Matt Thurmond

March 5, 2017

Tips for starting a non-VC backed tech business

Want to start a tech business without a VC backer? Lets assume this is the goal so you can maintain ownership control in order to control the strategy, build the product your way, and grow at a slower, non-life-killing rate. See below for ideas on how to achieve this.

Conserve cash
  • It all comes down to cashflow, burn, capital, and runway. Cashflow is cash sales minus cash expenses. Burn is any month-to-month loss of cashflow. Capital is how much cash you and your team have to cover the burn. Runway is capital / burn for a given time period.
  • Given the above, you want to maximize cash sales as early as possible, minimize early expenses, and maximize any non-dilutive sources of capital available (savings, salary, freelance earnings, rental income, investment income, etc.).
  • Bootstrap first, so you can extend your runway and find out if you really want to do it.
  • The ideal bootstrapping scenario is one where you’re earning a bunch but not putting in many hours. This can be a job or a series of high hourly rate freelance projects that cap out at 30 hrs/week.
  • Have a cash cushion so you can invest a bit of your own money to cover up front expenses (freelance services, shared space, travel, etc.).
  • Cut your personal burn rate as much as possible. And ideally have team-mates without much burn (or with a lot of savings).

Pick the right business
  • Start a business that requires minimal upfront investment. One great example is a services business (i.e. outsourced dev shop, tech integration services, etc.). A focused e-commerce site, media site, or basic mobile game would also work. Possibly even a simple SaaS or enterprise software offering, but these can get complex fast.
  • Steer clear of a business that requires a network effect and is more of a winner take all, raise as much as possible as fast as possible type of situation. Marketplaces — Airbnb, Uber, eBay — and social networks like Facebook and Snapchat typically fall into this category. No bueno.
  • Start a business in an unsexy space. You’ll have less competition for those critical early sales.
  • Start a business in a space you’re really familiar with so you can get up and running faster and have the necessary market knowledge and contacts.
  • Have a clear revenue model monetizes immediately. The strategy of most social businesses is to get users first, then layer in ad sales later. You don’t have that luxury. SaaS also doesn’t monetize fast — you work hard to get a sale and get a long-term stream of subscription cash flows. Examples that work in software are e-commerce markups, lead-gen fees, app sales, yearly up-front license fees, and custom development fees.
 
Pick the right people
  • Start bootstrapping with people who can build and sell the product, and who don’t require salaries. This reduces cash expenses.
  • Find investors that are willing to let you keep control and grow the business at a slower rate (if they exist).
  • Use friends and family money, and make it clear to these individuals in the contract that you’ll maintain control and not be growing as fast as possible.

That’s my laundry list for now. It would be hard to hit all of these but the more the better. And I do think there is a spectrum of accepting outside capital. Bootstrapping enough to where you can maintain strategic control indefinitely, under any circumstances, is really the goal — not “$0” of outside capital. That said, if you’re past notch #2 on the VC funding spectrum below, you’ll probably start to lose control.

The spectrum between bootstrapping and foot-to-the-floor VC funding

Here’s a list of 5 non-VC backed startup examples:
  • basecamp.com — 50 person project mgmt software company. It has over 100k paying customers and I estimate revenue of over $50m/yr.
  • techcrunch.com — The founder bootstrapped and still owned 85% of the company before selling to AOL five years later for $30 million.
  • braintree.com — Raised no money for the first three years. Eventually took a few rounds of expansion VC funding. Acquired by eBay/Paypal for $800m.
  • tsh.io — 60 person dev shop.
  • sparkfun.com — Electronics equipment for personal projects, over $10m in revenues.

Here are a bunch more: 37signals.com/bootstrapped

In a future post I’d like to dig into and categorize the various bootstrapping methods practiced by some of these companies, and what all this means for me personally in terms of next steps. But for now, that’s all I’ve got!