Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Hillel Cooperman
[Editor’s Note: This week we’ll run several different guest posts by people who are boostrapping (or did bootstrap) their businesses. Today’s post is by Hillel Cooperman]
I co-founded a software startup (Jackson Fish Market) with two friends of mine – Jenny Lam and Walter Smith. We’ve been bootstrapping our business for the last couple of years. The business was started with no outside investment and no cash out of our pockets except for $8,000 sitting in a paypal account generated from ads on my food blog. It’s true that we chose to finance our startup through consulting to maintain our independence. But in essence, the path we took to financing of our startup (along with many other things about our small company) was a function of what resources we each brought to the table. Rather than focus on things we couldn’t do (like hit the lottery, or be independently wealthy), we knew we could earn money consulting. So it was a no brainer. That said, we’re by no means over the hump in terms of transitioning to a world where 100% of our revenue comes from our core business. So I won’t write to tell you how to do that since I clearly don’t know (yet). But we have been financing our business for over two years overwhelmingly through our consulting efforts, so on that topic, per Marcelo’s request, we offer some humble perspective.
First, some caveats… there are multiple ways to start a business. No way is right or wrong per se other than the path that gets you to a profitable, sustainable business at the end of the day. (And just to be clear, that way is right.) That said, financing your business is not always straightforward. While getting money from angel investors and venture capitalists certainly gets the most attention, it’s not the only way to move forward. And (surprising to some) it’s not even the preferred way to finance a business for many entrepreneurs. With investors usually come strings. Without debating the pros and cons of taking investment money, it’s safe to say that many entrepreneurs have eschewed that money. Not because they couldn’t get it, but because they didn’t want it.
If you don’t take on investors, the question remains, how do you pay that first month’s rent, and for some, that first year? With any bootstrap the goal is for the business to start pulling in revenue as close to day one as possible. As daunting as that may seem, it’s in fact a very focusing constraint. And one that gets you experienced early at one of your single most important responsibilities as a business owner – making money. The question is how. If your product takes any development time, you’re going to need to make money while you develop that product. And frankly, the single best way to do that is to develop your product on weekends and evenings while you keep your day job to pay the bills. That’s the least risky path of all. But it’s not always possible.
In terms of earning cash while your product is in development, the next best thing to keeping your day job is to consult. It’s like keeping your day job but trading security for higher income. Now I understand that not everyone’s day job can translate to a decent (or any) rate of return as a consultant. However, in the tech industry, large companies (and small ones with some of that investor money) need consultants of every stripe all the time. And odds are, that the job you do today five days a week can be a consulting gig for some other company (or maybe even the company that currently employs you full time). If you’ve determined that you in fact do have some skills that people will pay you for on a consulting basis, then it’s time to go get those gigs.
Your best bet is to make sure to leave your current employer such that a) they still love you, b) you know all the people there who might want to hire you as a consultant, c) they know you’re open to consulting. Doing this in a thoughtful, sensitive, and respectful way to your former employer is key. A big ad for your consulting services in your goodbye mail is probably not the way to go. Calling up key folks and asking for work after you’ve left is a fine approach however.
While consulting won’t give you benefits, vacation, security, etc., it will usually pay you more per hour than you were making as a full-time employee. It’s best to do some research via the web and by talking to people who hire consultants like you about the rates they pay and expect to pay. You’ll earn every dollar, but you’ll decide when you want to earn those dollars. This can be tricky. Consulting gigs can be feast or famine. And given that you’re financing your startup via consulting, you’ll want to build up a cushion of cash, and carefully manage how many hours you’re putting into your consulting effort. Unfortunately, this won’t always be possible. Clients often wait to hire you until the last minute. And then they need you at all hours to make a deadline. That said, when the client hires you, you have a chance to negotiate your hour commitment up front. And as long as they feel like they’ll get your best work in a reasonable time frame, most clients are willing to be flexible. That said, you should have a bottom line or you’ll end up doing nothing but consulting. We’ve lost tens if not hundreds of thousands of dollars worth of consulting work because we were unwilling to change our schedule. We don’t regret not getting those gigs because ultimately we have to draw the line somewhere or we’ll never spend time developing our own products.
