In 2013, I interviewed Jason Calacanis, the angel investor.
I asked him: “Why do venture capital investors take these big risks with their money?”
He replied:
There’s a lot of money in the world. There are trillions of dollars just sitting around, and people are bored. The money is bored! Money wants to burn! Money does not want to sit in a safe.
What an interesting idea: “the money is bored.”
Jon Buda and I are bootstrapping Transistor.fm and Spots.fm. We’ve invested our own money into both of these projects.
When you’re self-funding a startup, your money is the opposite of bored. Your money is stressed.
You’re caught between these two realities: you’re investing real time and money into the product, but the product isn’t yet giving you anything back.
SaaS launch example
We’re launching Transistor.fm on August 1st.
Currently, we have 51 early access customers and $781 in MRR.
Let’s say that after we launch we double MRR to $1,500.
To get to $21,000 in MRR (enough for Jon and me to focus on Transistor full-time), it will take five years (assuming 10.0% exponential growth and 5.0% churn).
Five years. 60 months. That’s a long time to wait for a paycheque. Once Transistor hits $20,000 a month, that’s dependable, recurring revenue. With that kind of MRR, Transistor also becomes a valuable, saleable asset.
But at the beginning, before the product has proven itself, it’s all a big risk.
It’s easy to see why bootstrapped founders get stressed. It’s easy to see why many experience burnout and have to quit.
Bootstrappers who are building something new have to walk this fine line:
- We need to invest a considerable amount of effort to launch our product.
- But we also need money to live, and it can be years before a SaaS can support you full-time.
Basecamp’s bootstrapping model
All of this has me thinking about Basecamp.
What Jason Fried and DHH achieved is what most bootstrappers aspire for. Heck, most of us would be happy for even a fraction of their success.
Basecamp has long been the example of how you can self-fund a product, bring it to market, grow it, and have it succeed.
But the story we’ve been telling ourselves about Basecamp and bootstrapping isn’t quite right.
In 2006 David and Jason did something many of us have ignored.
They took investment!
I recently read this interview with DHH on Startup.co. The interviewer asked:
As you’ve built Basecamp you’ve been very vocal about resisting the temptation of unicorn culture. How have your perspectives changed?
David’s answer is interesting:
It wasn’t without temptation or struggle to stay like this. Especially in the early years, before our bombastic views on venture capital, the IPO rat-race, and other ills of funding were known. We had, I think, close to 50 different VCs get in contact.
Ironically, part of what did give us the confidence to turn down that whole world was a small sale of equity to Jeff Bezos. That gave our personal bank accounts just enough ballast that the big numbers touted by VCs and acquisition hunters lost their lure.
37signals, the poster child of the bootstrapped world, took investment two years after they launched the product.
That Bezos money didn’t go into the company. It went into their personal bank accounts.
It was insurance money.
Jason and David were able to hedge their bets. That Bezos investment removed a lot of the stress and risk that comes from bootstrapping a product.
Bootstrappers have created a religion out of building something from scratch and self-funding the entire thing.
But what if that ideology leads to burnout? Or bankruptcy? Or not being able to go the distance?
Here’s David again:
“I really wish that more founders who are on to something could find ways to diversify their accounts just enough to dare go the distance.”
It’s something we need to think about.
Cheers,
Justin Jackson
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Thanks for the info.
Great thoughts/observations! One thing that I think is really interesting in playing the "what if" game w/ revenue forecasting is seeing what happens solely from reducing churn.
Take your example. If nothing changes except for reducing churn from 5% down to 3%, your runway to hitting $21k in MRR goes from 60 months down to 40.
User retention is the secret key to growth.
Also, sidenote: I highly suggest using linear instead of exponential as it's a number that's realistically attainable long term and gives you a much better estimate of where you could be in the next 12-24 months.
This comment was deleted 6 years ago.
Since I know a lot of folks will ask: the MRR forecasting tool I used is by @Shpigford:
https://forecast.baremetrics.com/
I don't know if that VC talk we have around here is always relevant.
VCs would not even think to invest in the two "FM" services you've mentioned. (Not that there's anything wrong with them, but those are small businesses, with small potential market cap, irrelevant for the VC world)
Most businesses you see around IH are meant to be small business (again, not that there's anything wrong with it). You won't see VCs invest in your local bakery or that successful handyman that is already scaling up to 3 employees.
Yes it does cost money to start a business, but these days these costs can be easily covered even if your business makes $500 a month (exc. your time, of course)
Point is, this community is mostly not relevant for VCs. There are exceptions of course, but still this is largely the case.
(P.S. - It is not uncommon that the founders cash out at some point, so they are in fact selling their own stocks rather than raising money. This does not elevate the post-money valuation of the company, like when you get an investment, though)
This is quite short-sighted given that most of today's unicorns started as "small businesses".
Who would have thought that a company to rent airbed space between travel addicts would then go to challenge the whole hotel industry?
Not precisely what I was saying.
