How Much To Burn While Building Product

In last week's MBA Mondays, I wrote about burn rates at three stages of a startup. The first stage is what I called "Building Product Stage" and I suggested that a burn rate of $50k/month was appropriate for that stage.

I got a fair bit of pushback in the comments for that part of the post. My favorite push back came from The Kid, who said:

50k a month?!?!??! maybe it is such in venture world, but if you're a broke ass fool bootstrapping his/her way, try 5k per founder a month until you have paying customers. if you're hardcore (translation: desperate broke ass fool), cut that number in half — it's definitely possible.

The Kid and everyone else who pushed back on that number in the comments are right. You can build a product for less than $50k/month, particularly if you and your co-founders are deeply technical and if you have at least one founder who has great product and design skills.

I was chatting with Naveen, cofounder of Foursquare, the other night. He told me that the month he and Dennis finally raised money for Foursquare from USV and others was the month his savings had run out. Basically he and Dennis worked for nine months without any pay and built V1 of Foursquare all by themselves for basically no money other than their time which they were not charging the company for.

We see this a lot actually. Many (most??) of our early stage investments are in companies that have bootstrapped in this way. So I feel a bit badly about throwing that $50k/month number out there. But there are companies that are fortunate enough to raise money at the seed stage and use it to build product. And for those, I see $50k/month as a good upper limit.

So I stand by the $50k number, but with a big caveat. If you can do it for less, by all means do that. Bootstrapping is a great thing and leads to great products and great companies.

#MBA Mondays

Comments (Archived):

  1. Conrad Ross Schulman

    You become much more creative without cash. you learn how to accomplish software, hardware, design, ux/ui, newsletters, blogs, social media, logos, fonts…and so much more!When your a spoiled pre-funded baby, you don’t have to work hard and you don’t have to prove yourself or your product. the same way in real life, a father doesn’t want to give his son everything, the father wants to see his son do it on his own to attain the same values and degree of respect.With tech companies, the less cash the better. The more cash, the more spoiled the pre-funded baby is.

    1. fredwilson

      i have seen a lot of evidence that what you say is true

      1. Conrad Ross Schulman

        A shiny example of the ‘pre-funded baby’ is Color. They recently pivoted from¬†its contained social network into a video extension of Facebook. How many times are they going to pivot and transition their product?Their problem is they raised money before building a beauty. This is what I like to call suffering from the pre-funded baby disease.

        1. fredwilson

          you are so right. i see this a lot.

        2. JamesHRH

          I don’t totally buy this argument.Color is a gong show because it is a dopey idea. Somebody said ‘pic share + loc aware + awesome team’ and away they went.Would doing it lean have mattered? I don’t see how – no one would have actually asked a consumer a validity question & it’s hard to see which founder had any background in consumer insight.The $41M is just what that team could extract from the top tier VC market.Just a fail. Nothing else IMO.

    2. John Petersen

      I tend to agree with the first part that you find ways to be more creative, but I have to disagree with the second for 2 reasons.1) Just because you have been pre-funded, doesn’t mean you don’t have to work hard. Funding or not, if you are putting in ridiculous effort, your startup doesn’t stand a chance.2) It all depends on the background and experience of the founders. It’s not the money that makes people lazy or spoiled. That seed was planted a long time ago. It’s just that you don’t get to see the results until the person is given the opportunity to show their true colors.

  2. JimHirshfield

    I agree. Even with KidMercury’s numbers, $5k per founder per month = $50k for 2 founders at it for 5 months.And with the FourSquare situation too…Let’s not forget digging into savings, generosity from friends, and opportunity costs. There’s definitely a cost associated with deferred salary that a founder may never recoup.I do get how a dev can put together an MVP for $5k. But to get it scale and evolve, costs more.

    1. JimHirshfield

      OK. Coffee kicked in and my math skills are back from a lost weekend. $50k per month is INDEED a different number than $50k in total.I will pay attention. I will pay attention. I will pay attention.

      1. Aaron Klein

        I never do math before coffee. Never. ūüėČ

        1. FAKE GRIMLOCK

          NEVER DO ANYTHING BEFORE COFFEE.

          1. JamesHRH

            @aaronklein:disqus¬† – if I could figure out how, I wouldn’t wake up before coffee.

      2. ShanaC

        More sleep may also be in order….

        1. JimHirshfield

          ūüôā

          1. ShanaC

            Also, you may want to think about one of those sun replacement lamps. I just got one, and it is really helping what is turning out to be seasonal exhaustion.

  3. Oo Nwoye - @OoTheNigerian

    The problem with your upper limit is that some team might go building a Twitter app, buring 20k a mont thinking ther are doing ok.Putting that ‘low’ 20k figure in parspective, it come to 240k annually. Thats huge! You do not want kids thinking unless they have that much in savings, they should not take the leap.Why don’t you ask your portfolio founders how much they spent per founder while building their products?

  4. John Petersen

    I’d be very curious to hear some thoughts the success rates around bootstrapped vs. seed funded companies and if there is even any correlation either way (especially in regards to first time entrepreneurs).I tend to think that bootstrapping leads to more craftiness and creativity and teaches founders important financial decision making skills that will stick with them as more funding dollars come in. I guess it could be very dependent on the founders, but my gut tells me that bootstrapping creates more disciplined founders.

    1. fredwilson

      many bootstrapped efforts fail because the founders have to take a job, etc but if you take bootstrapped vs seed funded and look at both cohorts post a similar funding round, i think you’ll see that bootstrapped succeeds more often

      1. John Petersen

        Well then the follow-up to this is pretty obvious then. I would think that at some level if all other things were equal, you would tend to back founders who have bootstrapped at some point over those who never had that luxury.

        1. fredwilson

          not consciously, but certainly subsconcsiously

          1. Laura Yecies

            I wonder if this expectation around bootstrapping and the lifestyle it implies ends up having something to do with the lower percentage of women entrepreneurs issue you and GothamGal have written about.It’s one thing to make one’s own choice about eating ramen, it’s another to do that for one’s children.This does not mean, btw, that I do not agree with the general lean startup approach.¬† I joined, to turnaround, a company that was overfunded and spent way to much in the early days and changing the company’s mindset and culture around costs was necessary but very difficult.

      2. FAKE GRIMLOCK

        BOOTSTRAP WHILE MAKE MONEY VITAL. BEST IF OWN STARTUP WHERE MONEY COME FROM.

    2. JamesHRH

      Your question is the root cause of the classic consultant myth ‘ and then deLeon burnt the boats!!!!!! – no going back to Spain ‘.I have personally seen several startups that tried to bootstrap while key tech people consulted, etc. When things got tough, the company just paused. People went from part time consulting to full time consulting to employed by a client.Some companies never came out of pause mode.I know of one person who called himself CEO of a startup that had no product, no plan and no activities – the 6 people that had been involved all went back to consulting and stayed there. But, in his mind, the company was still alive (true, but in a coma!).

      1. John Petersen

        Ha. That is a very interesting definition of a startup.¬†I am much more of a burn the boats type of person. Leaving yourself no other options, you will find a way. Although, that being said.. if you have the opportunity to do some planning, it makes sense to think things through a bit before you burn the boats. It’s a very difficult balance between planning and waiting for the right moment and complete boat burning.

  5. William Mougayar

    Your $50K is a luxury that applies to funded companies, so it’s not a wrong number. You could have said $50K if properly seed funded, and anything under that if bootstrapped.That said, there is a big difference between building a prototype for a few hundred users, and building a more robust, scalable product that’s ready to take on thousands of them. The first one can be done much cheaper because you cut corners, but with the later, you can probably be more diligent with scalability & UI from Day 1.

    1. awaldstein

      You hit on something.Prototyping capabilities is one thing. Everyone does this,But if you are building something that is community driven by definition, it had better work or be strongly controlled.Bad user experience will quash even the biggest and best promise if it can’t deliver.

      1. William Mougayar

        It’s a fine line between finding enough MVP functionality & not going crazy on scalability issues.

        1. JamesHRH

          Scalable team is the real key.They will want to use scalable tools – you just have to say NO until they scale the tools down to a reasonable (for the situation) level.Or, you have to find people who are willing to do without the tools until the company gets to that stage (this is so optimal, because everyone on the team commits and builds up a hunger to get to that stage).

