When I co-founded my most recent company back in 2007, my partner Steve and I shook hands on a commitment to bootstrapping this one with 100% self-funding. This decision was made not because we have anything against venture money, as both of us have had and currently enjoy positive experiences with venture-backed firms. We simply hypothesized that we had a capital efficient business model that could work as a self-funded play. We knew that if we could run hard to profitability on our own funds, we'd enjoy huge flexibility in how we run the firm, in perpetuity. We both agree today that it was absolutely the right call: We turned profitable in our first 12 months in the market and now we're growing very strongly into 2010. The gambit worked for us. This is the first time I've done a startup without any outside funds, and looking back now on the first 2 years, I have some insights that might help other entrepreneurs as they struggle with the very real question of growing organically (that is, your own money, or that of your friends and family that comes without institutional structures) or taking outside angel or VC money. It really comes down to a few variables around what you're capable of doing in your first year...

These are 5 questions to ask yourself if you're thinking of bootstrapping with modest funds:

1. Can you start selling quickly? If your initial business model requires an unspecified development or R&D period before you can even think about customers and a pricing model, its going to be almost impossible to self-fund your company to profitability unless you have really deep pockets and don't mind revising your spend plans every step of the way (not recommended.) We build software, but we also knew what we were building and exactly how long it would take -right down to the week- (thank you, Agile development methodologies!) in order to deliver a complete offering to our first paying customers.

2. Will customers pay you quickly? Its one thing to know you can build something you can sell quickly, but do you know if people or businesses will actually pay you? Seems obvious, but find out before you start. We actively interviewed prospective buyers of our software service before we wrote the first lines of code. We showed them detailed product mockups and how it would be used. We added capabilities they wanted. We talked to all kinds of users involved in the purchasing process. Doing that, we confirmed that if we built it, a handful of awesomely wonderful "believers" would buy it from us. Most importantly, we confirmed our payment terms. We pursued this as a collaborative process, and we came up with a pricing model that worked for them and us. Consumer and B2B plays have different paths to this knowledge, but you need to follow that process.

3. Can you build only things you can sell? Brutal discipline in offering design is non-optional. There is very little room for hunches about product acceptance when you're building on a shoestring. If somebody won't buy it, don't even think about building it or adding it, no matter how cool. We made this mistake at a feature level in our software a couple times in the first year... We allowed our desires to supercede direct market feedback. Those features are now long dead, but the cost of lost development cycles taught us a key lesson: You cannot be too obsessive about confirming that every aspect of your product is both desired and supportive of your revenue model  (confirmation = people who don't work for you saying that they want it and will pay for it.)

4. Can you commit to a true hiring process? As there is so little room for error in the first year of a bootstrap, you need to eliminate the possibility of an expensive dud hire. The way to do this is by having a true process. If you can work with folks you've worked with in the past, that's your best bet -get "the band" back together. If you have to hire strangers, then don't settle for less than total rockstars. Really dig deep on all potential hires. Take your time to get it right. If they are developers, demand to see some new work from designers, make back-end developers do real code challenges (our policy is that if a developer candidate whines about a code challenge, move on, no matter how talented they are) Give market or customer facing candidates personality tests (again, if they whine, move on), conduct background references, do brainstorming sessions to see how they work... Leave literally nothing to chance, or you will suffer for it financially and operationally. Of course, even if you do all of this, you'll still likely screw it up... We did all of this and we made one hiring mistake in our first year, but we solved it quickly, which is the next point.

5. Are you willing to cut a loss before its an actual loss? Here, a "loss" could be a non-productive hire, a bad product decision, a demanding customer, a recurring unneeded expense... literally anything that your gut is telling you COULD become a problem, lose it now, no matter how much your brain is telling you that your gut might be wrong. Your gut is probably right, but even if you're just being paranoid, you have to keep this raft afloat to profitability so you must execute with uncomfortable certitude.

In short, product, operational and fiscal paranoia is the fuel of the bootstrapped business in its first year. The paranoid self-funders who survive their first year in business can aspire to become well-adjusted entrepreneurs when they turn profitable.

