“Bootstrap a lifestyle business, strap yourself in to the VC roller coaster, or take out a loan with a personal guarantee and risk losing everything if the business fails.”… For as long as I have been an entrepreneur this was pretty much the menu of options available to most founders of software companies. Before you even tested the business you had to commit to one path and hope you chose wisely. Choose incorrectly and you could kill an otherwise great idea by setting yourself down the wrong path. Raise VC for a business that tops out at $10m a year in revenue; you’re headed for zombie status or a forced acquihire. Carefully build a small profitable business; well you’re obviously not the kind of ambitious dent-in-the-universe founder VCs want to back, so get ready to burn through your savings. Good luck even getting your local bank to talk to you about a loan to start your new SaaS business; you’d be better off asking them to finance the 5th Taco Bell in town.
But recently, a proliferation of new tools and funding options are creating more pathways for entrepreneurs to build and fund software companies while maintaining flexibility and optionality. Let’s follow the path.
0/?You find a unique pain point and have an idea for a product that will solve it
What you don’t do is put together a pitch deck, finagle a multi-billion-dollar total addressable market and spend the next 6 months fundraising. You know that for all the new “pre-seed” funds popping up and all the talk about how “it’s never been easier to raise money” that fundraising on a pitch deck and an idea is a long, hard, time-consuming process that’s unlikely to be successful. Better to just get started on the business without asking investors’ permission. So you do…
1/?♀️Launch a minimum viable product and get your first customers
The path starts by just getting started. You work directly with your potential customers and validate that they actually have a problem and want to pay to solve it. Here your options have never been better.
- You could start a consulting business first. Spin up a simple LLC with Stripe Atlas and use recurring invoicing tools like Harvest or Freshbooks and you have yourself a side-hustle consulting business. From there you can test if there is true willingness to pay in this market and learn more about what kind of product your customers would pay for.
- Use no-code tools to stitch together a prototype of your product. You could use Makerpad to find the right combination of tools that let you build a software product without code. This could either be a duct taped version that actually does what it says on the label, or a “Wizard of Oz” version that looks and feels like software, but actually you are doing the heavy lifting by hand behind the scenes.
- You could learn enough code to build the first version. Depending on your learning style, budget, and time, you might prefer coding bootcamps or online tutorial repositories (like Pluralsight or Egghead) or both. Starting with a product to build is the best way I know to stay motivated while learning to code. Even if the product fails, you will have learned a valuable skill.
- You launch your MVP and get your first customers.
2/?$2-5k MRR (monthly recurring revenue): “rent money” and growing
Your product is live, people are paying for it. Those people stick around (retention) and more people continue signing up (growth). You’re in business now. Once you get to a few $1,000 in monthly revenue, “rent money” level, you have several options on how to proceed.
- Continue to bootstrap the business on the side. If you can continue to balance a job or freelance work, you can run your business on the side and keep it growing until it generates a full-time income for you.
- You could go “digital nomad” and move somewhere like Thailand, Bali or Budapest, with a very low cost of living and where your new product can support you full-time. This isn’t an option for many people with a mortgage or family to take care of, but for the right entrepreneur it can be a great way to cut your personal burn rate and keep your options open.
- With this traction you could raise $50k-150k on a Shared Earnings Agreement (or SEAL) which would allow you to go full-time 1 on your business. A SEAL is designed to bring on investors who will back you early on and let you decide later whether you want to build a profitable sustainable business or a high-growth rocketship.
- At this point you would likely have a great shot at joining your accelerator of choice. But know that most accelerators’ business model is predicated on getting as much of their cohort funded by VCs as possible. If pivoting the business to larger markets, focusing on short-term growth, and honing your pitch to maximize your raise on demo day isn’t what you want, either skip the accelerators or be very clear upfront that you aren’t sure you want to go down the VC path… yet or ever.