          1. William Mougayar

            Good point. There are tools that can help scalability, but if you are not ready for them, they will not help. We almost went down that path, but we’re lucky enough to have done good diligence before deciding. There are super aggressive sales people that will sell you tools as an answer to anything.

  6. andyswan

    Opportunity cost is real.A three man team spending $0 cash and nothing but their time IS STILL BURNING.¬†If they’re good, they could probably be getting at least $60/hour for their time, each.¬†Three people, that’s $180/hr, or $1800/day if you’re doing it even moderately right.That’s $9k/week at 50 hours per week (which is probably low). ¬†So… $36k/month “without spending a dime.” ¬†And still, NO ONE knows your product exists.It’s hard. ¬†It’s expensive (one way or another), and it always takes longer than you think. ¬†

    1. Dan Lewis

      1000x this.I have a small side project (as you know Andy, and I owe you an email) and when I tell people it’s not break-even, it’s because I don’t value my time at $0. ¬†If I spend 20 hours a week on it, even at minimum wage, that’s about $7,500 a year. ¬†That’s hardly nothing.

    2. Aaron Klein

      I’ll put this another way, because I wholeheartedly agree: you can’t build a startup without cash.It can be your cash. Or it can be an outside investor’s cash.Being both the entrepreneur and investor is freakin’ awesome if you can afford it.

    3. JLM

      Of course, they are getting paid in equity, right?They own the thing.

      1. andyswan

        Yep. There are only 100 points, no matter what. Better keep as many as you can!

    4. Dennis Buizert

      Completely agree with this. I think a lot of people tend to forget that basic requirements for living. 

  7. Brad

    The problem with venture capital is that you tend to spend it, eventually run out of the money and have to look for more.

    1. JimHirshfield

      Isn’t that the problem with money, full stop?

      1. jason wright

        Not if it’s your own money ūüôā

        1. Jacob C. Donnelly

          It’s sort of like college and student loans. Do you think that if the student had to go into their bank account to pay for college that they’d screw around, get drunk on a regular basis and not maximize the value gained from college? Because they are getting, essentially, free money (money that they don’t have to pay back at that exact minute), they don’t see the value in it. Therefore, I question whether companies should get seed money or should they learn to bootstrap. You’re more likely to screw up with someone else’s money than your own.¬†

          1. JamesHRH

            That’s a maturity issue.Anyone who ‘goes Into to their own bank’ has to be a mature student, not 18.Again, I you are starting a company to become mature, that’s a mistake.

          2. Brad

            That is such a great analogy.

          3. ShanaC

            Yes to some degree. ¬†It used to be like that in the 80s (more savings, more grants, smaller loans), and I think campuses are much less “party animal house” than they were before because of awareness.

          4. LE

            Wharton School and PENN Undergrad tuition in 1980 was $6,000 which in todays dollars is less than $16,000. ¬†Today it’s 42k.

          5. ShanaC

            Don’t get me started on that problem. It is worse than we think…

  8. jason wright

    Not having the money teaches discipline, inventiveness, creativity, and scrappiness. When the money finally comes the skills gained (or are they just qualities innate to some and not others regardless of access to money?) during the moneyless stage will be very useful in helping to decide where the money gets spent. Not having the money can also burn you out. This is bad. This is very bad.

    1. JamesHRH

      If you are learning anything on your list by doing a startup, that’s a error IMO.You should BE all those things, if you are going to bootstrap.

      1. Brad

        Disagree. Bootstrapping is a place that you can learn to all kinds of skills that can help build a large company. Facebook was bootstrapped to a large extent which made it very very valuable to the VC’s once it came. From what I read, Mark Z. was/is not the most mature but he realized the value when no one else did. Life is the ultimate classroom, we learn until we die.

        1. Dave Pinsen

          Zuck has seemed pretty mature in his recent TV appearances (e.g., Charlie Rose). 

          1. Brad

            Did not see it. My point was that you learn so much in so many different situations, bootstrapping or not. James point is that if you are learning while building you are not ready to bootstrap. However, everyone learns as they build at every stage along the way.

          2. JamesHRH

            It depends on your goal.Mark Z (and several other of the world’s wealthiest people) have extremely deep instincts for ‘defining a need’.OS SW, Productivity tools, Search, Social were the single largest need in their respective eras.If you are that person, bootstrap the hell out of yourself and, frankly, don’t sweat the immaturity factor (you are going to be so massive that people will forgive you, unless you continue to act like a 15 year old).There was a time when Bill G was loathed by the industry. He took steps.There was a time when Larry P showed up at industry events in a white lab coat. He took steps.There was a time when Mark Z was completely transparent about what he was going to do. He’s taken steps.If you are NOT one of these people (3 in the last 35 years, FYI), then my advice would be to prepare yourself for doing a startup.A little preparation will keep your key relationships and health in order.After all, you don’t have to go to school to pay (dearly) for an education.And some of the courses you will take (YOU 101, BASIC INNOVATION ADOPTION 306 or HUMAN NATURE 235), are really expensive.

          3. Dave Pinsen

            I’m not so sure Zuck’s current maturity comes from the experience of building Facebook — having that kind of stratospheric success so young can lead to the opposite result. If anything, he seems grounded despite his meteoric success.

      2. jason wright

        …”qualities innate” James,…but righting people off at birth isn’t a good thing either. People adapt, people learn, and people grow. ¬†

        1. JamesHRH

          If you check my other posts, you will see that I believe very few people have innate qualities that allow for immediate startup success.Most need experience.

          1. jason wright

            …and how does one gain experience?

      3. JamesHRH

        You are who you are.You become who you are based on your experiences.Some people direct their life in order to end up somewhere.Others make random choices and follow the path to see where it leads.

        1. FAKE GRIMLOCK

          BE WHO YOU ARE. THEN ITERATE UNTIL YOU AWESOME.

      4. K_Berger

        Sometimes you don’t really know until you try.¬† Some people do their best when the pressure is on (like many star athletes).

        1. LE

          I agree and I’ve seen this happen many times. People can get incredibly smart when they are forced to do so and also when emotion kicks in. ¬†Another “pressure is on” example off the top is improv comedy. People can be incredibly funny on the spot but not if they have all the time in the world to prepare. The pressure and deadline actually aids the creative process.¬†

          1. JamesHRH

            LE – I am not arguing against the POSSIBILITY of what you are saying. I am saying that the price you will pay (emotionally, economically, physically) may be a bad investment, if you do not succeed under the pressure of being an ill-prepared founder.

      5. FAKE GRIMLOCK

        FOUND STARTUP IF AWESOME. FOUND STARTUP NOT MAKE YOU AWESOME.

    2. ShanaC

      I think we underestimate what burnout can do. ¬†I’ve been through real burnout, and it is among the worst things I have ever been through.Taking care of yourself is part of MVP

  9. Mike Kijewski

    We built a pretty awesome product in about 13 months on $13k a month. I wouldn’t do it any other way.

  10. JimHirshfield

    Who’s “we” – details please. Number of people, etc. What did that $13k cover?

    1. Mike Kijewski

      (assuming this question was for me) 2 full-time devs and a product / industry specialist. We started with a desktop application that we had bootstrapped to about 55% completion in our spare time, and got to a viable product in about 13 months. We spent about $15k over my previously stated burn rate on legal / accounting services. 

      1. JimHirshfield

        Yes, thanks for the details. Seems like you kept your costs WAY down.

  11. federaldrugs

    Generally I do not post on blogs, but I would like to say that this post really forced me to do so, Excellent post!

  12. christopolis

    If money is not your problem it is inventory. Too much inventory leads to lack of visibility. Lack of visibility leads to lots of wrong turns. Same with any business. Cash is only the constraint when it is.

    1. Carl J. Mistlebauer

      Not real sure about the relationship of inventory with visibility: ¬†In the old economy, lack of inventory decreases sales while too much inventory constrains cash flow. ¬†Thus, its all math in regards to minimum inventory, inventory turns, and managing sales.Not real sure what is meant by “visibility.”

