How do you bootstrap a company that requires significant R&D before an MVP can be shipped? Or for that matter one that has initial infrastructure costs, or one would only be affordable if there's an economy of scale?
This is armchair quarterbacking, of course, I'm not an entrepreneur and do not pretend to be one. Patio11 has a lot of interesting and relevant things to say, but I would hate to live in a world where entrepreneurs only undertook ventures that could be bootstrapped for a reason that I'll frankly admit is selfish: throughout my career I've worked on very fascinating problems in either VC funded startups or companies that have began their life as such; I can't see a scenario where I would have been able to do this (or similar kind of work) in a bootstrapped product company. That's not to say there aren't other interesting problems that could be solved in a bootstrapped company, but my own area of focus -- distributed systems -- is almost by definition something that requires both infrastructure and up-front development (and, in general, is only something that should be used if there's a scalability or reliability problem to start with.)
"How do you bootstrap a company that requires significant R&D before an MVP can be shipped? Or for that matter one that has initial infrastructure costs, or one would only be affordable if there's an economy of scale?"
You can't — obviously. And folk like Amy Hoy @patio11 freely admit that.
The key word there though is "requires". I've encountered lots of companies that have spent silly amounts of money, often their investors money, because they've missed opportunities to validate their business model in cheaper ways. Either because they don't know how or they don't want to. Folk who are so focussed on the vision that their aiming for that they fail to look down as they walk over a cliff.
To stereotype slightly I'd say that folk with a dev background are more likely to go that route than not — since the business / marketing / user research end of the skill spectrum that can help with that stuff is less familiar to them.
Nothing against VC funding, and it's absolutely necessary for some companies. It's just that the majority of folk that I see trying for it are doing so before it is actually required. Either because they're missing ways they can continue more economically because they lack the skills, or they hope that the (lack of) positive feedback that they're getting so far will be solved by money.
As an armchair quarterback I'm a bit surprised about what you've said about "folks with a dev background" (if I didn't focus on distributed systems, I'd likely focus on development tools/services -- and there are tons of bootstrapped companies in that area), but I'll take your word for it.
Sorry — I didn't mean to imply that dev folk don't bootstrap!
What I meant, and expressed poorly, was that dev-ish folk tend to not have some of practices in their toolbox that you can use to validate cheaply (e.g. by knowing how to assess markets well, or knowing how to interview potential customers in a non-directive way, or indeed the ability to talk to customers at all, etc).
We also have a tendency to want to build things because, y'know, that's what we do ;-) We also tend to want to build things really, really well for that awesome future place where we have millions of users. So we over-engineer for where we are now, and the learning we need now.
Because of both of these issues I think folk with a dev background find themselves in a position where VC is the only route forward — when if they'd taken a different approach earlier on they could have continued bootstrapping and avoided VC money until later / forever.
You can easily start a company that requires significant R&D: start with consulting; then one day sell the product you want to make with the right license and timeline, then make it and sell it to everyone. Look at Space X, they were making money wayyy before they were igniting rockets.
It's a plan that probably works for enterprise middleware, but for the majority of reality that is not covered by such a descriptor, it is significantly harder to find a path this way.
Unless you're an Oracle consultant on one end of the scale, or a WordPress theme designer on the other end, you're probably not going to be able to repeatably find lots of clients who want a little of your time and are willing to pay enough for you to work on the side.
A lot of clients want to hire consultants for full-time work, and they are frequently only looking for bodies to fill chairs. Finding a decent client that treats you with respect and understands they can't monopolize your time is hard, hard work.
So if your R&D effort is not related to your consulting--or your contract terms assign ownership of all work materials to the client--you'll just end up in the same situation as having a job.
I suspect the only reasonably repeatable path for early funding for big R&D efforts is through obtaining grants. Learn grant writing, or pay someone who does do grant writing (imagine the longest paper you wrote in college and quadruple it). There are a lot of research grants available, even for independent people not associated with accredited academic research environments. There are even grants for work in the arts.
I've spent the last two years doing freelance consulting. The money I've made was great, but I'm no closer now to starting a company than I was before. You should only do consulting if consulting is what you want to do.
I'm doing it right now, actually. It is possible; there are clients out there that will pay for problems to be solved or for deep expertise. Even in the cases where they want a warm body for 3 months to a year, if it brings in enough cash for your other two partners to keep working, then great!
Outside of America this is basically how you have to do it pre-traction.
I think freelancing equips you with other skills (knowledge of the Big Three financial statements, ability to work independently, relevant laws, how to value a company etc) that will prove beneficial when it comes time to start a company.
I don't think you could pick a worse example. Space X was founded by a billionaire, who injected 100M USD from his own pocket, and then took 20M from his buddies. That's as far as it can get from what people imagine when they read "bootstrapping".
You could say "I want to build colonies on Mars, I just need 10 Trillion in capital!" or you could say "I want to build colonies on Mars, how can I get there even though I only have 1 / 100,000th of the capital?
