Money is tight in the early stages when bootstrapping, before there’s any significant revenue in the company.
Once you reach around $1M in ARR, you start to experience what I call the “SaaS escape velocity” – most normal business expenses are now a much smaller % of your revenue, and you start to feel more secure financially.
Reaching that point though is a real struggle. In this article I go over the most common ways to fund the early days without raising venture capital (VC funding is not a good fit for most companies, in my opinion).
Bootstrap funding options include:
- Raising from friends & family
- Raising from angel investors
- Working part/full-time
- Running a service business
- The Stair-Step Approach
- Loans and revenue-based funding
- Startup accelerators
Let’s break those down to understand which might be a good fit for you –
Raising money from friends & family
Early stage founders who are not ready or willing to raise VC funding, will often probe their immediate network of friends and family for help getting started.
This kind of fund raising is much less formal and demanding than raising money from professional investors, or acquiring loans from banks, however it comes with its own complicates and risks – potentially jeopardizing the relationship with the people who provide the funding.
There’s 3 types of funding from friends and family – loans, gifts and equity – and each comes with its own set of pros and cons. I’ve personally never tapped my immediate network for funding, but it’s a path that’s definitely worth exploring depending on your circumstances.
Raising money from angel investors
Angel investors are private investors that invest in startups on a semi-professional basis. Unlike friends and family investors (unless the angel investor is from that group), they would typically use a more structured diligence process than the F&F investors, however not at the level of scrutiny as venture capital or banks.
Since angel investors use their own private funds, they often use their own discretion and intuition as much as hard metrics and well defined business plans – though that can vary significantly between individuals.
Unlike VC funds, who typically rely on returning at least 10x and are aiming to build $1b+ businesses, angel investors have a wider range of return outcomes that they would consider as investable businesses. This allows businesses that are aiming mostly to bootstrap and/or build a small business, or one that is in a smaller market, to raise successfully from angel investors.
Post exit I’ve started to get involved in angel investing, and have made 2 investments as of the writing of this article. In both cases, my main evaluation criteria revolved around how well I understood the business, and how much value I can provide as a mentor to the founder (s).
Other angel investors have a wide gamut of investment thesis and criteria, so it’s mainly about finding the right person to talk to.
Working full/part time
Generating income from full or part time work is one of the most straightforward ways to bootstrap a business, however it requires a certain mindset as there’s only so much you can do with the limited time you have outside of work.
This is the path I took building my recent company, Gymdesk. I worked contract and full-time for 3.5 years while bootstrapping my company to the point it could provide for me fully.
The most obvious downside of this approach is that progress will be slower, due to the limited time (and mental) resources you’ll have to devote to your business. However, as far as risk, this is one of the safest approaches for never running out of money, which is the main reason early stage startups die.
There’s also a combined approach to working and building a product, which is the next funding source on the list –
Running a service business
An excellent way to generate revenue while building a B2B SaaS product, is to first provide the future value of the product as a manual service.
For example, if you’re building a project management product, you can initially provide actual project management services while you build the tools to automate and replace the manual work you’re doing to manage the projects.
This approach doesn’t work for every product type, since some product flows do not make sense as manual actions as it can easily get too overwhelming, but for more high-level processes this can be a great way to start and to build deep knowledge of the use-cases different businesses would have for your product.
Not surprisingly, a lot of bootstrapped B2B SaaS founders first had a service business in the same vertical their built their product for. Providing services to your target market is an excellent way to get the domain knowledge that will fuel your competitive advantage. It’s no coincidence I listed domain knowledge as the main prerequisite for a successful B2B SaaS product idea.
The Stair-Step Approach
The Stair-Step Approach is a term coined by Rob Walling, describing an incremental approach to building a B2B SaaS product. The approach is built around starting with small products in an established marketplace, like the Shopify appstore or WordPress plugins, and slowly expand until you fully own your time, and can focus on building a full-scale SaaS product.
This is a complimentary approach to working full/part-time while building the product, which I described earlier, and might be easier if you don’t have the experience to immediately start with building a fully independent B2B SaaS product.
The benefits of starting small and in an established marketplace, is that marketing is typically much easier. When your product only does one or two things, it’s easier to explain what it does, and when it’s published in an existing marketplace, you will get visibility just from the volume of people looking for solutions there.
Loans and revenue-based funding
Taking business loans is the most basic and available source of funding for any business. There’s an inherent risk of doing this before you have any revenue, since there’s a decent change your new product will never get off the ground and you’ll end up in significant debt as a result.
However, once you have a bit of recurring revenue, you can much better estimate how long it would take you to potentially repay the loan from business revenue, especially if the loan will give you the bandwidth and resources to accelerate growth based on what you already about the market.
Most countries have subsidized programs to support businesses with loans, such as the SBA loans in the US. Worth checking if there’s such a program where you are building your business, as well as other business related grants.
The predictability of recurring revenue provides another funding avenue – revenue-based funding. There’s loan provides that will loan an amount based on your current recurring revenue, and structure the repayments to be a certain percentage of that revenue.
Stripe, for example, provides such loans directly from your account with them (though you can probably find better terms from other loan providers).
Startup accelerators
Startup accelerator provide initial capital, mentorship and a network for early-stage founders. Some of those are very focused on VC scale companies – for example, Ycombinator, and some of those have a stronger orientation towards bootstrapped companies – like TinySeed, the accelerator we went through with Gymdesk.
The capital you can expect from going through an accelerator is typically in the $50-$150k range, and the amount of equity you will need to provide in exchange is around 5%-15%.
In my opinion, this is a good tradeoff for companies that want to focus on quickly getting to profitability without raising venture capital.
This is one of the main reasons we joined TinySeed – we didn’t actually need the funding at the time, but we were looking for the mentorship and network they provided. Many companies in our batch did utilize the cash infusion to accelerate their operations and growth.
Funding your way to profitability
Bootstrapping a company to profitability is challenging, especially in the early days.
With efficient, revenue focused companies, all you need is a little bit of a head start – and there are many ways to obtain the initial capital you need to get started without raising venture funding.
