The founders funded and bootstrapped a product. We even have some paying and non-paying customers. But reality is the revenues generated currently is not sufficient to build features and scale. How do we move forward?

If you've got users, and you've got revenue, you've crossed the big hurtles.   You've proven your idea was good, that you can execute it, and you've validated a market for it. A lot of startups would kill to be where you are (and die trying.) It seems to me that a VC is your next step.    That your startup is just the sort of thing they're looking for. In your question details, you say "VC's are out of the question."   Why is that? I know there's a lot of lore about evil VC's, but you don't hear so much about the many successes they enable.   In fact, they were instrumental in the success of virtually every service you use : Facebook, Quora, Google, etc. You may want to rethink this VC thing.

It sounds to me like you guys need someone with more business acumen and connections to investors. Would it be safe to guess you are a group of engineers and product people? Is there a real salesman on your team? Your description makes the business sound ten times better than most startups I come across. They are almost always pre-revenue and promising the moon with nothing to back their promises with. Do you think you would be the first startup not out of SV to raise funding? Come on! Funds are looking for the best investment, not the one that is closest! I'm happy to open some doors for you if I'm convinced there is a real opportunity. Feel free to send me your materials. It ok if they are incomplete or disorganized. I just want to understand what we are talking about..

I would recommend that you build a good business case around the concept. In fact, as you already have paying customers, and users who are willing to pay provided they get additional features is a strong validation of the relevance of the concept to your intended audience. A business case is essentially a plan on how much money will need to be invested in resources, people, infrastructure, marketing, etc.... and if that is done, what is the expected outcome. Done over a 2-3 year period, a good business case document will help you provide potential investors a good view of your path of profitability. Before you approach investors, make sure that you understand WHY they invest. I am sure you would be aware that VCs, or angel investors, will invest only in companies that can scale. They are not interested in modest sized businesses, even if they are nicely profitable. (The why part of this point is an entirely different topic). All the best. Happy to help if you need assistance with your business case.

As Jason Lemkin and others pointed out, you're not in such a bad spot: you have passed the seemingly impossible hurdle of getting that first client. But I have another suggestion for you besides pep talk. Figure out how much money and time you actually need to build those few extra-features that would help you break into the second phase of real sales. Once you know that, if the amount is less than a million dollars, don't go the VC route. Find some ex-entrepreneurs, who have already made at least one exit and who know something about the specific space your product addresses, and reach out to them. It may seem like a long shot but VCs are also a long shot and only in very rare occasions add real value beyond the funding they put in.

I concur with the advice you have received regarding working with VC's to get additional funding. In the meantime from a marketing perspective there are a few things you can do with what you have got. If you have 100 paying customers you can certainly find more just like them. If they are happy customers then these very same customers can be your advocates and help you find more. Without having a clue what your business is some of these ideas may or may not not be applicable. 1. Do some email marketing to your existing customer base and offer them an incentive for referrals. If it makes sense build the marketing into the product like dropbox does providing users with more space if they refer a customer who signs up. For your product could you build a referral program through your existing customer base that incents them with more value from your product? 2. Not sure who your target customer is...but if it is SMB's get an offer up in a site like http://Rewardli.com 3. How much money are we talking? is Crowdfunding an option? get a Kickstarter campaign going and get you existing customers to help you. Dont worry about perception early adopters LOVE to help. 4. Do you know what the lifetime value of your customer is? if so then affiliate marketing might be ideal for you to acquire new customers. You only pay when a customer signs up. So calculate a bounty you can live with and get an offer up on http://CJ.com or Linkshare and the like. 5. Get a little marketing help to drive acquisition on the cheap (get an intern through folks like startuply)...check out fellow startups like http://wahooly.comhttp://y.com that can get you infront of influencers. 6. Your basic PR/guerilla marketing to get your product showcased infront of your target market could get you more customers. 7. Webinars can cost next to nothing to produce but get you new customer leads assuming you are in the BtoB space. I could literally go on all day. The fact that you have existing customers is gold.... you just need to figure out how to leverage them to acquire new customers while you go after the big bucks. Not sure if you have a hustler on your team whose job it is to get you funding. But if you do not you might be well served to check out an accelerator program. There are pros and cons to accelerator programs but 2 key benefits of an accelerator program is 1. They will connect you directly to VC's and give you the platform/forum to meet many potential investors. 2. Some programs like the ones we run at Microsoft will give you access to resources in addition to funding. I have a random list of all kinds of Accelerator programs here: http://freshiii.tumblr.com/post/39875033273/lists-of-startup-accelerators-and-incubators

I know it may sound obvious (otherwise, forgive me if I've missed something) but you need to raise money, pronto. Terms/valuation shouldn't matter too much. It's either that or nothing. So get to it, take a couple hundred thousand from FFF and go for it. Best of luck!

Have you thought of bringing another partner, who will be sales and marketing focus and put additional cash in the company. I would look for someone who has a small exit and hungry for next challenge.

Thank you all for the advise.  I sincerely appreciate everyone's contributions so far. It is invaluable for me and my team through this journey. Some of them are set to motion already related to marketing. We have been talking to VCs as well, but it has not been satisfying so far.