4 Years Into Our SaaS: Why Bootstrapping Was the Only Logical Choice

Hey, there. Four years ago this December, my husband & I launched our first software as a service, Freckle Time Tracking. Since then, it’s grossed nearly $700,000, and we’ve grown, shrunk, hired, fired, stagnated and worked our tails off. To celebrate, I’m writing a series of blog posts about what we’ve learned.

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When I was a young girl (8, 9, 10), I became obsessed with money. Mainly because we only intermittently had any, due to severe mismanagement. The words “Because we can’t afford it” ground deep grooves into my daily existence. It weighed over every opportunity, every decision.

So, get-rich-quick schemes were irresistable flames to my little moth of a heart, but… I knew better. I’d fallen for Sea Monkeys, once, and had never forgotten it. Some part of me knew that The Internet Treasure Chest and Stuff Envelopes From Home were just Sea Monkeys in sophisticated clothing.

But every time I saw the promise of riches, it hurt. I knew they were fantasies, I knew my cynicism was the only correct response, so I did nothing but grind my teeth and hurt like hell.

I grew up to be a consultant. A very expensive consultant. Because instead of buying into the fantasy, I read real biz books, and spent my time learning provably profitable skills, and hustled on the side. I wanted money, and I wanted it reliably, and I only trusted it if it was something that I actually worked for.

I worked; I got paid. Life wasn’t giving me a whole lot, so I made it give me more. When I started out, I was charging $10 an hour. By the time I quit consulting, I got paid a lot. (No joke: one of our last gigs worked out to about $500 per hour, per person.)

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I poured my heart into work for my clients and watched them destroy it. I watched my clients go into management death rolls, never shipping the things they spent thousands or tens of thousands or more on… the things I built died inside their stupid and ineffectual bureaucracies. I made my very best suggestions, I educated, I consulted, but in the end, I often ended up having to (metaphorically, though sometimes literally) make the logo bigger. I’d tried every kind of client: cheap, local, sophisticated, ignorant, startup, Fortune 100. Same shit, different day.

(I was even working on a really cool project at the Bear Stearns midtown offices the week before they suddenly ceased to exist. Naturally that project died, like almost every one before it.)

By the time we started to build Freckle, my husband and I had managed to attract clients who listened to us and who actually shipped what we built. (Thanks, Pepsi.) But it didn’t matter in the long run. I was sick of it all. I was 24 years old and burnt out.

So to say control was important to me? Understatement.

Having complete and utter control of the fate of my project was the most important thing to me.

I was so tired, deathly tired, of watching the wrong thing be done. Of projects never shipping. Of fatal compromises. Of fighting management, who were ignoring (or never even considering!) the needs of the user. Of having to use mockups in my portfolio instead of showing people the real app because the real app never lived.

Of having to appease and manage “stakeholders” who couldn’t tell their ass from a very well-spec’d hole in the ground, rather than focusing on what I was actually supposed to be achieving.

And I had enough friends in the startup game to have witnessed that “investor” is just a ritzier name for “stakeholder.”

Here was my mental list of things I’d never have to deal with, if we bootstrapped:

  • being forced to sell
  • being ousted
  • being forced to take on team members we didn’t want
  • being forced to pursue revenue sources at odds with serving our customers (e.g. ads)
  • being forced to work at an acquirer
  • being dilluted
  • having to worry about stifling shit like SEC regulations on what we tweet, blog, or tell our friends
  • managing investors who thought we weren’t growing fast enough, or who wanted to see wireframes and walkthroughs of the product and make changes, or any of that interfering bullshit

Because investors are only your allies in a few very narrow circumstances: if you want to grow big and fast, if you want to sell, if you don’t love your business & don’t care to keep it, if you don’t mind tough legal strictures and placing your business’s value in the hands of the public, if you don’t mind being forced to become an employee again.

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None of the above was an acceptable outcome to me. And, while visions of money bags danced in my eyes — wouldn’t it be nice to be handed a million dollar check! — growing up with money problems made me skeptical.

I’d long since learned that “free” money doesn’t exist, but power imbalances in financial transactions certainly do. And I was tired of being the sucker.

So, funding was never an option I’d even consider.

