- Vinay Nair
Why You Should Prefer Bootstrapping over Fundraising at Early-Stage!
In my fairly long experience of interacting and engaging with startup founders, I have developed a certain degree of awe for them, at least the ones that do it right. It takes a great deal of creativity and courage to give shape to a brand new idea, and an inordinate amount of hustle to turn it into something reasonably successful. But even the smartest of founders find themselves taking a tumble when it comes to figuring out funding and that makes me the saddest.
What a shame it is to nurture the loveliest rose, and then have its prickliest thorn raise its head and poke you till you bleed!
Funding is a confusing maze to navigate, and one misstep can land your startup in a labyrinth of uncertainties.
Figuring out a funding model that works for all the parties involved in a business is a Herculean task, and if undertaken when the business itself is still at infancy, it can spell trouble for both the firm and its founder.
Perhaps the most puzzling of questions that a startup founder must encounter at the very outset is: “should I bootstrap it, or get a seed investment to get it up and running?” Even though this is perhaps the most omnipresent question in the minds of all new entrepreneurs, the answer is far from simple or even definitive.
If you look at the scantily available stats from across the world, you will see that the bootstrapping trend is picking up of late.
However, bootstrapping is often not the most fun experience to have, especially in the early days. In fact, it can sometimes set back startups by years, and drag the founders through the frustrating and time consuming process of building the road to success.
Most importantly, it is not even an option for all founders out there because not everybody has the means to fund their own stellar idea till it truly takes off.
Besides, for newbies in the business scene, it can feel infinitely more reassuring to have a strategic partner from the word go: someone who understands the industry and has sufficient experience to steer you along the right path.
More money in the bank also means you can grow much faster, and your dream can take off and soar without having to crawl and stutter for ages before the big break comes.
I know that all of these can sound extremely alluring.
If you are an aspiring entrepreneur reading this, I am probably feeding your confirmation bias with all that I have said about how difficult and arduous bootstrapping can be. It is indeed infinitely more tempting to go chasing after investors instead of painstakingly burning the midnight oil and burning your own money with it.
However, there is good reason that bootstrapping is gaining more traction of late. I, for one, am very excited to see that the new generation of entrepreneurs are beginning to value prudence and steady growth instead of buying into the seductive headlines that list out exorbitant amounts of money some VCs shell out for startup equity.
While there can be no “one size fits all” funding formula for startups, I genuinely believe that for most of them, bootstrapping is the way to go.
Of course, if your startup needs massive sums of money to develop infrastructure and go to business, you should probably go calling venture capitalists right away, and that’s perfectly alright.
But, for a majority of the startups that are coming out, bootstrapping should be the strategy to go for. Unless you absolutely do not have the means to finance even a small and steady version of your dream business, you should definitely steer clear of taking on an investor till you have grown to a significant size.
Chasing Investors Can Take Away, Valuable Time
What many startup founders are guilty of is the folly of running after potential investors instead of strengthening the foundations of their business. Just like a baby, a company can develop the most, rather than grow, in its first couple of years. It is the perfect time to build the base and correct whatever mistakes that might crop up during the initial phases.
This early stage is all about experimenting and finding your groove: learning what works for you and what doesn’t.
This process itself takes time, and more importantly, demands a significant amount of nurturing from the founder and his/her team.
Now, at this crucial period, if you focus on finding funding instead, your base can end up being far too weak to eventually support the investors you take on. In these initial period, founders usually do not have a large team at their beck and call, who can perfect the sales pitch that is involved in wooing investors. Therefore, it is the founder who has to take time out from the business itself to run after potential investors.
Taking on Investors Early can Translate to Greater Equity Dilution
Every business has a certain risk factor associated with it, and one that is just freshly starting out is probably the riskiest of them all. To invest in such startups, venture capitalists ideally look to grab a large share of the equity, which leaves the founder with little to raise subsequent rounds with.
If a founder has a great product that is destined for success, it makes little sense to give away a significant share of it for a throwaway price.
At this stage, even if you are extremely confident in the bright future of your enterprise, you will not have the bargaining chip to make sure that investors shell out cash for a smaller share of equity. Then, when the business does explode, you are left with a terrible regret for having given away such a massive chunk of it for so little.
Bootstrapping makes sure that even if you grow slowly, it remains all yours (or mostly yours) by the time your company is ready for a great exit, and you rake in a lion’s share of what came out of your very own idea.
Investors Can Force a Business Into Growing Too Big Too Fast
While growing the business is understandably one of the major goals of a founder, heedless growth can come at an extremely high price.
Investors, who are mainly out to get a high multiple on their investment, will often pressurise the startup to grow quickly.
In this quest for superfast growth, startups will often end up hurting their bottom lines and even losing money, just to feed the maniacal lust to stay at the top of the market.
This sacrifices the slow and steady process of organic growth, and transforms the firm into an enterprise that is neither sustainable nor sensible.
Bootstrapping Keeps Businesses Lean and Efficient
If raising massive amounts from VCs was any indicator of success, WeWork would have been in a much better shape today than the mess it has landed itself in. It is true that having money in the bank can lead a business to grow fast and furious, while effectively smoothening out the founder’s wrinkled forehead.
However, what often also happens is that with too much money in hand, a new business throws caution to the wind and takes imprudent decisions that affect it in the long term.
At this point, you are probably thinking: “but wouldn’t the investors step in to discipline them to make sure the money is not misused?” Well, if examples like WeWork and Uber are anything to go by, not really.
Often, all venture capitalists care about is driving up the valuation of the company. This often makes sure that”greater fool” is always ready to buy out their shares at an even higher price (sometimes ludicrously so). This does not necessarily mean that the business itself is making immense profits, but only that its equity is trading at exorbitant rates.
While this strategy can work in the short term, and some founders can get away with it, it often turns into a disaster in the long run. I keep bringing up the case of WeWork here because its IPO debacle is the perfect example of this strategy going utterly wrong.
In case of WeWork, the investors (primarily SoftBank) did not lose as much as the founder did, and this example goes on to show why reckless investments can lead a company to go astray.
For all of these reasons, I wholeheartedly believe that bootstrapping a business is far more sensible than taking on Investors too early.
It may be slow and you may not make the headlines for having cinched a tonne of seed money, but it will lead to a more sustainable growth over a longer term. It is definitely more founder-friendly even if it does not seem to be at the outset, and it is something I would recommend to every entrepreneur starting out on their dream journey.