It also turns out that you can use one kind of consulting to pay for another kind of local investment. Our scarcest resource is development. One week of design time can easily generate one month of development work. So every hour we spend doing development consulting really needs to bring in four times the cash that design consulting brings in given the opportunity cost. Once we realized this, we stopped doing most development consulting. Our design talent does excellent and profitable consulting work and end up paying the bills for our development efforts
Again though, that’s not always possible. Sometimes you need the money, you need the client, and they want development work (or more design work than you can handle). The temptation will be to hire more consultants. This is the path that turns you into a full-time consulting company that once had dreams of selling its own products. That’s not the path you want to be on. The way we’ve drawn the line here is that if there’s a consulting gig we want. And we can’t let it interfere with some of our core efforts, we hire our own contractors to help. It will eat into the profit of the consulting gig, but it will also let you make sure the client is happy, and your core development efforts don’t get interrupted. For us, this works. When we’ve had a glut of consulting work come in, it’s been tempting to just hire a bunch ore full time consultants. To date, we have resisted this temptation and we think that’s the right path. It’s true that we could make more money by hiring more consultants while leaving the core team to develop the main products from our startup. But beyond a very early point, that gaggle of full-time consultants demands attention and care. And when the glut is over, sometimes you’ll need to even fire those people. Not a good place to be.
We’ve drawn the line by vowing never to hire any full-time people whose job is consulting. And because of that decision, we’ve found a balance where we can do just enough consulting to keep a healthy amount of fiscal runway beneath us and have a good amount of time to stay focused on the products we expect to carry us over the long term. As a bonus side effect, we’ve built relationships with half a dozen simply superb contractors that we can call on when we need help. And at this point, we’ve even hired several to help out with some of our non-consulting projects. (Ironically, many of the people we’ve hired as contractors are doing consulting to finance their own bootstrap startups. This is good karma in my opinion.)
Juggling consulting gigs and staying focused on creating your startup is not super easy. But if it was, everyone would do it. And in our minds, it’s easier than having to deal with the strings that come with investor money. While we have to bill consulting hours to earn complete freedom over our core business deliverables, that freedom is essentially priceless. We may sometimes move more slowly than a competitor with traditional financing, but the independence we have has been worth it.
To date, our core business has only generated 10-15% of our revenues so we’re not in any position to abandon our consulting services. However, as our core business ramps up, we expect to ramp down our consulting business. And while I’ll always be appreciative of our clients, and of the consulting itself in that it’s enabling us to operate our startup, I’ll be glad when it’s over. And luckily, since we haven’t hired any full-time consultants, shutting down that part of our business should be a snap. I think.
—-
First, some caveats… there are multiple ways to start a business. No way is right or wrong per se other than the path that gets you to a profitable, sustainable business at the end of the day. (And just to be clear, that way is right.) That said, financing your business is not always straightforward. While getting money from angel investors and venture capitalists certainly gets the most attention, it’s not the only way to move forward. And (surprising to some) it’s not even the preferred way to finance a business for many entrepreneurs. With investors usually come strings. Without debating the pros and cons of taking investment money, it’s safe to say that many entrepreneurs have eschewed that money. Not because they couldn’t get it, but because they didn’t want it.
If you don’t take on investors, the question remains, how do you pay that first month’s rent, and for some, that first year? With any bootstrap the goal is for the business to start pulling in revenue as close to day one as possible. As daunting as that may seem, it’s in fact a very focusing constraint. And one that gets you experienced early at one of your single most important responsibilities as a business owner – making money. The question is how. If your product takes any development time, you’re going to need to make money while you develop that product. And frankly, the single best way to do that is to develop your product on weekends and evenings while you keep your day job to pay the bills. That’s the least risky path of all. But it’s not always possible.
In terms of earning cash while your product is in development, the next best thing to keeping your day job is to consult. It’s like keeping your day job but trading security for higher income. Now I understand that not everyone’s day job can translate to a decent (or any) rate of return as a consultant. However, in the tech industry, large companies (and small ones with some of that investor money) need consultants of every stripe all the time. And odds are, that the job you do today five days a week can be a consulting gig for some other company (or maybe even the company that currently employs you full time). If you’ve determined that you in fact do have some skills that people will pay you for on a consulting basis, then it’s time to go get those gigs.
Your best bet is to make sure to leave your current employer such that a) they still love you, b) you know all the people there who might want to hire you as a consultant, c) they know you’re open to consulting. Doing this in a thoughtful, sensitive, and respectful way to your former employer is key. A big ad for your consulting services in your goodbye mail is probably not the way to go. Calling up key folks and asking for work after you’ve left is a fine approach however.