Bootstrapping was the only approach that would give me what I wanted:

  • independence
  • autonomy
  • disintermediation
  • ability to always do what I believed is right
  • total choice: who to work with, what to work on, when, and how
  • a long-term asset (a company I get to keep forever)

Ownership is the strategy. Bootstrapping is the tactic. Personal sovereignty is the reward.

Phew! OK, that came out more serious than I intended. Well, there are more posts where this one came from. Stick around, follow me on Twitter, for the next post about our marketing strategies over 4 years of stagnation and growth.

Second Installment: Why We Shut Down Charm on the Eve of Public Launch, at $48k/Year and Growing.

Get my next bootstrappy gettin-shit-done essay delivered straight to your inbox. (And be first in line for tickets & discounts.) Drop your name in the box!

Discussion

  1. Erik Porter

    Good for you! My business partner and I feel the same way and are just getting started. We’re attempting to bootstrap a bit while fully employed somewhere else. Difficult, but should work out for our long term goals of running our own business full time.

    Thanks for the great post!

    Reply
  2. Matthew McFarling

    That is so awesome! Thanks for sharing your thoughts. I cannot wait to read about other things you have encountered in the last four years of building your business.

    Reply
  3. Asher

    Great article, Ive seen a lot of articles about the dos and dont`s of VC startups, but never a good retrospective on bootstrapping. Eagerly awaiting the next posts.

    Reply
  4. Rayann

    I agree with the other comments – this is a great piece. We all need to read this, and more! Grab a mojito and get the next one posted!!

    Reply
  5. Shola

    Nice post. You said “old biz books”. I get the feeling you have invested time (and testing) studying direct response. Care to mention any books that really helped in your evolution as an entrepreneur?

    Reply
  6. Carl

    Hi Amy, interesting read, especially as one who is also working hard to build their own business.

    The only thing I would say that could be counter to your argument is that surely selling a business for $1 million would give you the financial security to make your next venture completely your own?

    Reply
    • Amy

      Carl, I think you’re operating under a common but sadly very critically wrong assumption:

      Funding is not “selling a biz.” Bootstrapping isn’t the opposite of selling a biz, it’s the opposite of taking funding. A check for $1 mil in funding isn’t freedom by any stretch of the imagination — funding is a yoke.

      But let’s say there was an offer on the table to buy Freckle for $1 million. I’ve had other offers in that ballpark range, but hell no would I ever take one. Why? Because Freckle will make that much in 3 years. In total, our products will have made about $750k in 2012. It’s not a good ROI for me to give away a nice, solid income for $1 million.

      Compared to a lifetime of running a single product that generates $360k/yr — even if it never grows again — what is $1 million? Peanuts. A loss. A giant ass opportunity cost.

      And remember that that if you get paid at once, $1 million will be taxed all at once, in the same year. You will pay more in taxes on this than on revenue because you won’t be able to take 3x the write-offs in a single year, unless you’re a prodigious spender… of course, if you sell your biz, you suddenly have no more biz to write-off expenses on.

      Oh, and there’s another wrinkle.

      When you sell a startup-y biz in this day & age, you’ll typically be required to work at the acquirer for 2-4 years and you’ll “vest” your buyout amount.

      I’ve asked VCs if they ever do pure product acquisitions, with no team, and they look at me like I’m nuts. It almost never happens.

      So, let’s say you really do sell your company for $1 mil. Then you find yourself stuck in a job again. Hate the job at the acquirer? Too bad, if you leave, you forfeit a lot of the money you “earned” by selling. Also, since you’re an employee, taking writeoffs is even tougher.

      I don’t know about you, but I can’t imagine founding a company for freedom and control, and then downgrading to a job — a job YOU CAN’T LEAVE. It’s the opposite of everything about the dream of owning your own business.

      Reply
      • Dawn Green

        Add to the high tax burden and other factors of selling your business for $1 million the fact that you lose all of the other tax benefits of owning a business. No more cool equipment write-offs, cell phone service, no more business dinners, no more business travel, conferences, etc. Sure, your new employer might pay for some of those things, but it’s at their discretion, not yours.

  7. Ric

    Hi Amy. Thanks for another inspirational article. I’ve been meaning to write a post like this!

