When I joined the team at Revelr in late 2015 we weren’t in a position to be able to go out and raise funding and we weren’t yet sure we’d want to. While we were first time founders we’d read enough horror stories of founders losing control, beign forced out, and being forced into bad decisions that we weren’t 100% sold yet. But at the time it didn’t matter because we couldn’t raise yet even if we wanted to.
So I knew I was signing on to a team that was bootstrapped up to that point and would continue to be for the foreseeable future. And that can be a bit of a scary prospect. Especially if you’re someone who’s grown used to receiving a nice sized paycheck like clockwork every other week. However if you’re a founder, or want to be one, bootstrapping is an increasingly popular way to go. And with a little preparation the stresses can be a bit easier to bear.
As a founder, or co-founder, you’re going to need to learn a bit about finances even if you’ve never had to worry about it before. Just like companies you personally have a burn rate. These are all your monthly expenses. Mortgage (or rent), utilities, car insurance, health insurance, bill payments, food, transporation, etc. Even if you weren’t founding a bootstrapped company this is just general personal finance advice. You should always know what your monthly burn is and should always keep an eye on it.
Personally for this I like to make a spreedsheat and track things month-to-month but even if you don’t go to this extent at least figure out a round about number so you know if your monthly rate is either closer $2,000 or $3,500.
If you don’t keep track of your expenses month-to-month it’s good to do from time to time. You’ll be amazed how much money you can end up spending on extraneous things. This is especially true in a world where every service is a Sass overing with a monthly subscription. For example: do you really need that personal paid GitHub account? Have you made sure that playing around you were doing in AWS hasn’t resulted in a VM sitting around costing you a few bucks a month?
Again, so far this advice is still just regular personal finance advise and is nothing overly special.
If you’re like me you probably did your first pass and tracked down some expenses you don’t need and then cut them out and then justified everything else. But everything you justified, do you really need it or do you just want it? This is a very important distinction that’s critical to learn.
The worst thing you can do is go into this and not know how much runway you’ve got. When it comes to figuring out your monthly expenses there are some that are known up front like a rent payment or mortgage payment that doesn’t change month-to-month. But what about something like food? That’s a bit tougher because it tends to vary and even if you set a strict budget you can have unexpected costs that pop up. Another example of this is your utility bills (electric, water, etc).
What I did for these was look at the last few months and take the highest value and round it up. That number was what I used as the average. I’m sure there are people more experienced than I in finance that would find issue with this simplistic approach but for me it worked very well. The heating and AC in my condo is electric and I was doing this math during a very cold winter when the heat was running almost constantly. That meant that during the spring, our mild summer, and now going into fall I haven’t had a single month that equalled that much. Overkill? Yes. But it’s a level of overkill I personally am comfortable with.
One of the reasons for this is my next point:
So you’ve cut all the expenses you can, you’ve figured out your monthly expenses, so now you know how many months you can last before you have to start earning something. Now take that number and chop off at least 2 months. Given the current economic climate it might even make more sense to chop off 3 instead. Why?
Because the number you’ve got right now is how long you have until your account reaches zero. You don’t want to reach that point and then start looking for work. You have to assume it’ll take some time to find something so you want to make sure you’re covered. And as always when it comes to financial estimates, round everything up. Always assume your numbers are wrong and not in your favor. Basically, err on the side of caution.
At this point none of this should really be that ground breaking or revolutionary. All of this advise is really just general personal finance advise you can find all over the internet. If you’ve been in a position of not having to keep an eagle eye on your finances then now’s the time to change that.
From a financial standpoint these basic steps helped me prepare for the life of bootstrapping. Hopefully they’ll help you too.