  13. reece

    have definitely gone through what Naveen and Dennis did, and then some¬†stupidly, when i started (and moved to NYC) i had next to no savings and tended bar to pay the bills… the hardest part of which was the distraction of another job, even a “fun one” like bartendingwhile on the one hand, i’m really proud of our bootstrapping, it definitely put me in a hole that i’m still digging my way out of and i try to tell new founders to avoid doing the same if they can

    1. John Petersen

      So the question then becomes.. if you could go back and take seed money so that you wouldn’t have to bootstrap and bartend, would you take it? Do you think that the lessons you learned from bootstrapping are more valuable then what you would have gained by taking money?

      1. Adrian Sanders

        bootstrapping effectively is just hustling Рturning nothing into a dime, flipping a dime for three nickels and parlaying that into three 5/1 bets. i think the problem with getting seed funding right away, or even right out of college, for many is that it shields you from the true value (and potential) of money.

      2. reece

        ha. yeah, i’m still glad we bootstrappedbut i wish i’d chunked the time more deliberately. bootstrapping then fundraising vs. half bootstrapping, half fundraising the whole time… should’ve focused my efforts

        1. ShanaC

          What are some good ways to cause yourself to focus?

          1. Tom Labus

            Looking in your bank account.

          2. ShanaC

            to which i sayO_o

          3. reece

            just meant that while in bootstrapping mode, i should’ve stayed there, then distinctly moved to fundraising mode

          4. Mark Essel

            This makes perfect sense, you force yourself to make decisions instead of fence sitting and lowering your chances of success (my tragic flaw). Hindsight is 20×20, now the trick imagine what you’d tell yourself from 5 years in the future ūüėÄ

          5. reece

            “faster, still…”;)

  14. Tom Labus

    Most start ups (of all types) never get anywhere near VC money. ¬†¬†The ability to survive and proceed is usually because the founders get desperate enough to figure out some maneuver to hang in there. ¬†But that desire to “hang in there” is fleeting. ¬†There’s some equation there involving time, craziness and cash.

    1. Dave Pinsen

      There’s another potential variable in the equation: revenues. I had the pleasant occasion a few months back of getting a direct deposit from Apple that was 2x the amount of the check I had to pay an iOS developer for some work on the app in question.Same thing happened with the last round of development work on a Rails-based web app (though the revs in question came from my merchant account instead). And now I’ve just sold one site, so part of those proceeds will fund the next couple rounds of work I have planned.This gets to the double challenge that the VC-fueled ecosystem presents for bootstrappers:1) It raises the cost of skilled labor (developers, designers, etc.).2) It conditions users to expect stuff to be free. That leaves open the possibility of generating ad revenue, I suppose, but I would think you’d need some serious scale to make money that way.For example, In Bloomberg’s coverage of the Saudi billionaire’s investment in Twitter, they mentioned that Twitter had 100 million regular users and generated $140 million in ad revenue last year. I can’t imagine running a web app profitably with $1.40 in annual revenue per user, but maybe things are different when you’ve got that kind of enormous scale.

      1. Tom Labus

        I’m very pro revenue and also want to see “social” evolve to the point where start ups can have products they can actually charge customers for.I liked that NYT article yesterday about the “industrial web”.¬†

        1. Dave Pinsen

          What social products would you pay for right now? Say they charged just $5 per month. I’ve come to like Twitter, but I’ve been conditioned to expect it to be free. If they started charging $5 per month for it tomorrow, I’d stop using it and I wouldn’t look back. Same with Disqus. I can’t think of a social media service I’d pay for right now for my personal use.Would you mind posting a link to that NYT article?¬†

          1. LE

            Charging anything at all is a non-starter. It would kill the ubiquity and make it less valuable. Reminds me a little of how Howard Stern dropped significantly in public mention when he went to Sirius in 2006. (Even though it worked out for Stern and Sirius).

          2. fredwilson

            yup. i’ve written extensively about this. it’s not the right business model for social media

          3. Tom Labus

            I agree with the current crop of products. But if there is more meat on the bone someone is going to figure out how to get paid.

          4. FAKE GRIMLOCK

            ME, GRIMLOCK, WOULD PAY $5/MONTH FOR AD FREE NO CRASH SOCIAL. IT GOOD WAY WEED OUT NON-SERIOUS USERS.

          5. Jon Winebrenner

            If we are talking about personal:$5/mo for Facebook? Nope.$5/mo for Twitter? Nope.$5/mo for LinkedIn? Yes.If we are talking about business:I would pay $5/mo (more even) if it gained me access to the right clients. 

          6. JamesHRH

            I would pay for Twitter.If AVC used it to keep spam and drive by posts out, I would pay for Disqus.

      2. PhilipSugar

        So true.¬† Couldn’t agree more especially the double challenge.

  15. catarino

    Interesting, when you replied to me on your last post, I also replied that “Yep, we’re in different realities” (because I’m in Portugal) but following the comments I’m seeing that you have different “dimensions” in your US reality.I have a question about startups on countries outside US:¬†In your experience (and from what you know from other investment companies/fellows experience), what’s more important/what’s the usual scenario?¬†1 – Invest in a company/startup of a country where the burn/rate will be much lower that in US (say 20.000$/month) even if it’s far (and might miss opportunities) from Silicon Valley action.2 – Invest in a company/startup to be relocated to where’s the action and more opportunities even if burn rate will be much higher (your 50.000$/month).thx

    1. fredwilson

      we’ve done boththere is no one way to do things

      1. catarino

        I understand. To be clearer, the question was more inclined to “what’s the usual scenario” in your experience.

      2. Dave Pinsen

        Did you change “welcome back stranger” to “welcome back friend”, or are they two different levels?

  16. Brandon Marker

    I enjoyed this post and the viewpoint. Personally, I shy away from that kind of burn rate in a developmental stage company. It is not in our focus to be involved with such a large seed stage company. HOWEVER I most certainly see them and speak with them. If you are trying to build a large, scalable product without a couple of founders like those of Foursquare or the like, you need that development team and they may cost the company a bit of cash. 

  17. Miljenko Hatlak

    When you come in position that you could burn 50k $ monthly per founder, your start-up must be in final phase of product development, and it should be ready to “earn its money” either through investors or by distribution to final user.Also, at that stage¬† you really must have a product that should fulfill all expectations of final user and be competitive to products that are already on the market, being a¬† product worth to be mentioned in a good light.If you are planning¬† to make your product competitive, time will come when you’ll desperately need this amount of money, but it’ll be already burnt through various costs that could be easily avoided and/or postponed.You should allways ask yourself are you really at stage that your product requests full time jobs from you and¬† your employees.¬†¬†¬†¬†

  18. Fred Krueger

    Here’s what I think angel investors want to see:Prototype stage (valuation as an idea: 250k)——————————————————————-2 founders, built after hours, in a dorm room for absolutely nothing. The product does something cool, but has no bells and whistles and almost no UI. Somebody (a rich uncle) might write a 25k check for 10% of the company, to pay for rent and¬†red bull. Depending on whether the 25k check exists or not the burn in 0-5k / month.Angel stage: pre-money:2-3MM———————————————-Either armed with a prototype, or with some past experience, the company gets an actual angel round of 500k-1mm. At this point the company gets a crappy office in mountain view or garment district (5k a month), 4 paid¬†programers¬†(5k a month each+options), an office manager (3k a month) and starts flying around to tech conferences.Total burn: 40-50k / month.VC Backed Series A——————————If Instead (or after) the Angel stage, a VC gets involved and writes a 1MM check, expect the spending to go up at least 2x.¬†– hiring programmers at market rates (closer to 10k/month)- paying recruiters- paying the CEO 10k/month- hiring a “numbers guy” (CFO/Accountant, whatever) at 10kBurn: 100k per month.

    1. fredwilson

      thats a good modeli wrote my own in the comments to last week’s postnot too different

    2. catarino

      Still find these numbers mind-boggling.anyway, don’t forget hiring Designers, marketing and “flying to product related conferences”don’t focus on Tech Conferences.

      1. JamesHRH

        Can you look someone in the eye and say ‘this opportunity will generate $100M in revenue in X years?’If not, then these numbers should boggle your mind.

        1. catarino

          Sorry not following.

