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.
[author_more]
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.”
Wrong.
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.
Continue reading %A Masochist’s Guide to Bootstrapping Your SaaS Startup to Profitability%