Happy to hear any other perspectives on this.

Just had an interesting insight with an entrepreneur friend of mine over the weekend. Alex is a technologist I'm working with on an early stage company just getting off the ground. We were colllaborating on an issue throughout the weekend. In the spirit of levity, I made an offhand comment about this weekend being heavily tilted towards the  "work" side of the "work vs life" balance.

But, Alex made an interesting retort with total sincerity, "I disagree. The notion that there should be balance between work and life is the problem itself. Its all just life flatspace with different nodes of activity. The more connectivity and intensity amongst the nodes, the more robust and novel the life."

Alex is right. It seems small, but its a useful reframe of mental model, especially if you are burning really long hours per week and fighting this sense that your "out of balance"... Instead, one can consider that you have a flatspace that is your entire life of activity. Some things you fill it with are professional, some are recreational. Some take lots of concentrated effort, some are relaxing. Some are stressful, some are blissful. Combining all of them creates novelty and robustness for all of your life's activity. The emphasis then becomes one of shaping an aggegrate quality of experience, regardless of whether it might be have been parochially defined as "work" or "play".

For any startup, there is an ever-shifting balance required between the desire to "Get Stuff Going" (Momentum) and the desire to "Get Stuff Just Right" (Perfection).

While the qualities of Momentum and Perfection are obviously both very important, I would argue that Momentum should always trump Perfection early on. Getting confused on this can screw up a company before it even gets started.

Momentum is the fuel for literally every aspect of the young company's operational success: Team assembly, product development, funding and revenues.

Starting a company is an unnatural act. It therefore requires an immense amount of energy to successfully come into being and reach the point of profitable self-sufficiency. The key to getting to that self-sufficiency is creating cycles of energy that become increasingly Perfected with every iteration... Think of it this way: Momentum buys you iterations to achieve Perfection. We have to plan intensely and well, get as close to a Perfect hire/product plan/market plan/capital raise as we can, then you have to just go execute, because that is how Momentum is established.

I would rather get things 80% right and be moving forward with increasingly effective (read: historical error-correcting) execution than to have perfected an aspect of the company at the expense of getting momentum. This might seem obvious, but its sometimes tricky to catch ourselves when we are inadvertently elevating Perfection above Momentum.

Here are 10 random examples that a team might be elevating Perfection over Momentum. I'm sure you can think of more:

1. Waiting for the entire team to get assembled to start developing product. (Start building what you can with who you have!)
2. Shopping for ideal funding terms when the ones you have are good enough (There is a big opportunity cost to execution for a small team to hunt the perfect whale for funding)
3. Trying to bake-in details of today's market reality into a product that won't be out for a year (You're probably over-designing.)
4. Developing go-to-market plans that hinge on contingent future successes ("When we achieve x, then y is a slam dunk. So, we should have z in 12 months.)
5. Holding off on a launch of a product because one or two key features are behind schedule
6. Not pursuing a big customer because you think they'll say no because the product is not "feature-rich" yet
7. Letting customer/user requests for features drive your product planning to excess (fear of disappointment)
8. Holding off on doing something because a future rockstar employee (architect, sales VP, new CEO) is supposed to be onboard in "the next month or so" (Rule of thumb: If something is truly happening at any time in the next 2 months, you'd already know exactly when. If you don't know exactly when, its at least a quarter away.)
9. Not firing an employee because you think you can fix their deficiencies in short order (aka, "Perfect" their wrongs... Newsflash: You can't usually do this in a startup. You made a bad hire. Get over it and get rid of them as fast as you legally and ethically can, even if it means a few things drop. Preserving team momentum and standards are worth it.)
10. Waiting to pursue additional funding until you think the company is in "optimal position" to get a good valuation. (It will take longer than you think, and you risk slowing everything down and decreasing negotiation leverage. Go for it early.)

Momentum is extremely powerful, but it means developing a tolerance for imperfection. We are not in the business of Perfect, we're in the business of making things happen that get closer to Perfect over time. "Fail forward fast" is a great saying by Tom Peters. That's exactly what we're talking about here when we value Momentum over Perfection.