Your bank account and a startup are not friends

Money. The life and blood of a startup, but also of a founder. Yet, somehow, the personal finance of founders is something that is rarely written about. That’s not very helpful: most entrepreneurs don’t start loaded. They start with small savings and an idea, and have to start making the two work together.

Got cash?

Money is oxygen. You need it to live. You can’t do without it. You can’t make informed decisions if you ignore it. And if you run out of it, your project dies. You can’t negotiate with an overdraft.

Let’s start with the obvious: some people have money before they start a company. I’m not talking about £20K in a savings account, but real money — anywhere between £100K-1M. Enough to hire people, enough to test an idea independently, enough to not take orders from Day 1, enough to plan out a product and enough to not fret about making rent. These people include second-time founders; people from rich, generous families; ex-employees from lucrative jobs (e.g. investment bankers or early employees of an IPO startup); landlords etc… More often than not, few people will make it public knowledge that they started with this kind of money. That’s a shame, because it can lead to distorted advice. Yes, design is important. Sure, product management is critical. Of course, you want to build right, not buggy. Makes sense that you shouldn’t waste time doing your accounting, payroll, admin and legals yourself. But what if you can’t afford to pay someone? What if you need to ship really quick? All you may be able to afford is one founder who builds and another who sells.

Let’s look at the other side. You’ve strenuously built £20K–40K in savings from previous jobs. You rent, you live in a costly city like London or San Francisco, and you don’t have ready access to a deep pool of money. What do you do?

Bootstraping

The bootstrap way doesn’t get much love. There are no investors to cheer for a bootstrapped company. Early-stage bootstrapped founders don’t have much time to write Medium posts and they don’t have budget to hire content marketers. It’s also not particularly glamorous to bootstrap: you’re not going to throw a party and you are unlikely to snap up booths at conferences. You’re not going to look like success anytime soon. However, this is how most businesses start. You start with your own money and you rough it out.

So say you have £20–40K in the bank. First, you are not going to put it all into your business. People who said you should don’t need to make rent. So you start with a £0 bank balance for your company and you have two choices:

• You’re going to burn your savings because you’re not going to make money short-term
• You’re going to try to make money fast and breakeven
• A combination of the two

The first option means that you’ll have a limited runway. 6 to 12 months, depending on your lifestyle in a major city. If you are focussed on B2C, B2SMEs, or B2Devs products with low ACV, it’s likely to be your path. To learn more about it, I’d recommend having a read of @greybaker’s story of how he founded and bootstrapped Dependabot: “Living Off Our Savings and Growing Our SaaS to $740/mo” story on Indie Hacker.

The second one is what we did at Innovate42. Making money means having at least one customer, ideally from the start. If you want to actually break-even and live in London, you will need your customers to pay around £30K per year per cofounder. If you are three cofounders, that’s making nearly £100K in your first year. Did someone say B2B? That’s right. Only fairly large companies will be willing and able to pay that. They may be in for doing something new, having a fresh pair of eyes, or just having smart talent at a discount to advise or build a highly-customised product for them. You will be in to build a repeatable product, so priorities won’t always align and let’s face it: your priorities aren’t going to be the big corp’s priority. But they will be paying and you can break even, which means you live another day and you will learn to love refactoring.

Either way, you are keeping options open. You want to make it a lifestyle business? Fine. You want to aim for a small exit? Fine, do a small angel round. You want to make it big? Go talk to VCs! You’ve got options now. You can set the bar for what success looks like.

If you run out of cash, well it’s time to get a good job or a consulting gig. You then get some money, stop buying potato salad for lunch, and, more likely than not after year(s) of roughing it, give up your entrepreneur dreams so you can go Duck & Waffle with your partner.

The accelerator

The accelerator route, or incubator, or any variation of ‘you don’t have a product yet and we will help you get there’, is probably the best known ‘startup’ way to start a business with no money. If you’re building a B2C business, haven’t got money in the bank, and can’t monetise short-term, it’s likely the way to go. And it’s a fantastic route if you pick the right accelerator, like YC, EF, Techstars or Seedcamp. Mentorship plus money accelerates, period. You will find a lot of content about why acceleration matters because accelerators are businesses and they market their services, so there’s not much I need to add on the value they bring.

Accelerators often provide a decent amount of cash, but you’ll still be pretty lean — likely £100–150k depending on the accelerator. Probably enough to hire one person, but more likely to make sure you can cover your costs and get a bit of outside help. Mostly, it gets you in shape to raise a proper seed round, when you can stop fretting about your personal savings melting.

The tradeoff is that from Day 1, you have to go after a big market and you have to be bold. There’s no dabbling, there’s no ‘maybe I make this a £10M business’. You go after a £1bn+ market and you need to hit £100M in a 5–10 years frame. You’ve set a very high bar for success.

You do you

Whichever way you choose, have a hard look at your bank account and the type of business you want to build. Be opportunistic. There are multiple ways to build a business. And ultimately, you have to stay true to yourself.

Looking back, my cofounder and I sometimes wonder, should we have bootstrapped for this long? Should we have done an accelerator? And the honest truth is: we’d probably do it the same way all over again because it fits our personalities. We wanted to have something tangible to show for, something coming straight from customer demand, and we wanted to take our time to understand and nail the market opportunity. We enjoyed the grind, being scrappy. And it took a year and a half, which is much longer than we thought. So, my savings are gone and won’t be recovering anytime soon. However, we survived the walk in the desert and we recently raised a round from 15 incredible business angels, such as the founders of Gumtree, Entrepreneur First and Crane VC for Innovate42. So onwards to a new phase of growth!

PS

If you enjoyed this, follow us on the Innovate42 stories. Also — if you’re keen to build an early-stage startup but don’t quite want to go without a salary for a full year, we’re hiring 😉 : https://angel.co/innovate42