A Masochist’s Guide to Bootstrapping Your SaaS Startup to ProfitabilityBy Dave Schneider
Alright, let’s start by addressing the elephant in the room.
Why is this a guide for “masochists”? Does that exclude you (the reader – probably not a masochist)?
I can assure you that your startup will not be causing you any physical pain.
But undeniably, it’s a gruelling process that many describe as an emotional rollercoaster, and if you’re bootstrapping, consider that the rollercoaster is going to go on for quite some time.
Luckily, we’re here to help you enjoy the ride.
I’ve spent 1.5 years bootstrapping NinjaOutreach to profitability, and although it’s impossible to tell you exactly how your startup can become profitable, I can provide you with a strategic outline on what you should be thinking.
Determining Your Run Rate…And Other Questions Involving Money
Here’s a question for you: how much money do you have to put into your startup?
The simple answer is probably, “well, I have $X in my bank account, so I guess $X.”
The answer is much more complex than this.
Consider that in order to bootstrap your startup to profitability, you have to support yourself, and the business, long enough for the business to pay its own bills.
In order to derive the answer, ask yourself these questions:
How much money am I willing to put into the business?
Have you ever watched those episodes in Shark Tank where someone steps forward to present a business that has barely made any money, despite the fact that they’ve invested tens of thousands of dollars into it?
That’s the part when the Sharks usually go “wow”, and not in a good way.
A startup can very easily turn into a money suck. After you invest the first thousand, it becomes that much easier to invest one more thousand.
And so on and so forth, until you’ve eventually invested tens of thousands of dollars into a business that you have only budgeted $5k for.
Honestly, I’ve been there.
However, it doesn’t do anyone any good to dump all of their savings into a potentially failing startup.
My advice is to think critically about what the maximum you can really afford to put into your startup is. Consider also that you have to live and likely have other bills to pay. Then, take that money and put it in a separate bank account for your startup – that degree of separation will seriously help you if you ever start to run out (and it will help you be more aware that you’re about to run out, too).
If you do get to the end, it doesn’t mean that you have to pull the plug on your business, but it does mean you have to present a case to yourself (and potentially your spouse), as to why another investment on your part is worth it.
How am I going to spend that money?
You may just be starting your startup, but you should have an idea as to what your monthly expenses will be, at least to the nearest few thousand (and potentially, few hundred).
At the end of the day, there’s typically a few major things you will spend money on:
- Tools – These are things like software and web apps that you need to manage and grow your business.
- Employees – These are the people you hire to build and run the startup. This is usually the biggest cost.
- Services – These can be things like accounting, legal, hosting, etc.
- Company – These are costs for incorporating, taxes, etc.
- Marketing – These are any paid channels you’ll be advertising on or using to acquire customers.
What your actual breakdown is will vary, but suffice to say that you should be able to look at the market and estimate what your tools and services will cost, as well as know how many employees, if any, you plan on hiring, and finally having an estimated budget for company and marketing expenses to hold yourself to.
As you move further into your startup you should revisit these original assumptions, adjust them, and then see how that affects your run rate.
Now that you know how much you’ve budgeted for your business, and you have a general idea as to what your monthly expenses will be, you can divide the first by the second to calculate your run rate (how many months your business can last) under the assumption that it will make NO money during this time.
For example, if you’re willing to put $10,000 into the business, and you estimate that it will cost $2,000 a month in expenses, then you have a five month runway (assuming the business makes no revenue during this time).
How long will the business take to become profitable?
The last part of the question concerning runway involves your business’s contribution. After all, there is no reason to assume that the business will make absolutely nothing and then, all of the sudden, in a single month will start covering expenses.
Chances are it will gradually make more and more money, offsetting your monthly expenses and extending your runway, until hopefully, one day, you cross the chasm.
On Day 0, this is very difficult to calculate, but as you move forward with your startup you’ll hone in on this figure.
For example, when we first launched our startup in January of 2015, based on the initial daily sign ups we were seeing, conversion rates, and our prices, I predicted that we would end the year at around $4,000 a month. We knew this was well below our expectations, and started working hard to improve our product, traffic, and conversion rates. As things improved, that initial $4,000 fluctuated between $5,000 and $15,000, and inevitably became $10,000 monthly recurring revenue by the end of the year. While we didn’t know this in January of 2015, we had a reasonable estimate that we continually monitored and updated, so we knew what to expect from the business in the coming months.
What Should Your Run Rate Be?