While consulting won’t give you benefits, vacation, security, etc., it will usually pay you more per hour than you were making as a full-time employee. It’s best to do some research via the web and by talking to people who hire consultants like you about the rates they pay and expect to pay. You’ll earn every dollar, but you’ll decide when you want to earn those dollars. This can be tricky. Consulting gigs can be feast or famine. And given that you’re financing your startup via consulting, you’ll want to build up a cushion of cash, and carefully manage how many hours you’re putting into your consulting effort. Unfortunately, this won’t always be possible. Clients often wait to hire you until the last minute. And then they need you at all hours to make a deadline. That said, when the client hires you, you have a chance to negotiate your hour commitment up front. And as long as they feel like they’ll get your best work in a reasonable time frame, most clients are willing to be flexible. That said, you should have a bottom line or you’ll end up doing nothing but consulting. We’ve lost tens if not hundreds of thousands of dollars worth of consulting work because we were unwilling to change our schedule. We don’t regret not getting those gigs because ultimately we have to draw the line somewhere or we’ll never spend time developing our own products.
It also turns out that you can use one kind of consulting to pay for another kind of local investment. Our scarcest resource is development. One week of design time can easily generate one month of development work. So every hour we spend doing development consulting really needs to bring in four times the cash that design consulting brings in given the opportunity cost. Once we realized this, we stopped doing most development consulting. Our design talent does excellent and profitable consulting work and end up paying the bills for our development efforts
Again though, that’s not always possible. Sometimes you need the money, you need the client, and they want development work (or more design work than you can handle). The temptation will be to hire more consultants. This is the path that turns you into a full-time consulting company that once had dreams of selling its own products. That’s not the path you want to be on. The way we’ve drawn the line here is that if there’s a consulting gig we want. And we can’t let it interfere with some of our core efforts, we hire our own contractors to help. It will eat into the profit of the consulting gig, but it will also let you make sure the client is happy, and your core development efforts don’t get interrupted. For us, this works. When we’ve had a glut of consulting work come in, it’s been tempting to just hire a bunch ore full time consultants. To date, we have resisted this temptation and we think that’s the right path. It’s true that we could make more money by hiring more consultants while leaving the core team to develop the main products from our startup. But beyond a very early point, that gaggle of full-time consultants demands attention and care. And when the glut is over, sometimes you’ll need to even fire those people. Not a good place to be.
We’ve drawn the line by vowing never to hire any full-time people whose job is consulting. And because of that decision, we’ve found a balance where we can do just enough consulting to keep a healthy amount of fiscal runway beneath us and have a good amount of time to stay focused on the products we expect to carry us over the long term. As a bonus side effect, we’ve built relationships with half a dozen simply superb contractors that we can call on when we need help. And at this point, we’ve even hired several to help out with some of our non-consulting projects. (Ironically, many of the people we’ve hired as contractors are doing consulting to finance their own bootstrap startups. This is good karma in my opinion.)
Juggling consulting gigs and staying focused on creating your startup is not super easy. But if it was, everyone would do it. And in our minds, it’s easier than having to deal with the strings that come with investor money. While we have to bill consulting hours to earn complete freedom over our core business deliverables, that freedom is essentially priceless. We may sometimes move more slowly than a competitor with traditional financing, but the independence we have has been worth it.
To date, our core business has only generated 10-15% of our revenues so we’re not in any position to abandon our consulting services. However, as our core business ramps up, we expect to ramp down our consulting business. And while I’ll always be appreciative of our clients, and of the consulting itself in that it’s enabling us to operate our startup, I’ll be glad when it’s over. And luckily, since we haven’t hired any full-time consultants, shutting down that part of our business should be a snap. I think.
—-
If you’re interested in hearing from businesses who’ve successfully gone from inception to revenue while taking no (or very little) investment come to our afternoon conference – Small and Special – on Tuesday, June 30, 2009 at 2pm at the Georgetown Ballroom in Seattle. Eight founders will speak on how they successfully created business out of their passions. In addition, every attendee will get a free copy of Small Giants by Bo Burlingham and be eligible to win a free custom animation from Lilipip Studios worth almost $8,000. The whole event is only $25 and tickets are limited. We hope to see you there.
