In my 10+ years of running Internet companies, I've never raised a single dime, yet I've still gone on to sell three profitable companies and am currently on my fourth, Carbonmade. Bootstrapping is something I'm very familiar with, so I've gathered together some thoughts that should provide you a step-by-step process of going from idea to product to profitability. I have nothing against raising money — angel or venture capital — it's just not the process I'm most familiar with. How to bootstrap goes hand-in-hand with how to run a lean startup, so expect some crossover below.
Idea generating is only slightly different when you're bootstrapping than when you're looking to raise money. The only important difference is: if you're planning to bootstrap your idea must have built-in revenue generating functionality from the get go. Building Twitter is off the table. You can't wait to hit scale before turning on the revenue features. That's why ideas around Software as a Service (SaaS) are so effective for bootstrapped companies, because you only need one customer to reach revenue — and, with inexpensive hosting costs, probably only a dozen or two to reach profitability.
Bootstrapped companies can't afford to wait around to reach a network effect. You need to start generating dollars as early as possible so that you can quit your day job or put a stop to the draining of your bank account as soon as possible. Bootstrapping startups don't have the luxury to wait around. So when generating an idea for your startup, toss out everything that doesn't involve charging a fee for at least some of your clients. Leave the ad revenue and crazy business model revenue streams to the startups with venture funding. That's just not your game to play.
You can either come up with the idea first or the team first. I think it's fine to do it in either order, but it's probably best to come up with the idea before the team. Then you can build a team around the idea. When bootstrapping, you need to find a team that's willing to work for nothing and spend their off hours with you, so finding these types of people can take some searching. You're far more limited in your choices.
The worst thing you can do is work with people who can't comprehend the idea of bootstrapping. You need to work with people who understand that their nights and weekends are going to be fully dedicated to building a product. They'll be working two jobs, not one. You need to explain to everyone you depend on how a bootstrapped company works: Revenue generation is slow at first, though steady, and it could take a year or more of hard work before they can quit their other job and work full-time on the company. But the advantage here is that after a few months off the ground you'll have a clear sense of how soon that day can come. Another advantage of a bootstrapped company on the SaaS model is that it's really easy to calculate your cash flow.
It goes without saying that the people you work with should have complementary skills to your own, but the bootstrapper's "slow but steady" mindset is just as important to the health of your company. You'll find a lot of people may not be comfortable with this approach. Weed those people out as co-founders when you're bootstrapping a company. A one and done approach won't work here.
Almost every bootstrapped company begins as an off-hours tinkering project. That's true of Carbonmade, which Dave built for himself first; that's true of TypeFrag, which I built over the course of a week during my sophomore year in college; that's true of 37signals' Basecamp, true of Anthony's Hype Machine and lots of other companies.
The good thing about bootstrapping is that you don't need to spend a single penny outside of server costs and you can even do most things locally before having to pay any money on a server. Your biggest expense is time, and that's why off hours are so important.
Consult on the Side
The way we started Carbonmade, the way 37signals started, the way Harvest started, and many other startups too, was by first running a consulting shop. We ran a design consulting company called nterface that Carbonmade grew out of. It's great, because the money you're bringing in through client work tides you over while you're waiting for your startup to grow.
Carbonmade was live for nearly 18 months before we started working on it full-time. During those first 18 months, we were taking on lots of client work to pay our bills. The great thing about consulting through the early months is that you can take on fewer and fewer jobs as your revenue builds up. For example, you may need a dozen large projects during the first year and only two or three during the second year. That was the case for us.
I know of other successful bootstrapped companies that during the first year would take on a single client project for a month or two, charging an appropriate amount, and that would give them just enough leeway to work on their startup for two or three months. Then they'd rinse and repeat. They did this for the first year and a half before making enough money to work on their startup full-time.
There's No Need to Rush
When you're bootstrapping there's no rush to get things out the door, even though that's all you hear these days. I know people talk about iterating quickly, and that's all well and good, but when you're bootstrapping and not meeting anyone's deadlines but your own you can take your time to better perfect your product before every release. In my opinion, you should strive to be more Apple-like and really think things through. If you don't take money from an investor who will demand quick new product releases, you can take the time it needs to perfect things.
The first few iterations of your product are everything, and bootstrapping through this beginning phase can allow you to take your time and think through everything. If you're too worried about getting off the ground quickly, then you're bound to make a mistake.
Bootstrapping a company allows you to grow it organically. We at Carbonmade always refer to this as incubating your project. We like to release something, let it sit, feel and gauge the reaction, and then move on from there. You don't have this kind of freedom when you're not bootstrapping, because you're desperately trying to ramp up as quickly as possible.
I've heard stories of companies acting too quickly on initial feedback only to undermine themselves going forward because the feedback was from the wrong user group. For example, if only web designers had given us feedback in the early days of Carbonmade, demanding more precise tools for editing the look and feel for their site, we would have never realized that our market is far more broad: the masses of creative people who don't have a build-it-yourself skill set. We would have limited Carbonmade to a smaller group of people and never have gotten as big as we are today.
Making That First Dollar
Bootstrapping is all about making that first dollar. When I launched TypeFrag we didn't get any sign-ups for the first week and this got us very worried — my partner and I almost threw in the towel — but about five days into it we got our first bite. Then another. Then three the next day. And more and more. Sign-ups began to pile up well beyond what we had anticipated.
All this money coming in meant we could begin to lay out our plans. If no money had come in, we would have had to drastically change directions. Revenue validated our idea, and as every dollar came in we got a better sense of our cash flow and could plan the future development of TypeFrag more accurately. We were able to quickly figure out that people wanted PayPal, so we add that and saw even more money come in. Your first dollar validates your product, your business model, and everything else.
When Investors Come A Calling
As soon as you make that first dollar, investors are going to start making inquiries. That's a good sign! It means you're doing something right. They're not scary guys and most of them are really nice and great people to meet with! Even Jason Fried, the man who is well known for scorning investors, says in 37signals' 13th podcast that it may even make sense for your bootstrapped company to take investment after you've gotten off the ground. I completely agree, as long as you know exactly how you're going to put that money to use. Furthermore, the outcome you anticipate you'll get from taking money needs to be well beyond what you anticipate doing without it.
My advice: Consult with a select few people you really trust who aren't tied too closely to your company and see what they have to say. Try and find someone who has raised money before and had a successful outcome or two. Share everything with them and see if taking that $2.5 at a $10m valuation makes sense. Can you put that $2.5m to use to make your company worth at least 10x more than it's worth today in three to five years?