Genuine VC

From experience, I know how difficult it is to build a successful startup - and I think it’s nearly impossible to do it simply with contract workers, i.e. those that don't share the passion and energy that you need to create something special. Likewise, I think it’s nearly impossible to motivate people to commit to your cause if you're not doing so yourself. My advice would be to get to a point where you can burn the midnight oil yourself, lead by example, and work on your selling skills - i.e. selling others on your vision for the future and passion to make that vision a reality.

Great post, David. You nailed all the issues involved in this kind of decision.

I agree with Pat's criticism of using contract programmers with no equity stake. If this company involves any interesting technology and intellectual property, the development team must be fully engaged.

We have been bootstrapping our own company in a similar manner, with one small difference, I am a programmer and so nothing has been spent paying me. Our product does involved both a software and a hardware solution though and was all accomplished in our "spare" time and with our "spare" cash.

We looked long and hard at the options for early stage funding (more than once) and as with your friend, decided that we would have to give up more equity than we were willing to part with - if, that is, we managed to get investment. Instead we decided to focus on developing the solution in our own time and with our own resources, not getting distracted writing business plans and looking for investors that might understand and not closing off future avenues for funding when the development was finished ("not these guys again... next!"). Our approach has cost us time both in terms of our own and in getting the product to market but as with your friend we hope to maintain more equity.

One point you raise hits home with me: Is she being paid a fair amount for the opportunity cost of her time for the consulting gig? If not, perhaps a different imbalance exists. My salary in my current job is lower than market rate for the job I perform and the time commitment has been significant and even detrimental to developing this project, but a sad fact of life is that I have to eat and short of getting even more distracted looking for another job I didn't have many other options but to muddle through.

It's been a long road for us but now we're about 6-8 weeks from launch and will have a complete solution and a few early pilots when the time comes to approach investors. At that stage we're just looking for capital to hire some more people and grow the company and the product, but the core product is ready to roll and even has pilot customers to prove interest in the market. If I had to do it all again would I do the same thing? Probably not, I might be more inclined to approach angel investors and look for the early stage funding that would have allowed us to move faster - Then again, the market is a different place now than it was then and more exposure to the technology has made the product is easier to understand so I might be letting that influence my thoughts on how easy it would be to get that early stage funding. Either way I don't regret the choices we made and look forward to the challenges ahead.

I thought building a new business was supposed to be a team endeavor? Could she be shooting herself in the foot if she tries to hold on to too much of the potential value?

What is an idea worth? What is the creation of a new entity worth, Zero (maybe negative) through billions, but how often is one person able to hold majority control? Doesn't seem too often these days.

Another approach would be to find a person who "drinks the same Kool-Aid" as she does. The two could then share the effort involved in short-term, side money-making work, and long-term energy and focus investment in the idea. Whether it is possible to find a "Kool-Aid" friend just like that, on demand, is arguable, but maybe she has such a person in her group of friends.

Great points throughout. One thing that your story does not indicate is whether your friend is a first-timer or not. It would also be useful to know the magnitude of bootstrapping costs we are talking about here.

I agree with Samuel and Otis: the concept of "I am the only one to have spotted that opportunity" generally translates into "there is no opportunity". Unless an entrepreneur can surround her/himself with the right team and talent, embracing the vision and the execution path, developing a startup will be very challenging.

This is a dilemma that many entrepreneurs face – and usually is the 1st trade off that has to happen.

From my own experiences, you are better off surrounding yourself with at least 2 strong developers who can deliver on the product in a timely manner - and if you want good developers you need to spend $$ to ensure they can do their job well.

It’s a “penny wise, pound foolish” scenario for her – my fear is that she may end up with an inadequate product, minimal spend on product development and 100% of equity.

Without information asymmetry, VCs would never make any money ;)

I believe that she can do this and that bootstrapping can work. We talk about the opportunity cost, by building it slowly. But that is also the same that you loose chasing venture and even angel money.

I've experienced this myself and seen it repeatedly in other startups.

Unless you really have a capital intensive business or a good ready angel friend it's not worth wasting the time during the early phase of the business.

It's much better to start building the business slowly and interacting with the users.

And for god sake, stop writing that business plan! You know it's all a lie anyway. It's a waste of your time. Let your business, your blog and a Backpack site replace it instead. Later on it will be a lot easier and credible to write one if you really need it. The amount of time would be entrepreneurs spend on their business plan and not actually starting their business is incredible.

It is easiest to do web based startups of course if you have a developer on the team. I am a developer myself, so I don't have the problem.

There are many people available people that could be brought into it early on for not that much money. I've heard of many people using sites such as elance.com and guru.com to get the first prototype of the ground. If that works well, maybe she can continue that.

I am the entrepreneur in Dave’s post. Really appreciate all the feedback. I took to heart each of your comments and after a couple of read-throughs I agree with you – all of you. Yes, I need a team. Yes, I must lead by example. And, yes, I realize 100% of nothing is still nothing. I know my idea is not one in a million and execution is what really counts. What follows is my thought process in deciding to consult for cash and use that cash to start the business.

On the business side, I spent several years in Internet sales, marketing and business development mostly for community / peer-to-peer products. On the personal side, I developed a deep passion for a specific offline interest shared by millions of people. I am taking my offline interest, which has enormous spending characteristics and combining my online professional experience to create a service that allows this offline group to connect online.

I believe in my idea more than anyone, typical of entrepreneurs who build products that respond to a personal unmet need. So right off the bat there is a huge asymmetry that exists. I value my idea too high; others value it too low. I have to get this idea to a point where some of the risk is minimized. I have to get something out there – it can be scrappy – just something to show demand for the service and get feedback before going too far down one path. Then I’ll be in a better position to recruit a talented team and if capital is necessary, to raise funds.

This is what I know:

• I have an incredible passion for launching this product.

• I need to get something out the door to prove the concept.

• The technology to build a prototype is already out there. It just needs customization. A lot of developers can build this.

• The engineers I know, who I hope will join me after some viability of the concept is proven, are straight out with projects of their own. I would have to wait two to three months to get their time.

• I don’t have the skills to build it myself.

• I do have business planning, modeling and Internet sales & marketing skills.

So I’m using my skills to get cash to pay someone else to use their skills to build my prototype.

And who knows, maybe the developer will become my first team member. At least I’ll have something, other than an idea, to reduce the asymmetry that currently exists. And in the meantime I’ll keep reaching out to people who drink the same kool-aid and see if there is a talented developer in the mix.

Thanks for your thoughtful comments. You have given me, and I’m sure many entrepreneurs, some great insight.