The same goes for all these startups that think they need 2 million or 10 million dollars to start. You need skills and $100 to start. Someone mentioned distributed systems as an "unbootstrapable product" which is total baloney. Start by identifying clients that would buy your product once it exists and help them distribute their systems. Build up your team and use your spare cycles to build out the features you think you're going to need but currently can't find anyone to pay you to build them.
If you are still hung up on Space X starting with $100m, let me ask you this. Say Elon had lost it all on Telsa and he was starting with a loan from one of his friends to start Space X. How small would the loan have to be for you to confidently say that Space X would never get people on Mars? To me, the size of the loan only dictates the speed of reaching the ultimate goal.
SpaceX is a perfect example though. First off, of course a company like SpaceX requires a lot of money to do anything, that's the nature of a company that needs to produce and operate manufactured goods, there isn't the same cost floor as with digital goods (which is now practically zero).
More importantly, the goal of SpaceX is fundamentally the colonization of Mars, and the idealized method to do that is a fully reusable interplanetary spacecraft. If SpaceX had tried to build that and only that from their start they would have rapidly ran out of money, even $100 million, and had little to show for it. Instead they bootstrapped their way toward acquiring the capability to design, build, and operate such things while also building a corporation capable of funding such operations. Initially they built a small orbital launch vehicle, just barely at the limit of market feasibility, using very conventional technologies and very conventional designs, applying innovation peace-meal where it made sense. Even then it took them several tries to get a launch vehicle that worked, and it wasn't even very competitive in the launch market. But it proved that SpaceX was capable of building launch vehicles, which enabled them to get grants and contracts to build a launch vehicle that was.
It wasn't a demo or a prototype, the Falcon 1 was a fully functional "MVP". And it wasn't investment funding that got them to the next stage, it was effectively pre-orders for the next generation of their product. Then you look at what they've done since, they've built iteratively, advancing toward their goal, but even now they still haven't gotten everything into place that they need. They're still working on partial reusability, still working on manned spacecraft, still working on clustered core staging, and so on. But even so they have viable products that are bringing in a lot of revenue, with new products coming online soon that will bring in even more revenue. They are still several iterations and many years away from their goal but by the time they get there they'll have the expertise, experience, and revenue to actually make it happen.
As with most endeavors, it's almost always easier and better to get to a big goal iteratively. That's how you build skill, it enables you to sell your earlier iterations to maintain revenue to keep your company alive, and each iteration provides lessons which inform the next and can reshape the grand idea you once had.
Elon Musk was worth $160M and invested $160M in SpaceX, Tesla, and Solar City. His investors gave up on him during the hard times. He chose to risk all of his money instead of giving up.
I'm not arguing against your point, but he wasn't a billionaire when founded SpaceX. He sold PayPal to Ebay for $1.5b, but owned only a fraction of that.
That circles back to the same problem, then, doesn't it? One would is now essentially looking for less ambitious, bootstrap-able ideas, as opposed to doing interesting things and seeing what comes out -- whether or not it's bootstrap-able or not.
Of course many natural-going ideas are also amenable to being bootstrapped (software development tools/services would probably be a good example), but key here is ideas that naturally arise from your area of expertise.
How do you bootstrap a company that requires significant R&D before an MVP can be shipped? Or for that matter one that has initial infrastructure costs, or one would only be affordable if there's an economy of scale?
You can't. That isn't a problem though. The 'bootstrapped versus capital-backed' dilemma is false. It's not a case of one being better than the other so much as a case of "the one that's best for the business and its founders". Often there won't be a choice - some businesses have zero chance of raising money before they start and some have zero chance of starting without raising capital first. The discussion is usually around whether or not the majority of SaaS startups need to raise money first rather than any business.
How do you bootstrap a company that requires significant R&D before an MVP can be shipped
It's hard but possible. Your team could do consulting on the side to pay for the R&D. A hardware company I am very familiar with did this for 2 years and skipped all seed funding, to build a highly complex and expensive hardware product. It was succesful.
Getting university and government grants requires a great deal of gaming the system. I'd say governments and academia also attract gamers of the system moreso than startup world (indeed, that is a point that pg makes).
I can't speak of "most interesting", I can only speak of what I've worked on :-)
Distributed systems that span tens and hundreds of thousands of nodes and provide excellent reliability characteristics. A multi-year C++ project being built by a small/medium sized team. Those are just a few example (stated deliberately vague due to NDAs, etc...)
This is armchair quarterbacking, of course, I'm not an entrepreneur and do not pretend to be one. Patio11 has a lot of interesting and relevant things to say, but I would hate to live in a world where entrepreneurs only undertook ventures that could be bootstrapped for a reason that I'll frankly admit is selfish: throughout my career I've worked on very fascinating problems in either VC funded startups or companies that have began their life as such; I can't see a scenario where I would have been able to do this (or similar kind of work) in a bootstrapped product company. That's not to say there aren't other interesting problems that could be solved in a bootstrapped company, but my own area of focus -- distributed systems -- is almost by definition something that requires both infrastructure and up-front development (and, in general, is only something that should be used if there's a scalability or reliability problem to start with.)