I don’t know if there really is a right or wrong answer to this, but someone once told me:
“If your run rate is less than 6 months, you’re being too risky, but if it’s greater than 18 months you’re not being risky enough.”
The first part of that sentence is pretty clear – if you’re less than 6 months away from running out of money, you’re playing with fire. Either you have to invest more money into the business (or find someone who will), cut your expenses, or grow your business extremely fast.
The second part is not as clear – why is having a long runway “bad”?
Well, it’s not bad to have cash on hand, but it is bad to not be using it.
Think of your startup as one big business hypothesis. The hypothesis is that your idea can become a sustainable business based on what the market needs, wants, and can pay for.
Testing the hypothesis is essentially building the business, and the more the business is built and marketed, the stronger evidence you’ll have as to whether or not your hypothesis is correct.
Therefore, if you have so much runway, you should consider whether there are things you can spend money on now that will allow the business to grow faster and more quickly test that hypothesis.
Trust me, the only thing worse than spending 6 months of your life and $10,000 to find out your startup was a bad idea is to spend 1.5 years of your life and $10,000 finding out the exact same thing.
Typically, extra money is allocated to employees, although this is by no means a rule..
How To Stay Lean & Sane Bootstrapping Your Startup
In the final section we’re going to put the spreadsheets away and focus on tips for staying lean and sane.
Let’s start with the easier of the two; lean.
You know where your expenses are going to come from, more or less, so staying lean is about keeping them low until the business catches up. Here are some things to consider:
Don’t pay yourself or your cofounders
Typically, not paying yourself and your cofounders is an easy way to save money in the early days. Myself and my cofounders went a year without paying ourselves from the business. During this time the business made money, but it made more sense to us to invest it back into the business and hire other employees to grow it faster. Luckily, we had budgeted what we had available in our own savings to know that it could work.
While I don’t recommend working without pay indefinitely, as it will eventually demotivate you, in the early days, it is quite common and even smart – remember that a lot of the value of the business is in the equity you have, so growing it bigger and faster is actually more valuable to you.
Start with simple tools and graduate into bigger ones
When we first started NinjaOutreach we knew there were a few tools we absolutely needed, like an email autoresponder.
I went with Aweber, because I already had an account I was paying for. It didn’t do everything I wanted it to, but it was cost effective and did the thing I needed most at the time.
Late last year after the business had grown to be several hundred customers, I upgraded to Drip, which is $150/month compared to Aweber’s $49/month, but gives us a lot more value.
Expensive tools are priced based on the value that businesses derive from them. Don’t assume that something that is more expensive is going to be better for you if your business isn’t substantial enough to take advantage of the value the product is supplying. Start small, and upgrade as necessary.
Implement lean startup best practices
Lean startup is an entire methodology. It’s not necessarily about bootstrapping your startup and keeping costs low, but about how you can be agile and test this startup hypothesis as quickly as possible without over-investing time or money.
For example, you’re probably familiar with the concept of the Minimum Viable Product (MVP), which is the version of your product that can be built and shipped the quickest that can help validate your concept.
We, unfortunately, spent 6 months building our initial prototype, which was way over the top for what was needed to help validate the concept. The result was that we built some things people didn’t want or need and wasted months of learning and money.
Nowadays, I try to ship features as fast as possible, to get user feedback and measure usage, before overcommitting to any one thing.
Now for the sanity part.
Firstly, accept that this is likely going to be hard, especially if this is your first startup.
I had no idea when I started to build a software application that it was going to take us years to build a profitable business.
I had no idea that it was going to cost us tens of thousands of dollars, mostly as a result of not paying attention to the above advice.
I had no idea that despite the fact that I am an extremely logical and rational human being, I was going to succumb to my emotions during many days.
The fact is, a startup is a rollercoaster. It’s a total cliché that’s true. I have had many days when I felt great about the business, only to have the next day make me feel awful.
The following realizations have helped me:
- Know that you are not alone. This happens to almost everyone – there are a ton of articles about it.
- Know that you are learning. Everyday you are learning and leaving yourself better than the day before, even if things with the business are not going as well as you would like.
- Know that you will have more than one chance. Most people do more than just one startup. If you’re reasonably young and ambitious, there is always another chance.
- Know that one decision rarely makes or breaks the business. I have made bad decisions I really regretted, but the truth is no a single one has brought down the business. A series of bad decisions certainly can, but it is unlikely that any single one will be game over.
Considering the above, combined with frequent meditation, is helping me weather the storms, and I hope it will help you too.
Now, are you ready to bootstrap your startup to profitability?