    3. ShanaC

      I find the dorm room thing kind of overrated.  It also stresses a not real place- most successful startups are founded by older people.  With families, and houses!I know far more about the world now than when I inhabited the dormroom

    4. FAKE GRIMLOCK

      INVESTOR CAN PAY KID TO LEARN, OR ADULT TO DO RIGHT IN FIRST PLACE.

      1. JamesHRH

        I like this. @fredwilson:disqus thoughts?

        1. fredwilson

          thoughts on fred’s comment or the grimster’s reply?

          1. JamesHRH

            both ;-)GRIM comment.

      2. jason wright

        So you’re not a believer in investing in potential then GRIM? Dinosaurs! lol :-)I AM MAMMAL.

        1. FAKE GRIMLOCK

          KID IS THROUGH DART.ADULT IS USE SNIPER RIFLE.FOR SOME, DART MORE FUN.

          1. jason wright

            Asteroid Venture Capital LLC may disagree. Its dinosaur disruption thesis has a tremendous impact on thinking.

  19. PhilipSugar

    Again, I love that you put out a number because that is what causes people discuss and comment, and I agree that your number is right.Lately instead of thinking about spending or investing money, I’ve been¬†viewing all of my expenditures as wasting money.¬† That doesn’t mean don’t spend money, on the contrary I’ve been wasting more money than I ever have.¬† Now is a great time to be “investing” but I don’t view it that way, instead I think about how much I’m willing to waste.I know its contrarian but it really is liberating to shape your world view as wasting money.¬† So you say to yourself how much do I want to waste on this idea?¬† Think about it, at BigCo they will spend millions trying to avoid wasting thousands.¬† Be resigned that you are going to waste the thousands and when your decision comes up right you make the millions.So in this case its how much do you want to waste seeing if this idea is a good one.¬† If its your own¬†(and working for nothing is the same as¬†wasting money) you really are focused, and sure you can do it for less.¬† If you have investors $50k is a good number.¬† Higher than that you are wasting too much.

  20. Gordon Guthrie

    The first four weeks of a hunger strike prove that human beings don’t need to eat to live. The second four weeks prove the opposite.We do our cash-flow on the first principle ($50k a month? ay caramba! way too high) but our management accounting on the second principle ($50k a month, not so bad…).You need to calculate your sunk costs on a fully loaded basis – office, salary, blah-blah. There is a big difference between them (a factor of 4, 5, 6 or higher is not unusual).Using real figures in management accounting also gives you a proper focus on pricing – much less likely to give it some ‘hey lets freemium’ nonsense. (Freemium isn’t a price, its a marketing cost, and you can’t work out the marketing costs without a strong handle on realistic costs).

  21. jonathanmendez

    You can’t have this conversation based on $ alone. Time is as important a vector.

    1. kidmercury

      agreed, as are connections. if you have the in to get customers and marketing exposure from key influencers, you can reduce time and capital needed — winning product becomes the only missing ingredient.¬†

      1. ShanaC

        Know the key influencers in your industry is also helpful.  Which means knowing your product really wellWhile I got my pinterest invite from someone around here, most people I hear about on it got it from wedding websites.  Which means the likes of Martha Stewart would be an influencer, not Fred (sorry Fred)

    2. Prashant Gandhi

      A true win-win would be if you could get consulting at a potential customer or in the business domain where your product is focussed. Then bootstrapping becomes a form of apprenticeship really

  22. Clay

    I’ll lob in my “broke ass fool” experience as a data point. 1 “product” person leading the vision and mocking up wireframes. 1 designer contributed 80 hours or so upfront making it look pretty. 1 tech advisor contributing 10 hours / week. 1 odesk developer contributing 20 hours / week (only paid). Took 8 weeks to get to launch at about $600 / week burn. So ~$5K to launch, and we continue to burn about $500/week as we slowly roll out more features.

    1. fredwilson

      there you go. it can be done for less. what’s the product?

      1. Clay

        It’s called sellercrowd. Simple way for salespeople to trade contacts / leads anonymously. It’s very minimal at this point, but people seem to like it.

        1. fredwilson

          we’ve looked at this idea before. we like it. are you willing to talk to us before you need money?

    2. John Revay

      Hi Clay,  What platform did you write Sellercrowd on?

  23. Darren Herman

    In the early days of IGP (before we became IGA Worldwide), we were fully bootstrapped. ¬†When we raised a bridge into our Series A, we took no more than $3k/each. ¬†Upon the Series A, we adjusted up.While the numbers above a actual numbers, we specifically “lost” a lot more individually by opportunity cost for each of us.But you know what? ¬†Most of us didn’t care. ¬†It was the journey we were seeking and for a couple of us, it was well worth it.

  24. $3236

    I thought $50,000 per month was spot-on – for 1996.¬† We raised a $500,000 friends/family round to start and figured it would last a year – with the 2 founders not taking a salary and not having to pay rent.¬† Equipment and bandwidth were much more expensive then, and once you start hiring people, especially salespeople, that gets expensive too.¬† When we happily closed the round one of the investors said, “Steve, you can’t start a lemonade stand for $500,000.”¬† In 1996 he was right.

  25. markslater

    OK full disclosure:¬†we are seeded to about $400k – we completed a rolling close on this money – first close in october, second close in december.¬†Our burn was and is the same as before we had a closing. Its about $26K. There are some monthly fluctuations associated with 1 time projects but its pretty steady at this number. the founders supported this from march thru¬†Sept¬†of this year.¬†you can do it for less – or more – its really what you are comfortable with – we have a fully baked dev and product team for this money – we’ll add operations with series A as this is the key asset to scale.¬†We are able to do this with a team of:2 founders, 1 CTO, 1 community development, 4 core development. All are either outsourced or on options heavy cash light rolling contracts.¬†But there are op-ex things that should be considered. We are mobile – so we had provisioned a short code (3K a month). we then found twillio! ($250 per month). We were using rackspace (1k) we then moved to AWS ($300) for dev and testing environments. We use Latham Watkins for legal advice – if you are in their venture group – there are huge deferrals on payments.¬†

    1. fredwilson

      twilio and aws are game changers for startups

      1. markslater

        yes they are – way beyond simple money saved.here is another oneJIRA software – i have attached a screen of my dashboard. this software is simply amazing.As the CEO this dashboard gives me – graphical issues (open vs closed) detailed activity feeds within dev groups – i can drill down and even inspect code as its checked in and out – all on the fly) – its group project mgt on UI (see the graphical file attachments) its tied at the hip to google docs and has the most awsome notifications and messaging capabilities i’ve seen.¬†this software trounces on basecamp and the like for remote dev teams – its mine and the whole companies core tool. i cant see us building what we are building without it.¬†there are then other downstream tools – zendesk, etc that are time, money and resource savers……

        1. markslater

          here is the attach

        2. William Mougayar

          How about Pivotal Tracker ? We can’t operate without it.

          1. markslater

            never heard of it – but that means nothing!

          2. markslater

            looks great William Рjust checked it out. our selection process was simple. I hired the CTO Рhe chose the software. he had used this on several companies prior as had the dev group.

          3. William Mougayar

            That makes sense. Pivotal is used by a lot of the hardcore agile development folks. But there are others tools of course.

          4. FAKE GRIMLOCK

            ME LIKE PIVOTAL. AND JIRA.LOTS SIMILAR ALSO GOOD. PICK ONE, LEARN IT, USE IT.

          5. kenberger

            i’m excited to hear this. see my other comment near this one.

          6. Juha

            I’ve used Jira for years in software development projects and I tested Pivotal Tracker maybe 6 months ago in a startup project that I was involved with. Pivotal is way easier to learn and really is a great tool, and Jira is that too, but much more configurable and maybe not as easy to learn and use. ūüôā BUT, If I remember correctly, you can integrate these two and use them at the same time. So you can have tasks/issues created in Jira and shown/appearing in your Pivotal Tracker if you want to and the other way round I think.¬†And last, if you use Jira and Scrum, I’d would recommend trying out the Greenhopper plugin.

        3. Mark Essel

          I guess it’s too weird to try to get non-techs to make git commits for non coding tasks?I’m thinking of some kinda github/micro/blog hybrid for project tracking. I guess the “stories” serve as hypothesis to be tested by the startup/business though.Each time I try and get accustomed to a digital tracking/coordination tool away from the code I feel that it’s a bolt on.