Some small businesses just dont have a large enough market size to become a multi-million company.
I agree that is some cases, there's potential and good market size, but it's not always the case.
VCs wants to see exponential growth and millions of dollars in revenue after a few years. This is not the case for many indie hackers.
I think it's worth making the distinction between income and assets. When Jason and I sold a minority stake of Basecamp to Jeff, we were hedging our asset. Basecamp was a rising star with valuable but uncertain prospects. But it was also a business that was already paying the bills and then some.
That is to say that we weren't looking for Jeff's help to pay the bills. Whether such bills might have been our personal salaries or company expenses. We had waited that part out. Basecamp started development in mid 2003, launched in early 2004, and didn't make enough money to pay our meager four salaries + business expenses + some light cushion until some time in mid 2005! (Which is when we went full time and I moved to the US).
So that's a two-year incubation phase were we were working on Basecamp on the side while selling consulting services to pay the bills. I don't have the numbers in front of me, but I'm pretty sure that our MRR was only in that $20-30K range after those two years! You have to adjust for inflation a bit, but is still a pretty slow ramp.
That said, there are indeed ramps that are slower still and not sustainable. If it takes 5 years to get to the point where the business can pay two salaries, it's possible that the business isn't destined for that long term. At least not in its current configuration. But there's plenty opportunity to tweak that configuration to change the curve, as others in the thread have suggested.
Our example aside, I completely agree that we should be looking for a more diverse set of funding options. It's ridiculous that it's so monocultural right now that it's basically unicorn-or-bust expectations right from the seed stage.
All the very best with the business!
Thanks for sharing.
That begs the question: what ways can founders diversity their accounts just enough to go the distance?
I think the people at Indie.vc are onto something.
They invest in indie hackers-like companies through debt, and if you don't need any other investment after that (because you just need "insurance money" or a little bit more money to hire someone, etc), they get a return as a percentage of the money that you want to take out of the company (with a fair cap--I think like 3x of their initial investment), and they're happy with that.
If their investments want to raise more money and go the traditional VC-funded, exponential growth, etc. route, they just convert to equity.
I believe there's a huge opportunity in these types of alternative funding structures, both for companies that aren't "vc compatible" (ie, huge total addressable markets, exponential growth, etc) and investors.
There's a big problem with these forecasting scenarios: small changes to the parameters lead to an enormous change in the result.
I changed Justin's parameters to 11% growth (was 10%) and 4% churn (was 5%). In 60 months, he'd have $67,880 MRR. More than three times as much as his estimate. That's fat stacks of cash for a bootstrapper.
All we can do is guess at the input parameters, and hence it is really hard to estimate when you'll hit $20K MRR, or where you'll be in 5 years time.
The point of the article still stands though: you typically need some cash to tide you over until you are earning enough to live off your company.
You're absolutely right. Which is why, rather than inventing forecasts and thinking those are somehow real, I would encourage entrepreneurs to instead hone their assumptions (inputs). The foundational assumptions of the author's forecast are their pricing and their rate of acquiring new customers. If they can improve either (or both), their situation will change dramatically.
Good article, great points. I think if IndieHackers or Bootstrappers alike just drop the idea of needing to be rich by the end of year thats all the hedge they might need to go the distance.
I'm taking this new approach with my next product i'm building. The first product I got burnt out because I was focusing way too much on making it big that I got tired of the product and needed a quick break.
After the burnout, I realized it was self-inflicted... This time around, I'm focusing on the 25 year journey. Even if I need to keep my engineering job for the first 3 years of that run.
TL;DR - The bootstrappers paradox is often times self-inflicted. What's the rush if you enjoy what you're building and want to provide a great product.
p.s. - I listen to your podcast, it's solid. Thank you.
My indie project is a tool to make it extremely easy to run these what-if's, so I thought, why not apply it here?
Looking at your website, one "what if?" I asked is what if you are able to command better pricing in the future than you have so far. Your beta ACV's are ~$183. Your site is advertising $240-$1,200. If you can command something closer to $400 on average, your time to $21k MRR in a linear-growth situation is less than 24 months.
Also, yes, churn is huge. But the biggest throttle on getting to $21k is the rate at which you're adding new customers, IMHO. 50 per month (51 now, another +50 pop at launch and then sustained) is by definition a growth governor. Can you find a richer or wider channel (distribution)? My inner marketer says you should be focused there if you really want to shorten your time to paycheck.
Good stuff Justin.
I think it comes down to how honest you are with yourself as a founder. Have you already admitted that you don't know enough? Have you started learning and pushing through your weaknesses? Have you finally put the fear of making money aside because you know you can always trade hours for dollars and live the average lifestyle if you were desperate for it? Have you accepted that failure is just another big step towards your success?
Bootstrapping is easy. Having the confidence to jump into the deep ocean and know that you'll make it out fine is the hard part. What's the worst that can happen?
Would love to chat sometimes.
What’s the solution for the average indie hackers?
See comment I just posted.