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The Bootstrapper’s Bind

 

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by in Blog
June 30, 2013

If you are a broke entrepreneur deciding to bootstrap your startup, there’s only one number on your mind. Call it the runway, or the rabbit hole, the calculation is the same. Cash you have divided by cash burn per month = Number of months you have left to live.

Quitting a stable job and jumping into the maws of entrepreneurship is heroic. All those stories you hear about people hitting the jackpot and becoming billionaires overnight, that’s going to happen to you! You’ve got a fantastic idea, now all you need to do is build it, test it, validate it and you’ll succeed.

Chances are your startup is not going to be making money right off the bat. If it is, you don’t need to read this post. That means you’re only burning money and it could be a year before you find that perfect business model, that perfect customer-market fit, before the cash registers start ringing. Of course, that’s not something you need to concern yourself with because when the money comes in you’ll instantly turn into a billionaire.

And then when your bank balance drops to three-figures you decide to take the red pill. It’s a sobering thought, looking at your runway. How deep into the rabbit hole are you.¬†How many months do you have before you need to go back to your parents’ home and live off them.

One month? Two maybe. You could squeeze out three if you move to a cheaper place and eat less. But saving is not the answer, you’re just delaying the inevitable.

So here’s where you make the choice. Go home where you have no costs and continue bootstrapping your startup till it earns money, start looking for VC/angel funding to pull you out of the rabbit hole, or take up a side job to pay the bills and extend the runway.

Can’t go home. Sure, Steve Jobs started in his parents’ garage, but you’re not Steve Jobs and your parents have better things to do that take care of another adult.

VC/angel funding looks like a good option. You haven’t launched your startup yet, or you have but there’s not much traction, but it should probably be worth a million dollars based on those attractive numbers you pulled out of your arse. If you give away 10% of that, you have $100,000. Good enough.

Here’s the thing, VCs and angels want more these days. They want an actual product, a full team, preferably consisting of serial entrepreneurs, and the all important traction. They don’t just throw money at you if you’re just a college student writing code in your dorm room. You’re not Mark Zuckerberg.

So that means you need to accelerate your development, launch, market, gain traction, hire A-players, and only then start pitching investors. Think you can do all that before your money runs out? Don’t forget to take into account that acceleration increases your burn rate.

So you’re left with the final option. Freelance and make some money on the side. Maybe build websites or write blogs, or whatever you’re good at. Now you have another number to deal with, your hourly rate. Let’s say you want to make enough to pay the bills and other expenses, which might end up being $1200 a month. Let’s also say you only want to spend 10 hours a week freelancing so you have time to work on your startup. That’s 40 hours a month. Your hourly rate should be $30/hour.

The only problem is, freelancing means competing with other freelancers and dealing with clients. This means it takes time, time which you haven’t factored in. First you need to find the right clients. If you use oDesk and eLance, this part shouldn’t take too long.

The next part is pitching them and getting yourself in front of all the $1/hour freelancers from Asia. This is the tricky part, getting someone to pay you $30/hour instead of hiring ten of your competition. So now you need to recalculate and bring your hourly rate down. $20/hour means freelancing 15 hours a week. Not bad.

$20/hour is still a bit high though, but there are a few people willing to pay that if you provide quality work. You also need to pitch like a beast to convince them that you’re worth it. So that means spending more time finding the right clients, and then spending time crafting a convincing cover letter. This takes a few more hours. So apart from the 15 hours a week you actually freelance and bill, you spend another 5 searching for gigs and writing cover letters. That’s 20 hours a week.

Now let’s say you actually do find gigs. That means dealing with clients and you’ll be lucky if they let you get away with working only 15 hours a week. Since you’re just starting out, you want to make sure they are happy with your work. One bad review can nip your freelance business in the bud.

So you concede. A couple of extra hours here and there. Another hour to get the right shade of fluorescent green, or have a cat show up and walk across the screen when a person clicks a certain combination of buttons.

When you’re done they are still not satisfied. Change the header, change this functionality, add that. When it’s finally over you calculate how much time you actually spent on the project and how much you earned and you realize you’re less than $10/hour.

So you need to work 30 hours a week to stay afloat.

More time freelancing means less time bootstrapping the startups. Less time bootstrapping means more time till you can actually launch. More time till launch means more time till the startup earns. More time till the startup earns means more time freelancing to stay afloat.

This is the Bootstrapper’s Bind. It’s a vicious circle.

How do you get out?

 

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