        4. fredwilson

          wow. i will have to check that out

        5. kenberger

          Jira has some great strengths particularly for the enterprise, but as a few people here have now said here, Pivotal Tracker has some serious advantages, especially if you care about Agile. PT simplifies a lot and does a better job of making things more transparent for a typical startup management team setup.Then again, I’m a bit biased because my team did some development work for the PT product ūüėČ

      2. jason wright

        Cabana may be a useful new tool for creating a demo/ MVP app at low cost.I wonder if at some point a post opening a discussion on the merits of various cost efficient technical tools potentially useful to an impoverished bootstrap startup might be educational to the AVC community? Call it ‘Toolbox Tuesday’, or something like that, on the first, second, third, or last Tuesday of a month. Just a thought for if you ever have a ‘thin’ day.For example, Pivotal Tracker and JIRA got mentioned this week – I’d not come across either before, but several contributors seem to be making good use of them in their enterprises.

        1. fredwilson

          i may need the community to do that post. i am not in the coding business anymore

    2. awaldstein

      Thanks!I’d be interested in what ‘community development’ means if you can share that.

      1. markslater

        the role is in the beginning all about customer discovery. it will evolve in to cus development, and eventually a more sales / BD role.Justin is talking with pilot customers daily, visiting, asking questions, solving problems and bringing issues back to the product group. Its a page taken out of the lean model. if you want to learn more you can ping him direct t justin at getabl!

        1. awaldstein

          My respect for your approach has just intensified with this comment.

    3. jason wright

      What’s a “rolling close” please?

      1. markslater

        some line up the capital and have one closing event when docs are signed and money is wired. rolling close is when you hit a minimum target you want to get to Рto close Рget the first monies in while others are still in the process and become part of the second close.

        1. jason wright

          Thanks.

    4. Dave Pinsen

      deleted.

    5. LE

      “We use Latham Watkins for legal advice – if you are in their venture group – there are huge deferrals on payments.”Not a reflection on that firm but are you auditing and checking the invoices they render?My experience has been that it is not uncommon for professional firms, after an initial retainer, to go easy on collections. What that means to me is ¬†they have plenty of margin and can cut their rates for cash deals and on time payments. ¬†What kind of hourly rate are you paying?How much have you spent on legal? (If you want to share of course).What thought has been given even to using a large international firm like that *at this stage* and with this funding:”Getabl Inc is a privately held Delaware C Corp seed funded in its entirety by its founders, its advisors and friends and family.”

      1. markslater

        here is my take on this.¬†there are graveyards of start ups that dont get their paperwork right upfront – and suffer extended diligence as a result, deal fatigue on the part of investors, and painful revelations to the cap table, contracts and so on.¬†I’ll pay a premium all day to have my corp docs in order, have all key employee contracts, invention assignments, NDAs, options agreements, advisory board agreements, convertible note docs and key software contracts – VC ready. I’ve spent a total of about 5k on all of this so far – i’ve done it the other way as well – its not fun.¬†you’ll meet with a partner – he’ll then assign an associate for the work – the rate is reasonable when all of the abovie is being taken in to account. ($250 – $500- per hour)I think if you were to ask fred and other VCs here – this aproach helps the investing process considerably – and i’m all about making that frictionless.

        1. LE

          “I’ve spent a total of about 5k on all of this so far – i’ve done it the other way as well – its not fun. “No issue with the amount you have spent. ¬†They hope to make it up down the road with you. ¬†I would reevaluate though any future legal needs to make sure you don’t ¬†end up paying more money then needed. Obviously.¬†Keep in mind that lawyers are like salesman.¬†They want your business so they are nice to you. They want you to like them. They act like they like you personally and that you are like a friend. So you end up liking them and having a personal relationship which makes it hard to fire them and hire a cheaper advisor. ¬†Don’t get sucked in.¬†

        2. LE

          Mark I hate to be someone who is now telling to spend money on legal but after looking at your site (great idea by the way) a few thoughts:1) The part where you tell people to run the same deal that they are doing elsewhere may potentially, depending on the deal, not be allowed by the agreement that the merchant has with the other deal site. I’m not talking about something simple like “50% off” but something that is more creative and involved that the other deal site comes up with that they could claim rights in. As an example you normally can’t take an ad that is created for you in one publication and run it in another (the original publication if they created the ad normally holds rights to the creative). ¬†Just something to keep your eyes open on you might have to reword this in the future.¬†By the way you have to be practical about this. Even if this isn’t allowed that doesn’t mean you shouldn’t necessarily take the risk. I’m just saying know the risk and then make a decision. Because if you did everything the attorneys tell you you won’t have a business.2) Your idea is good and as much as I hate to say this you might want to go the patent route to prevent future problems.http://arstechnica.com/tech

          1. markslater

            ok – thanks for the feedback!for 1. its a source of debate over here – these pages are all in the process of getting a polish2. we have filed – we are likely filing 5 more in the first quarter

          2. Mark Essel

            Just signed up, didn’t realize you were in beta.LE shamed me with my lack of AVC regular support, and their great feedback.

          3. markslater

            hey mark – got the request – i’ll ping you first week of the new year with the invite.

          4. Mark Essel

            groovy.

          5. markslater

            a little birdy told me the language was changed this morning ūüėČ

        3. Mark Essel

          This is absolutely worth it. Props to 26k burn rate for 7 heads, that’s tight.

      2. fredwilson

        cash and accrual accounting. you need to understand both!!!!!!

        1. LE

          Also important is understanding the many ways that that system can be gamed as well as outright fraud. As only one example an audit I called for at a non-profit uncovered an approx. $20,000 receivable on the books that had been on the un-audited statement for years that nobody had questioned in the past because they had never operated at such a low level to even know what to look for. In 10 years they never did an audit and questioned why it even needed to be done at all if it had never been done in the past.  After all, everything was balanced. The board documents of course called for an audit but nobody ever read those. It is also not entirely uncommon for companies in actual practice to mix the two methods behind the backs of their auditors. Or stuff the channel with goods at the end of year to make the numbers and then take the goods back in q1. Or expense items that should be amortized etc.

      3. jason wright

        Why do startups seem to prefer to incorporate in Delaware? Is it a ‘disclosure’ issue, or tax liability, or another advantage? Thanks.

        1. LE

          Delaware is very corporate friendly.http://en.wikipedia.org/wik…But there is similar concept (since you asked) I will point out. It is known¬† as “forum shopping”. Whereby you try to choose a venue that is advantageous to the purpose you are trying to achieve.For example with UDRP (domain dispute) cases the National Arbitration Form is thought to be biased in favor of complainants.http://en.wikipedia.org/wik…And they’ve been accused of bias in other disputes as well: http://blogs.wsj.com/law/20

  26. JamesHRH

    The real issue, w SW bootstrapping, is the abysmal track record of ‘total code rewrites’.If you are building a business that will need rock solid performance, bootstrapping may lead to poor choices ( hopefully not poor practices, but that happens too).

    1. markslater

      you avoid this with jira. plain and simple.

  27. kenberger

    This discussion is of course limited without hearing the basic rough line items in this figure. Maybe that’s next monday’s post?I’ll start by throwing out this number: for a pair of offshore Ruby devs, we charge about $17k/month. The company must have at least 1 person to work interactively with them at least part of the time. That 1 pair can do quite a bit. This might not be a cheap price by offshore standards but it could cover much of a startup’s dev costs especially at the early stages.What are the other most important expenditures in the monthly figures being prescribed here?

  28. anne weiler

    I know Fred mostly focuses on consumer apps. Would love to see some comparisions for different types of businesses—b2b, ones dealing with higher regulatory requirements. I’m assuming that as the complexity of the product increases so does the burn rate. (And less likelihood of bootstrapping.)

    1. PhilipSugar

      I think its just the opposite.To get huge scale on BtoC you better be ready to burn through a ton of money.¬† Not at the development phase but at the roll-out phase.BtoB means you can bootstrap your product, get customers actually to pay, and use that money to grow.I have done several bootstrapped BtoB companies.¬† Wouldn’t consider for BtoC,

      1. William Mougayar

        Very true 100%. I am doing both now, and although the B2B product might be more complex from a features point of view, you can reign in on its scalability, whereas the consumer app needs to scale Ad infinitum for it to be successful–take Twitter as an extreme example of that.

