So you want to Invest in a Bootstrap Startup

When most people think about bootstrap model for startups they think about creating a company with no investors, or at least without the need to raise investment. That is partially true, since startups, at least technology based startups, require money to be developed, launched and operate; So money is essential to the company, so it if is not coming from the outside, then surprise surprise — that makes you and your team the investors.

Even if you are not investing real money, you are investing your time and energy into this idea, which can be translated into real money that you could have earned by working on something else.

Investors & Stakeholders

First let's break it down to the main players in a typical bootstrap.

• Investors — anyone who either invest time or money in the idea
• Stakeholders — anyone who has influence or being influenced by the investor. This could be the investor spouse, who has to be more with the kids and take care of the house, or it could be the investor mom who opens up her garage and provide food and some pocket money to support her daughter dream to develop the next Facebook. No matter who it is, it is important to identify them and involve them in the process.

Time Investor

The cliche says that time is money. Unfortunately in our case, it is so true. Since bootstrap startups don’t raise money from investors, they usually have to develop the product on their on time. This might be on someone’s free time on the weekends, late nights after work, or maybe even taking a break from work and working full time without getting paid.

No matter how you do it, the most important issue is that all parties are synchronized with each other about their ability to contribute time. This means, that it is crucial that each time investor, and the relevant stakeholders are all aware and agree how much time each of group is investing, and what happens in case someone is falling short in his investment.

Putting that in the open saves a lot of fractions and even disputes along the way, and set up the path for trust and open partnership between all parties.

Money Investors

Although over the years the cost of starting up a tech company has dropped significantly, it is still required to invest money in order to develop and launch a product in the world, where usually the budget could go on hosting and server and sometimes even marketing and advertising.

It is important to plan well how much money the startup is going to need, and when exactly it is going to need it. For example, in the development phase, it would make sense to invest a few hundreds of dollars on dev servers in infrastructure, and on release, it will be required to invest in an ad campaign to bring on traffic. If you know in advance those financial requirements, you could talk about it with all investors and see how you are going to support these needs.

Investment Capacity

No matter if it is time or money, it needs to be clear what is the maximum amount of investment that each can provide, and what is the timeframe for such an investment. This is also very important for the stakeholders.

For example, if one of the investors says that she can contribute 9 months of 20 hours per week of work, it needs to be validated by her spouse who will need to cover for those 20 hours with the kids for the next 9 months.

In case of money, if the investor says that he can invest $5,000 but only $500 per months, it needs to be taken care of when thinking about budget and expenses.

Return of Investment

Another important aspect of being an investor in a bootstrap company is to make sure all investors are aware and agree on how each one of them is going to be compensated about their investment.

Shares — this is the most straightforward mechanism to compensate investors. the more money/time you give, the more shares you get. The problem with this approach is that rewards control over the company to the one who invest the most, which to us, is not the best approach, since there is no correlation between the amount of investment and the ability to control the company. It is also harder to control, since the shares are given beforehand ,and when someone fails to deliver the investment, it is harder to adjust it from the shares.

We prefer a different approach for investment ROI, which is related to earnings. In this approach the investor will get a certain amount of money from future earnings for every investment they made. For example, the company can decide that it will pay $3 for each dollar it got from each investor. There could be a mechanism that tracks these payouts, and these payouts could be taken as a X% of the earnings from every month until all investors got paid. This mechanism reminds to a high yield bonds in which companies are issue when the risk is very high.

This can also be done for time investment, although we prefer not to include time investment in the ROI, as long as there are no huge differences between the investors.

Investor Relations

All these issue needs to be talked and agreed upon before the first line of code is being written. This is why we think it is very useful to have an investor meeting in which all investors, and maybe stakeholders, are meeting to talk and write down these terms. Failing to communicate about these issues opens up the door for misunderstanding, bad feelings and sometimes even to the demolish of the entire venture.