Early Stage Company Development · Early Stage Funding

How should a pure play B2C software startup think about fundraising vs. bootstrapping?

Brian Bensch Founder & CEO at Snow Schoolers

March 30th, 2016

The operating costs of running a B2C software company can be very minimal (web-hosting fees, legal entity formation, etc.). If founders are willing to go without salary for awhile, how should a young company think about the need to raise capital? It seems very plausible to run a company for awhile (12-24 months) without taking outside capital, yet that doesn't seem to be the norm. I've heard heard arguments both for opportunistic fundraising (when attention and potential valuation is high), as well as a the value of remaining lean for as long as possible.
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Rob G

March 31st, 2016

The best time to raise money is when you don't need it.  conversely, needing money to continue operating puts you and your company in a bad negotiating position with potential investors.  Therefor i recommend if you can bootstrap do it, but have some clear deadlines/milestones in place to set expectations.  things always take longer and cost more than you plan so discuss what happens when things don't go as planned.  As you make progress make investor connections and keep them warm for if/when you need them.  The more traction you get the more valuable your company becomes and the more options you have.  Options are always good.  If you can get to revenue and even cash positive while still bootstrapping all the better.  At that point the market and competitors are likely starting to take notice and you may want to take outside investment for any number of reasons: to scale, to acquire competitors, allow founders to take some money off the table, etc.  You never know what the market will do in the future so having cash in the bank to weather a recession, etc. is good if you can get it at the right price.  I think the ideal scenario is: bootstrap your way to profitability, investors like what you are doing and approach you to invest, take some investment under good terms (for expansion, a war chest, and to reward your founders for some of their risk - this means investors agree that founders can repay themselves for foregone wages and/or sell some of their stock and put the cash in their pockets).  This sort of scenario is not common, but not unheard of and i think entrepreneurs and their startups would be better off if they use this model as their standard.  This sort of models helps startups to focus on being efficient.  

regarding expectations for founders foregoing a salary: Everyone's financial situation is different so I would not necessarily make the assumption that co-founders over 25+ are in a position to forego a salary for 6-8 months.  They may have the savings, but they may not have the risk tolerance or their spouse may not have the risk tolerance, etc.   But if they are in a position to do so then that's a good acid test for their commitment to the project.  An even better acid test is if they are willing to forego a salary AND put money into the company so you can spin up even faster. 

Liza Taylor Communication Specialist at Keyideas Infotech

March 30th, 2016

Brian Bensch, it would be a great opportunity if founders are willing to go without salary for a period of 6 to 8 months. You just need to make sure that your product start generating revenue once it's launch in the market. No matter how low the revenue is even though it can be in negative, if you take the investment into consideration. Do disclose the revenue data to your founders because they are the ones who have gone without salary. Ask them for the salary they need despite the free offer they gave you. Brian, one needs to understand that liquidity is what everyone longs for. Once you get a clear information from them, you can keep a tab on your kitty whether you can still move on with the minimum salary for yourself to meet your basic expense. Do keep probing your founders in order to eliminate the benefit of doubt. After the probe is done, you can move on and go ahead with fundraising. Fundraising would be good for any product that has a revenue generation in a period of 8 to 10 months. This is the right step to approach.

Good Luck. 

Dimitry Rotstein Founder at Miranor

March 31st, 2016

Interestingly, that's exactly the question I'm addressing in my latest article:
https://www.linkedin.com/pulse/investors-good-startups-dimitry-rotstein?trk=mp-author-card
I think this answer applies to any startup: B2C, B2B, or otherwise.

Dimitry Rotstein Founder at Miranor

March 31st, 2016

> is it reasonable to expect founders to be comfortable not taking a salary for at least 6-8 months?

I'd say it's more than reasonable - it's required.
In fact, one of the easiest ways of being rejected by investors is to tell them: "Give me money so I could quit my job." That's not exactly what they want to hear.

Victoria Cabrera Marketing Coordinator at Patxi's Pizza

March 30th, 2016

hi brian - just want to point out that there are already tons of discussions on this topic and I sure at least a few will be helpful. Really good to do a search on FD before posting as the community has generated some awesome conversations 
http://members.founderdating.com/discuss/topic/Bootstrapping

Brian Bensch Founder & CEO at Snow Schoolers

March 31st, 2016

Thanks Dimitry and Liza. Forgive the potential tone-deafness of this follow-up question, but considering the average pedigree on Founder Dating is pretty impressive and folks have made healthy incomes in the past, is it reasonable to expect founders to be comfortable not taking a salary for at least 6-8 months? 

I would expect most of co-founders (assuming they are 25+ and have worked for a few years) to have at least $50-100k in the bank, and thus be able to afford to going without a paycheck, and that they should be excited enough about the project to be willing to spend down some of there savings rather than trying to raise money right away.

Agree/disagree?

Rob G

March 31st, 2016

just read this post by Mark Suster. http://www.bothsidesofthetable.com/2016/03/30/inside-scoop-funding-environment-might-mean/
"We no longer have our backs against the wall. Invoca has enough capital where we should never need to fund raise again. The company has rediscovered frugality and knows the value of a strong balance sheet. Like the market, Invoca has learned the importance of pragmatic growth over “growth at all costs” because when markets shift companies that run lean always have more options than those that only have a growth agenda."