        1. PhilipSugar

          I think the biggest issue is the customer acquisition cost and lifetime value.In BtoB you might have a very large initial cost but its manageable (you get to pick and choose who you go after) and you receive cash upfront¬† In the the BtoC model you have to spend a ton upfront and then eventually monetize that base.¬†In BtoC is its a chicken an egg situation, where if you don’t have lots of customers you can’t monetize.¬† So you spend a ton of money getting customers and you win when it finally tips, but until is does you burn money by the trashcan getting them.

          1. FAKE GRIMLOCK

            B2C CAN MONETIZE WITH 1 CUSTOMER.SCALE BEFORE MONEY NOT ONLY OPTION.

          2. PhilipSugar

            One consumer very hard to get to pay salary for one person for even one week..One business can pay salary for dozens of people for a year.

          3. markslater

            B2C is dead. Long live C2B.attention……intention – which one would you prefer?

      2. markslater

        what about c to b?

        1. William Mougayar

          What are some great examples of C2B?

          1. markslater

            any company working within the intention economy (not the attention economy) – so Personal identity management (singly for instance), personal RFP (thumbtack) connectivity (US, talkto, and cevacall) – and some companies in the collab consumption space where users are gesturing interest.ofcourse SIRI is an obvious example of C2B at work.

        2. PhilipSugar

          I think you need tons of money.   You are going to groan, but I actually think Groupon is CtoB and they needed dump truckloads of money to hire their salespeople.  Let the discussion begin.  We can take it off this board if you want.

          1. markslater

            its funny – most people actually say that. The reality is – and we have now found this to be the case – we dont need an army of sales people. merchants simply claim their business and start engaging with customers via the chat platform – we are replacing the phone. Its also free. if you like – email me and i can show you how it works in boston.There is nothing C2B about groupon IMO. they – like the other 8000 companies in the 200 billion industry are competing for your attention – they are using email – others use display, search and so on.C2B begins with the consumer gesturing intent, and controlling the conversation.

  29. ShanaC

    There are a number of comments that mention the likes of early development done through outsourcing.1) Is this sustainable2) Does it change the numbers?3) what happens when you scale?

    1. PhilipSugar

      Just could not disagree more with outsourcing development.¬† You can read my comments on Charlie’s blog.

      1. markslater

        well its highly dependent on a number of factors phil – i’ve done both and had good and bad with both.¬†You must have technical leadership within the company. You must have amazing software (jira) and you must have track record of prior projects with outsourced team IMO – any one of these lacking and you may as well buy software out of the box.¬†

        1. FAKE GRIMLOCK

          COST OF OUTSOURCING IS NOT GROW TEAM TO SCALE UP WHEN SUCCESSFUL.BENEFIT IS MIGHT INCREASE CHANCE OF REACH SUCCESSFUL IN FIRST PLACE.WHETHER TRADE RISK WHEN HAVE NOTHING FOR RISK WHEN HAVE SOMETHING GOOD DEAL UP TO YOU.

      2. andyidsinga

        link please ūüôā

      3. ShanaC

        More of a discussion point. I was surprised by the number of people here mentioning it.

  30. Modify Watches

    We’ve been in business (for real) since August 2010. I didn’t take a salary until last month – my reasoning was that debt for me was okay if I believed in the company’s future.¬†A few advisers said, “If you’re not paying yourself, it’s not a real company”. I get the argument, but would love some insight into exactly *what* you think the priority list is to get to the 50k (or whatever amount) burn rate?

  31. JLM

    This issue of burn rate or “start up costs until breakeven” is as old as the hills. ¬†It is a difficult skill to learn to accurately project because many such instances are quite unique unless you are in the fast food business of some other multi-unit operating business.There are always three scenarios — ramen noodles, 3 meals per day and Tiffany’s.At the end of the day, they are all pretty much the same thing EXCEPT for the issue of equity. ¬†In the ramen noodles scenario, the founders have a huge claim on the equity.Foregoing the comfort of Tiffany’s is often the purchase price for the equity.Even better when you can afford to fund it yourself.

    1. JamesHRH

      Totally agree. No right or wrong, just choices.The question is: if you do not know, automatically (autonomically?), how do you decide which path to take?

      1. JLM

        You talk to as many people as you can plumbing for your own comfort zone.What works for me may not work for you.Stunts are not dangerous if you know exactly what you are doing.Comfort zone is everything initially.Then you stretch it until you are thinking — hell, maybe I will wear that Speedo to meet the Queen after all.¬†¬†¬†

        1. LE

          “I will wear that Speedo to meet the Queen after all”It always disappointed me that Gates, until the bitter end, almost always wore a jacket and tie when in a business setting.

  32. mikenolan99

    Fascinating conversation, as always!I run a Small Business Development Center here at Minnesota State University.¬† We see all types of start-ups – mom and pop service businesses, manufacturing, software, bio-tech, etc.There is no “magic number” – no rule of thumb I’ve ever found.We preach the importance of financial projections – not that they will ever be 100% accurate, but as a model of what needs to happen to keep cash at a positive number.¬† We test, and then re-test all the assumptions. More often than not, the ones that pull it off boot strap like crazy, and are willing to put in sweat equity at the beginning.¬†

    1. JamesHRH

      numbers should come at the end of the understanding.

  33. Jon Winebrenner

    Can you also define “product”? ¬†If you’re talking about designing a new Smartphone, or piece of Hardware, your number is also way off.As a designer of hardware products trying to help people get their product to market, I am finding it harder and harder to get people to understand that the design of tangible product is more cost intensive than designing a website, or SaaS, etc.

    1. JamesHRH

      John – agreed, these are web centric burn metrics, but that is the core of USV’s investment thesis.

      1. Jon Winebrenner

        Understood. While we know that Fred is tied to web centric investments, the context of the discussions tend to be generic in tone. Web centric development vs meatspace development could be a whole other thread for MBA Mondays.

    2. fredwilson

      this doesn’t apply to anything other than software. i laid that out in the prior post i linked to at the start of this post

      1. Jon Winebrenner

        I figured as much.  I (obviously) missed the reference in the original post.

  34. Nanodome Ltd

    I’m with The Kid on this one, if not even more so: a VC lecturing entrepreneurs on their burn rate is surely like an investment banker telling a hot dog vendor to buy cheaper buns.Hands off our buns! :-p

    1. JamesHRH

      Nano – not a lecture. Post last week laid out Fred’s view of what was right level of burn (he even gave his prescribed raises and valuations).Its not at all like an investment banker doing anything.Its like the commissioner of the NBA telling you how to build a successful small market team: has he done it (no); does he have a very, very good idea what is going to work and what may not (to paraphrase Phineas Flynn: ‘yes, yes he does’).FYI –¬†http://espn.go.com/espn/com…¬†FYI2 –¬†http://en.wikipedia.org/wik…

  35. jason wright

    Maybe it’s a hindsight thing. If the startup succeeds then the process was right, and if it fails the process was wrong. Problem comes when the process was the same for both. Clearly no one factor decides success or failure. It’s like baking a cake. The right ingredients, in the right quantities, mixed in the right order, cooked at the right temperature, and for the right number of minutes. Even then it won’t be right for all tables and tastes.If it succeeds, however it was achieved, the process was ‘right’, right?

    1. FAKE GRIMLOCK

      ALL SUCCESS COME FROM HARD WORK, TALENT, AND LUCK.LUCK IS PART NO ONE CAN REPLICATE. HAVE TO DO BEST WITH OTHER TWO.