    We’ve been bootstrapping for about 4 years too, but our first product didn’t really work out financially. Our second effort (still with no external investment) has been doing much better though, and this financial year we’ll turn over about $350K (between 2 founders) as a combination of product sales and consulting, and we hope to just about double that next year. I’ve had two kids during all that so I still don’t feel very rich, but at least I can support my family now :)

    Cheers! Ric.

    Reply
  8. Shola

    Amy, I think a lot of one’s desire for an exit has to do with 2 things: 1) Your Reason “Why” (besides money) 2) Your definition for Wealth. For some, Wealth = Passive Income. For others Wealth= Passive income PLUS Asset Value.

    This is one of my frustrations with a lot of the people I know (not you, whom I’ve yet to meet :D) who have businesses that generate income but are not sellable. Only 1 in 100 businesses are sellable (John Warrillow stat of Built to Sell).

    Let’s say your “reason why” for starting a SaaS was that you wanted to: -fund a technology school in Mozambique -fund a movie about female developers – on your own terms, i.e. with your own money -become an angel investor in clean technology startups

    Assume you have a profitable business that makes say $500K a year. Also assume you are able to bank $100k of that.

    Your budget for your big “reason why” is $1 million.

    This means ceteris paribus, it’s going to take you 10 years to save that $1 million.

    Now let’s take another scenario. You work your ass off building a self funded SaaS. You grow your business to 3000 customers – they are loyal and profitable.

    Your pricing point averages $125/mo. That means you’re doing well over $3 million a year with those ~3000 customers.

    Over the course of 5 years instead of “lifestyle spending” on $100k a year you reinvested that money into the business – no vanity spends like sexy facebook pages. No – we are talking leads, leads, leads – conversions, conversions, conversions.

    While your competitors are turning 5% of their free signups into lifetime customers, you break out the ninja direct response tactics and are converting an astounding 10-15% of signups into customers.

    With a 30% growth rate, in a growing market, $3 million+ in revenues and a 3x multiple – you get an offer for 8 figures.

    (this is a reasonable multiple http://www.quora.com/Indy-Guha/Posts/Keeping-it-SaaS-y-Valuations-for-SaaS-Companies )

    Now you have your $2 million – cash (when the dust settles and everyone gets their cut).

    But – and this is a BIG BUT – you saved yourself 5 years.

    You understand that money you can gain or lose, but time you can only lose.

    We live in a $45+ trillion economy. There are only ~8765 hours in a year. In other words, you’ve made a killer ROI on your most valuable resource – time (which is far more plentiful than money).

    Your exit isn’t just about the cash though – because now you have a track record of a successful exit that is also an asset – a sort of brand asset – you can live off of for the rest of your life if you know what you are doing.

    Not only that – you believe in abundance. You know there’s no limit to the problems of the world so there’s no limit to the next company and the next and the next you can start.

    Finally, while product are great as an asset, a study of young pentamillionaires (see De Marco’s book) showed that the vast majority of them made their fortunes through asset appreciation – not passive income.

    Passive income came AFTER the asset appreciation, not before. If you look at a graph, the exponential impact of compound interest at high amounts of money is sick. So if your goal is passive income starting with a lump sum and doubling that pays off.

    The way I see it, there’s absolutely nothing wrong with selling a business – it’s an asset like anything else.

    Sometimes I think alot of people in the indie startup community yell “Sell Out!” when an entrepreneur decides to exit (not you mind you, just “some”).

    I’m a big believer in Jason Cohen’s mantra about building a profitable BUT sellable company from day one – so you DO have the option to do that.

    Sadly, I know far too many people who have profitable but non-sellable companies that they want to step away from. People change and having the option to sell your company just like you’d sell a website, a house or any other asset just makes sense (to me…)

    Just some thoughts – curious to know yours ;)

    Reply
  9. XU DING

    Thanks for sharing such valuable information.

    Just so you know, you are my role model. I like how you develop own products and make it your business.

    I am a developer too (was purely doing client projects previously) and now switching to develop own products as well .

    Watch out!

    Reply
  10. Mohamed Abd El-Salam

    Great inspiring article Amy, as usual.

    Waiting eagerly for the next one!

    Reply
  11. Alex

    Interesting article Amy. There is one question that I think begs itself though — with all this — are you happier than ever before?

    Reply

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