Three years worth of savings to start a bootstrapped business - Does it seem reasonable?


10

A friend of mine recommended 3 years worth of savings in order to start bootstrapping for my self-funded startup. Does this seem reasonable? I had previously been working towards a goal of 1 year's worth of salary, 3 years seems absolutely crushing.

Bootstrapped Funding

asked Dec 15 '10 at 13:50
Blank
David In Dakota
153 points
Get up to $750,000 within 24 hours with a small business loan from Clarify Capital

5 Answers


10

You need exactly:

  • The amount of money you need to run the business until it becomes profitable
  • Plus the amount of money you need to support yourself and your family until you can afford to pay yourself what you are making now.
  • Double or triple those numbers because you are optimistic
  • Add a little bit extra in case of emergency

If you are running your business on a $10/month shared host, expect to launch your business in one month, have no other expenses and have lots of potential customers who are willing to pay for your service already lined up you don't need a whole year's worth of money to start.

On the other side of the spectrum if you are planning a service that will need millions of dollars worth of servers, a team of developers and will start making profit in 3 years even 5 years of your salary won't get you very far.

answered Dec 16 '10 at 01:13
Blank
Nir
1,569 points
  • Very accurate and direct. I love it. – Alphadogg 8 years ago

7

I guess it depends on your business model, but three years seems excessive to me. When do you expect to start getting revenue? When do you expect to break even?

I think 1 year is a reasonable/realistic goal. You want to start getting revenue as soon as you can. Start selling your product as soon as you have a minimum viable product. Hopefully it doesn't take you three years to get to that point.

answered Dec 15 '10 at 14:17
Blank
Zuly Gonzalez
9,194 points
  • Agreed. I never heard of 3 years. One year seems pretty safe. In my opinion, anything above 6 months sounds reasonable. – Alain Raynaud 8 years ago

2

As other posters have said, three years seems like a lot; for anyone to save even a year's salary seems like pretty good going to me. qdot is right; it's more about your personal 'burn rate' than the money you brought in each year in the past - you may or may not be able to cut down on your running costs depending on your commitments (which of course is a lot to do with your family situation).

I think you should also be thinking about market opportunity - is space for the startup you have in mind going to get crowded the longer you leave it?

Another point: there is nothing saying you can't start your startup while you're still employed (which is for example what Balsamiq's Peldi did), but if you take this route, then it needs to be done with great care (e.g., looking after intellectual property issues, keeping your employer on-side, etc.). See, for example here.

My personal approach to limited savings has been to take a part-time consulting role and work on my startup the rest of the time (as per this question ). As the role is in a similar space as I my start-up, I get to learn about the needs of my perspective users on the job and thereby should deliver a better end product. Having said that, it's also pretty frustrating that progress is 50% of what I would achieve if I was working on the start-up full-time. This lack of progress is a bad thing for some startups, particularly when you need to get to market quickly (as per my earlier point). It turns out to be a good thing for me, as otherwise I would have delivered something truly useless by now!

answered Dec 15 '10 at 19:25
Blank
Steve Wilkinson
2,744 points

1

You need enough to spend till you get cashflow positive on a monthly basis, and sustain it.

We did that in 10 months, but had a line of credit lined up in case we needed to go for anoher few months. In our software, if you don't make it 12-18 months then chances are may not make it at all.

3 years is no magic number and seems very high. But it does depend on the industry you are in.

Less money on hand forces you to be strategic on expenses, which is fundamentally good business practice. So don't look at less startup capital as a negative. Think about this : Can you atleast prove the business with this startup capital, if the answer is yes then go for it or else need more thought and planning.

cheers!

answered Dec 18 '10 at 00:51
Blank
Paroon Chadha
61 points
  • Thanks Paroon. What you say in our last paragraph echoes my intuition that operating within a constraint might force me to be sharper than if I am trying to make too large of a cushion. – David In Dakota 8 years ago

0

It really depends on the type of the business, and potential exit strategies. If you expect revenues to counter the expenses in a year, getting revenue as soon as possible is a good idea.

You might be missing out on the explosive growth. Youtube had a tremendous rate of burning funds before it got acquired. It's all specific to your business, however, since I've seen startups launch with much less than a year of savings - one of which is quite successful but was started with about a month of savings.

Essentially, stop thinking about savings and years, start thinking about elasticity of expenses. You can probably live out of your office for 2-3 weeks, if you expect to find revenues in 2-3 weeks.. You can't, probably, stop paying for servers if you run Youtube, that would kill your company.

answered Dec 15 '10 at 15:42
Blank
Qdot
101 points

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Bootstrapped Funding