  36. Brad Lindenberg

    I think you can¬†definitely¬†build a product for less than $50k a month. I bootstrapped my first startup through to acquisition with zero outside funding and not only did I have to build a software platform, it was an e-commerce business requiring over a 300k in stock. I just reinvested profits but It was very stressful at times :)Second time around I’m building a web application (no stock!) but I want to bootstrap it until I have a working product/MVP. Personally, it doesn’t feel right to pitch for investment off a deck. I think I’d get better cudos from an investor if I pitched off of a demonstration. Talk is cheap, but being able to show that you can build a product, execute on a vision, and so forth demonstrates the ability of your team to a degree that a powerpoint presentation could never demonstrate. It also shows that you’ve sacrificed time and actually have skin in the game (like the 4square guys did).If a kid came to me with an idea on a deck and hadn’t put any sweat into it, I’d laugh at him, and I expect a VC would do the same?Two of Fred’s comments stand out to me:1)¬†“particularly if you and your co-founders are deeply technical and if you have at least one founder who has great product and design skills”I fit the mould of being the product and design guy, so I spend my time building the front end, database schema, logic flows, functional spec, then I hand that over to a team of devs who build the app. I believe over 3 months I’ve saved around $150k of burn by doing this (150 screens, 30 mobile flow screens, 60 page¬†specifications¬†for the devs and more). By the time the devs have my requirements its as water tight as possible and all they need to do is code, plus I can get a fixed upfront price on the development costs which I pay for myself, out of pocket.Once the first version is built we can pitch it and we’re at a stage that is way beyond “powerpoint” and actually have a working product. I can then get funding and pay the dev’s salary from that and start a real team.I dont know whether this kind of approach is the smartest, or whether its smarter to just try and get seed money off of a deck, but personally¬†I feel a lot more comfortable holding onto my equity for as long as I possibly can in the hope of a higher valuation from a VC who recognises the abilities of the team via an actual product demonstration, and the out of pocket investment and time taken to build it.I guess the question here is whether valuations of companies off of decks are always lower than those who can show a working product/MVP/prototype?¬†2)¬†“Bootstrapping is a great thing and leads to great products and great companies”The mindset differs greatly between¬†bootstrapping¬†and being funded. When bootstrapping, you are thinking “how do I make money” while funded founders are often thinking “how do I best spend money”… You need a product market fit to make money. You don’t need this to spend money (color, instagram, etc)There is a big difference between these mindsets.¬†I’d say the best entrepreneurs¬†can be funded, but maintain a bootstrapped mindset and thats where I hope to get with my current venture.

    1. Mark Essel

      I appreciate this approach, it’s conservative and ownership savvy all around.May I humbly suggest reading the Lean Startup by Eric Ries. There’s one waste you may not be accounting for, and that’s building a product that’s slightly off, and there are straight forward methods to minimize this cost.

      1. Brad Lindenberg

        Thanks Mark… I’ve read it and it sits in the back of my mind a lot of the time while we build out an MVP however we are working with customers during the build. There is a base level of technology required for this idea so we need to make something first, before we can shop it around, although you are 100% right… You don’t want to go down a path of making something nobody wants.¬†

        1. Mark Essel

          Groovy Brad.

    2. Nick Grossman

      “be funded, but maintain a bootstrapped mindset”+1 I think this is it. ¬†Basically, treat the funding as if it were your own money. ¬†Esp in the early days (it’s a different feel when the $ is for scaling up)

      1. Keywon

        Ditto. And treat your time as if you were paying for them too.

  37. Josh Haas

    Most of the success stories I’ve read start with one or two founders basically building the product themselves and getting some traction before raising money. ¬†I’m curious if there are examples of someone raising, hiring a team, then building the product and taking it through to a¬†successful long-term business? ¬†I feel like that’s a lot of people’s strategies, so there should be examples of it working, but I can’t think of any companies that fit that model?

  38. josh

    “he [Naveen] and Dennis worked for nine months without any pay….for basically no money other than their time which they were not charging the company for.”Is it ok/not for founders to post their (uncollected, low) salaries as a payable (when able) with very long terms? (PS: This is their company so the concept of sweat equity being given to them in lieu of work doesn’t arise. THEY are the ones giving equity out to future investors and employees.) In terms of today’s valuations this might be a small number –¬†if ever there is a decent liquidity event. Am curious to understand the protocol and its rationale.

    1. LE

      “Is it ok/not for founders to post their (uncollected, low) salaries as a payable (when able) with very long terms”Hey forgetting for a second what the standard practice is (which I don’t know since I’ve never needed to get funded¬† and further I’ve never cared what others do or what is standard anyway) I like that idea. ¬†I’m sure many will argue the other side but that’s just because of a lack of social proof in my opinion. ¬†“It’s not done -or- nobody does that” isn’t a reason not to try something and get any advantage you can. ¬†Along those lines the parent’s garage could also be rent payable.

      1. Josh

        Thanks for appreciating the non-standard nature of this solution.¬†Unfortunately,¬†on one hand our world of investors looks to invest into innovation;¬†on the other, “social proof” seems to be a driving factor in several investments!¬†Kind of a funny contradiction! So yes, understanding the ‘protocol’ helps to better navigate around it. ;-)Yes, the garage too could be rent payable. Several ventures do not find crazy valuations/even decent exits and so building in a mechanism for the founder to recoup his initial time and money are,¬†IMHO,¬†only¬†common sense and good form. It helps preserve the entrepreneurial spirit. S/he doesn’t have a portfolio to ensure he meets his targets. His/her company is his portfolio.If legalese reaches you better – think of this as a pay-to-play signed by the founders with the company before they really open it up to investors – series A and onward.

    2. PhilipSugar

      Love to see Fred’s take on this……but what I’ve seen is once you get “professional” investment you will not be able to keep liabilities like this on the books as part of the due¬†diligence¬†and the close.Not illogical as JLM points out you are working for the equity.In addition as an investor you want to see your money go to grow the company, not pay off past liabilities.That said this was the crux of my discussion around why having open books at non VC funded companies is problematic. ¬†Not only should you be keeping track of that, but that should be VERY expensive money that you gave up.

      1. fredwilson

        see my reply above phillip

      2. Josh

        a) “(PS: This is their – the founders’ – company so the concept of sweat equity being given to them in lieu of work doesn’t arise. THEY are the ones giving equity out to future investors and employees.)” (JLM is too wise for me to disagree, must dig it in deeper.)b) The entrepreneur and the business need to be treated as separate economic entities – as they are when the founder is easily replaced by the investors.c) As investors have a liquidation preference, why can’t the founders have one with the company when they really open it up to investors – say Series A and onwards?¬†The founders ARE the 1st investors.¬†It just seems the logical thing to do. Keep the costs where they belong.¬†

    3. fredwilson

      i’ve seen it done both ways. i prefer it to be payment for the founders stock. but i don’t have a strong view on it. it wasn’t a lot of money in foursquare’s case. maybe $100k at $60k/year salaries. their equity is worth so many multiples of that now.

      1. Josh

        Sure thing. They don’t have to worry! ūüėČ How have founders’/VCs accounted for the initial expenses in cases where cos. haven’t been as successful as 4square?

  39. FAKE GRIMLOCK

    HOW MUCH TO BURN WHILE BUILD PRODUCT? 100%. 

    1. vruz

      Why only 100%?:-)

  40. Prokofy

    Just to add my two cents, I’ll never forget the first time I heard the term “cash burn rate” some years ago. I had been brought in to turn around a troubled NGO and I met with a VP who was a telecom king (I know you don’t like the telecoms but they are good in business),¬† who explained to me that I had to figure out the burn rate — take the cash on hand, look at the hard expenses that couldn’t be put off, and divide and get the months left to live. Once you do that, it’s stark, and you take measures. Cut staff, cut salaries, cut travel, cut all kinds of things. It strikes me that the $5000 a month kids are not valuing their labour, and they are supposed to work insanely long start-up hours in a sense for free, without even any benefits. There’s something about all that I find unpersuasive — I don’t see the zillions of kids doing this start-up Stakhanovite stuff as actually yielding the innovation claimed.Even so, when you have OPM (other people’s money) — and you really feel that keenly in a non-profit in ways that you might not if your widget actually produced money on its own, and you weren’t awash in VC cash — you feel a sense of responsibility. How can you have travel that isn’t working toward the board’s goals and the organization’s stated mission if you only have 9 or 18 months to live?Or is there a zen to “cash burn” — by the time you have to have that conversation about “what your cash burn is,” you are already in trouble. There is no saving you. You shouldn’t have lived in the first place?I think about these things (especially about the non-profit world where there is so much that is ridiculous.)On the tech front, I have to say in and around Second Life during the boom years of 2006-2007, I saw obscene amounts of money showered on the basement-bound for their coding skills and on various really shakey “entrepreneurs” who only yesterday were shipping herbal products from Myspace accounts and doing “SEO consulting”. There were people living at the fancy hotels in LA and SF with the pools and taking drugs and behaving like arrogant asses never doing any more work after that “initial round”. Renting a warehouse and using boxes for furniture and then spending the whole day drunk or on pills getting “inspired” with the tatooed girls on their laps.If the states attorney generals monitored start up expenditures like they do non-profit charities, what a different world it would be. Um, God forbid we step on any of that “innovation” though, eh?