3/ ?$5-25k MRR: ramen profitable + team
You choose a path that gets you working on the business full-time. You start to get initial product-market-fit and feel like your product really solves a genuine pain point. You find a few channels of organic (ie free) growth and begin hiring your first team members. This gets you to “ramen profitable” where you can pay the founders a reasonable salary, at least to where you aren’t burning through your savings or the capital you raised. So what will you do to power the next phase of growth?
- As always, you can stay bootstrapped, grow organically, hire slowly, and run a Calm Company. This is particularly good path if you have a product with high retention, good free sources of new customers, and you are focused on a niche without too many direct competitors.
- But maybe you want to make a few key hires—a top tier marketer, the first person in outside sales, or a senior engineer to take the product to the next level—that current cashflow can’t support yet. New funds like Indie.vc and Earnest Capital 2 are ready to back companies at this stage that want to stay focused on building real, profitable, sustainable businesses. You could raise $100k-$500k to see if you can meaningfully change the growth of the business while still planning to return to profitability.
- You might run some growth experiments, either with your own cashflow or the capital you raised from Earnest or Indie, and discover that there are a ton of ways to turn cash into growth for your business. Now might be a great time to raise a few million in a Seed / Series A venture round on much better terms than before you had this traction.
4/ ?$25- 100k MRR: maximum optionality
You continue growing the business with several proven channels for customer acquisition. You have a minimum awesome team in place that can ensure the product is the best in its class. Somewhere in here you hit or have line of sight to a $1m/year business with a diversified customer base and likely some nice profits. If you’ve gotten here without taking too much outside capital, you have navigated the path to maximum optionality because the number of options for taking your business from here are numerous. You could:
- Keep funding your business with the most optimally formulated fuel that keeps you absolutely focused on building the best product you can: customer revenue.
- Somewhere in this range, the traditional banking system3 will finally become helpful. You’ll be able to fairly easily access a $100k line of credit or $50k+ in credit card limits to alleviate any short-term cashflow constraints.
- You may still want to bring on some more long-term aligned investors for a mix of patient capital, mentorship, and network. In which case the funds from #3 are still a good option, but you could also probably do a large enough raise that a priced equity round might make sense.
- A huge array of specialized revenue-based financing lenders are now interested in your company. Folks like Lighter Capital, SaaS Capital, Bigfoot Capital, TIMIA Capital, and RevUp will lend upfront capital in exchange for a percentage of your monthly revenue. Unlike traditional banks, these funds do not require a personal guarantee. They are debt instruments and typically become really viable around $50k MRR when the business has become fairly proven and predictable.
- You might also find that your business has a few “money machines” where you can plug money in and get more money out. Specialized funds like Clearbanc, which will finance your paid marketing budget (ie Facebook or Google ads), or Braavo, which will finance your receivables from app stores, are available.
- ☝️All the options to this point are not mutually exclusive and can be layered on one another in whatever way makes the most sense for your business.
- But also, at this point you could likely sell your business for a life-changing amount of money. You’ve kept most or all of the equity in the business. You likely don’t have a board that can block a sale or giant liquidation preferences that make a sale for a few million unattractive. Even if you don’t sell, knowing that you could at any time is a powerful source of freedom.
- Or, you could look at your $1m/year business and realize at this point you are in or adjacent to a $1B market. You are a proven founder. Your product, sales, support teams are well-oiled and scaleable. You talk it over with the team and decide to shove all your chips in and raise a monster round of VC on far more attractive terms than you could have at the beginning of this process. You could, but you absolutely do not have to.
5/ ?To Rocket or Not
The beauty of all of these options is that most of them can be mixed and matched. Entrepreneurs now have far more choices and paths that allow them to test the market, grow their business and move forward with or without funding. The choice is up to you.
This is the entrepreneurs new path of maximum optionality.
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Disclosure: I am the founder of Earnest Capital, which created the Shared Earnings Agreement↩
Again, full disclosure, I run Earnest Capital.↩
at least in the US↩