their return in five to seven years?” or maybe earlier for VCs. “Are you comfortable sharing control of and decision making for your company with investors? Is your team plan and pitched in the top 10 percent of companies seeking financing in your region?” All interesting things to think about.

Mike: I think that a lot of those are hard questions to answer too. I’ll say they’re very personal questions and depending on the time and day that somebody asked you, you might also change your mind. It could be hard to come up with a solid answer that you stick with.

Rob: Yup. I would agree. I think these are good things to think about. I think long time listeners of the podcast will have heard us discuss these types of thought processes before. Well, if you’re new to the podcast, you probably think, “Boy, these guys really talk about funding a lot for a bootstrapping podcast.” because in the past five episodes we’ve talked about it twice.

But I do think that it’s becoming more and more relevant. I don’t expect us to talk about it every five episodes by any stretch, but it does seem to be this emerging trend that is coming into the startups space. I think back to 2007 to 2009 or ’10, and I was using a lot of email marketing in my info products, and then I started bringing them into software products and kind of the startups space, it was definitely this emerging trend that I recognized. I talked about it at BOS.

Split testing was something I had seen in info and people in the startups were not doing that, that also became a trend that took off. There’s a bunch of things that have come from different angles. Even customer development and a lot of lean startups stuff was taken from the automotive. You see these trends coming in.

While startups and software have traditionally been VC funded and the trend that you can I have been a part of is this bootstrapping and self-funding kind of spearheading it, I would say, or I mean at least part of the folks who have really driven it over the past eight plus years. I think we look back and the first time I had said “fun strapping” on the podcast was in 2013 or 2014. It’s becoming just a little bit more common for folks to raise a round and not go institutional, which is another trend that I see, not infiltrating because that sounds like it’s a bad thing, it’s just another trend in the space. I think we’re just continuing the dialogue about it to keep abreast of what we see is happening.

Mike: Yeah. Things just change over time. As time goes on, the entire software space has become more and more competitive. I mean, eight years ago when we started podcasting, it was easier to launch products in terms of getting in front of customers. Now, there’s lots of competitions. You have to have a more polished product, it’s got to be further along, it’s got to solve more of the customer’s problems because they’ve got other things that they can pay attention to.

It just makes it, I’ll say a little bit more challenging to launch a product today than it is yesterday, than with the day before. As time goes on, I think that that trend is just going to continue. I say that the natural evolution is you have to have more resources in order to launch something. It’s kind of where the industry is headed. I’m not going to say that that’s where it will end up and that you’re always going to have to raise funding in the future because I don’t think that’s true. But I do think that there are certain types of businesses where it makes a lot more sense to raise some funds than it is to not, especially with certain life circumstances as well.

Rob: Yup. The good news is that it’s easier, I would say, than it has been in the past to get some type of small amount of funding with a lot fewer strings attached than say, 10 years ago. On the flipside, like you said, I believe there’s always going to be bootstrapping. That’s not going to go away. There’s always going to be folks who are hacking away, launching small software products, getting a lot of learning, getting some revenue. I think that’ll last forever and I think that’s a really great thing.

I’ve said this before, we live at an amazing time in history where even 30, 40 years ago, you couldn’t do any of this, and 100 years ago it’s even worst. But now, someone with some type of technical acumen can basically start a whole side business and really never leave their house and have this thing making money while you sleep. It’s always been the big draw I think for a lot of us. Part of it might eb the adventure and the active creating, I think that’s a big deal, but to be able to literally make money from nothing more than your skill and your computer is just mind-blowing. When I think back to being a kid, I was in junior high in high school and it was like, “Well, I don’t really want to work in a cubicle but were my options?” Right? In the mid to late ‘80s. This stuff was just coming about and I didn’t know much about it but the fact that we live at this age–consider ourselves lucky.

Mike: I think at the end of the day when you’re trying to evaluate whether or not to raise funds, it’s all about that trade-off of time versus money. Do you have money to burn? Burn is probably not the great way to put it, but do you have money to spend in order to learn quickly or are you okay taking a much longer time to do it, and doing things slow and steady based on what your financial situation is like, your personal life, and how much time you have available. That’s going to be different for everyone. That’s what generally governs these types of decisions for most people. I think that about wraps us up for today.

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