  41. Kevin Pillow

    Thank you Fred for this series of post’s, the comments from everyone are very helpful to my understanding of building a business and the product. By the way could you say hi to Prince Walid bin Talal for me….

    1. fredwilson

      who is that?

  42. Intelligent_Speculator

    The benefits of zero money is great planning and thinking because you don’t have anything else. I would prefer to back someone with deep thinking into execution plans of how to take over the world when they do get some cash. When you have no money you get creative and find chinks in the armor of the businesses you are going to crush when you get your funding. Backing passionate smart people who have proven to “find a way” without any cash is fertile investment ground.

  43. mikiane

    We are burning this amount in euros here at Joshfire (http://www.joshfire.com). But we are also generating around 40K revenues. Do you thing we should reinvest this revenue right now and increase the burn. Or stay at this level, considering it’s a classical rythm for a seed startup?

    1. fredwilson

      hard to say. depends on what you can handle personally.

  44. jason wright

    The problems of a discussion centered on a collective noun.”Car” – Examples are the Bugatti Vayron and the Tata Nano – four wheels and get you there.”Startup” – Examples are Google and a bootstrapped basement ‘Project X’ – ?

  45. Jose Colmenares

    Great comments. Great post.Just a comment.I’ll assume we are talking about going sooner or later to search for financing. That is, this point of view is not valid for all situations.As I see it, it’s all about trust: How much do I have to expend before having something to show that can make investors (angels, VC, whatever) believe in me? and and how much time do I need to do this?I mean, if I just left college, I have to show something. I wouldn’t expect someone to give 400K $ just because I’m cool. If this is my fourth start-up, it’s different. If it’s my first, but I’ve been working in the subject and someone may consider me an expert, it’s also different.¬†This is important because it can help to put a time line for the product building stage. And that means putting a cash burning limit. Or it can help you to realize that you will never do it alone, and need to change strategy if you want to get there. Maybe show something not as finished as what you had expected, but something.

  46. Joel

    I follow your blog … I am CEO of a start-up medical diagnostic company. ¬†Your burn number $50k/month is not out of line in the biotech field. ¬†In fact, it may be low. ¬†So, maybe for a start-up IT or software company it is way too high, but in the biosciences it is OK or low. ¬†I like following your blog – keep it up. ¬†Joel Ivers, CEO, NanoDetection Technology, Inc., Franklin, Ohio.¬†

  47. Magnus_Soderberg

    At the moment we at Triolith Entertainment has been running on a budget for $15000 that we used to get our stock capital (not sure if that’s the right english expression) And we have made roughly $13000 on the games we have released. So far no pay since we started which was in March 2011. Luckily most of us has been living on student loans so far but that is about to end for most of us now. So living cheap is totally possible ūüôā

  48. Lucas

    “… if you have at least one founder who has great product and design skills.”¬†You insinuate that you might need 50k when you lack product competence.¬†Hm, I seriously wonder. Is it really possible to build a great company by outsourcing core competence like that?¬†Core product built by employees or consultants. Dont sound like a winning concept to me.¬†Try Haskell! It¬īll take you to the moon on no cash:¬†http://www.reddit.com/r/has…

  49. Jacob

    And that’s what is important to understand. If all you have is $5k a month, make due with it. However, if you are fortunate enough to get seed money, utilize it. If you are fortunate enough to have 50k a month, great. The problem with having that so early on is with the entitlement factor. Do these business owners then feel entitled to money? Do bootstrappers know the value of money in a business more? Just things to think about.

  50. Rohan

    Do what you can with what you have, where you are.Bingo!

  51. Prashant Gandhi

    “I think the whole web world has gone to far and taken some of the wrong lessons from Lean Manufacturing, that is all…”If you are referring to the lean startup methodology, it doesnt refer to external behaviour of founders.. but is more focussed on making your product lean and agile. The idea is to build a product with minimal feature set, get feedback from our potential customers and¬†iterate repeatedly. The core idea is to get out of the building, validate all assumptions and confirm viability of business models before burning away a lot of cash.¬†¬†¬†

  52. LE

    “distracting game of penny pitching”Yes the press loves this stuff. ¬†And it’s a popular culture favorite.I remember an article in the 80’s about Sam Walton very distinctly … something like “drives pickup truck. Drinks coffee every morning at local shop”. ¬†And of course they also do the same thing with Warren (Netjets owner) Buffet and how he plays backgammon and lives in the same house he always did. As if that somehow means something. ¬†Of course if you already have your ticket punched you don’t need wealth trappings because the world already knows you so you don’t need to impress anyone. But not the 99% trying to get there.”In 1957, Buffett had three partnerships operating the entire year. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500.”Big. Fucking. Deal. I’m sure he doesn’t stay at Motel 8 when he is on the road though.¬†People always want to reverse engineer some quality someone has and give it divine powers.¬†And of course they always point to “excess” as bad and simple as good. ¬†Corporate jet? A waste of course! (not true – time is money).¬†Fancy home? No need for that! (Not true with¬†a fancy home you can entertain and meet people and do business deals).¬†Vacation home? (Same, everyone wants to be your friend. People come out of the woodwork. Good for business).¬†Boat? ¬†(A great way to entertain, meet people and do business.)¬†Fancy car? (Depending on what you do, good for business as well.)I would go one step further with what you call the “cult of low expenses”. I’ve seen plenty of business people over the years that are so fixed ¬†on cheap cheap cheap that they won’t part with a dime in the face of overwhelming evidence that in some cases, surprise, it does pay to part with money to make money. ¬†

  53. Sheldon Grizzle

    Paul, I’m with you. Obviously there has to be a balance here. We’ve invested in two startups this year (we’re a very early seed fund < $100K). Our take has also been that it has to be sustainable for the founders. What do you think is a fair compensation level for two or three guys hacking away to get an alpha or beta version up?

  54. FAKE GRIMLOCK

    LEAN ABOUT NO DISTRACTIONS FROM WIN.TOO MUCH MONEY IS DISTRACTION. SO IS TOO LITTLE.

  55. ShanaC

    Right, but it is translating into a kind of macho behavior that isn’t long term healthy

  56. Prashant Gandhi

    We need to stop making heroes out of the starvation story.. absolutely agree on that point. I just objected to the causality between lean and that behaviour.. one has nothing to do with the other.

  57. laurie kalmanson

    cult of the starving startup team replacing the cult of the starving artist in the popular imagination

  58. FAKE GRIMLOCK

    MONEY NOT MAKE STUPID FOUNDER SMARTER. JUST MAKE STUPID BIGGER.

  59. vruz

    Well, that’s only if you borrow and you can’t make the product yourself alone. Or even a working demo.All I hear are rationalisations to not make the product perfect.

  60. LE

    But money around a stupid person attracts smart people who help the stupid person think. As long of course as the stupid person has enough intelligence to take advice. (Think Presidents and their cabinets and advisors.)

  61. JamesHRH

    If you have ever seen an unprepared (can’t go with stupid, not a robot!) founder under pressure, taking advice is not their long suit.Investors say ‘great team / bad idea’ better than ‘great idea / bad team’. But what they really want is ‘great team / great idea’ – hard to do with an unprepared founder / CEO.And, if you have a ‘unprepared founder’, the chances of that founder creating a great team – especially if those people are forced upon that founder – are infinitesimal.

  62. FAKE GRIMLOCK

    STUPID MORE CONTAGIOUS THAN SMART. ESPECIALLY WHEN PATIENT ZERO IS BOSS.

  63. ShanaC

    neither are brilliant in practice, and do startups really want to be stuck in a patronage like system with benefactors (aka vcs). I doubt it, but sometimes with some of the more dinky types of web services, I got to wonder.