Frugal Startups: Advantage Over Well-Funded Companies
If words of caution from the likes of the IMF, OECD, and WTO are to be believed (as they should be), the world economy is headed for a rough ride in the days to come. With a slowdown in global growth prospects, investments are also slated to stagnate, leaving new startup founders with furrowed brows and little money in the bank. Coupled with many celebrated unicorns' uninspired turn at IPOs and rising concern about the so-called "Series A Crunch", this economic decline seems to be painting a rather gloomy picture for aspiring entrepreneurs, and the desperation for bagging VC money is turning more clamorous by the day. However, forgetting what seem to be storm clouds looming over the startup scene, I would like to take a look at the brighter side of things.
Startups have often been described as the "growth-engines" for the global economy, especially in its emerging markets.
Their success and prosperity can often effectively contribute to greater health for the economy at large. While it may seem to many that the funding crunch can potentially derail their prospects in this regard, I beg to differ. By pushing more startups towards smart and efficient use of frugality, this crunch may ultimately prove to be a blessing in disguise for the startup community. In my experience, frugal startups, more often than not, have the edge over most funded companies which start making headlines right from its inception for all the money it has bagged from investors. While funded firms may be the celebrities of the startup scene in its early days, many of them fail to make much of all that money and end up in dire straits anyway. On the other hand, frugal startups often find themselves shedding their underdog status to put together an enviable story of self-sustaining growth.
There are several reasons why frugality tends to serve companies better in the long run, with notable names like Shutterstock, GoFundMe, and Cards against Humanity having carved out a niche for themselves and growing to enviable heights, all without depending on heavy funding in their early days.
Choosing Frugality over Funding Saves Time
As cheesy as it may sound, time is as important as money; especially in the early days of building a business, when one needs to fine-tune all elements of the business model as well as the product/service before going to market. When the start-up founding team decides to forego the herd mentality of running after VCs, they manage to save a lot of time that is better invested into the business itself. Instead of sending pitch decks to every VC they can think of, and staring at the telephone for a call (or refresh one's inbox, because it's 2019!), they can use that time to work out what their customers want to use, rather than what potential investors might want to hear.
As I have said elsewhere before, pitching to venture capitalists for investments is hardly any different from perfecting a sales pitch, or strategizing a marketing model.
It involves extensive preparation that nobody talks about once they've bagged an investment and the money has been wired to their account. Moreover, considering that the number of people who get that money in the first place is so low, there seems to be little justification for wasting time doing all of this instead of hustling to improve their business, as all great founders do.
Frugality Yields Better Economics
This argument is rather simple, and a principle that most of our parents followed back when we were children and wanted as much pocket money as we could possibly get!
Most parents still refuse to give their children all the money that they want, even if they can afford to, for a simple reason: their children must learn to make the best possible use of resources that they already have before they can spend more.
A similar idea applies to startups, which are usually far less organized in terms of finances and effective utilisation of resources than their more mature counterparts. Flooding such startups with money means that they never learn to optimise what they have, and simply don't strive hard enough to achieve better unit economics. More often than not, ending up with more money than they know what to do with turns them into bottomless pits for their investors' money till disaster strikes. If you want an example for such a debacle, you will not have to look far back. Simply reading up on how the drama surrounding the WeWork IPO unfolded should give you a decent idea of why securing a lot of funding does not always guarantee a profitable enterprise, let alone a successful foray into the public market.
Frugality, on the other hand, allows these startups to make efficient use of their available resources and arm themselves with better economics for later funding rounds.
This not only builds a more sustainable business from the ground up, but also leads to less waste with a reduced propensity for unnecessary spending.
Frugality Ensures a Greater Runway
In the startup scene, having a greater runway means having plenty of time to scale and grow, without the pressures of the market and investor expectations derailing it. To draw yet another lesson from our childhood days, this point illustrates what we have all learned about the slow and steady winning the race. When a funded startup goes to market, it is forced to amp up production and sales volume and drive stupendous growth, even if that must come at the cost of its very foundation. This is because they now have investors to answer to, and an obligation to ensure returns on somebody else's money. Interestingly enough, a lot of these funded startups actually end up losing money rather than making more. However, since investors are often fine with it as long as the market value of their investment is growing, the startup continues to rise recklessly, often neglectful of how this lust for growth is hurting their bottom line.
Frugal startups, on the other hand, have far more independence in determining how fast they should go, and how prudent they should be.
Unlike many funded companies, which fly too close to the sun and end up being singed, frugal firms can set their own pace of growth and achieve it slowly while paying greater attention to the fundamentals of their business.
Even as most tech news sites and investment blogs hail funded startups for being smash-hit unicorns, the world of self-made billionaires is peppered with stories of frugality and hustling, over fundraising and making headlines. Most successful founders and CEOs have made it to where they are now by pinching pennies at some point or the other. Even though frugality may have proved arduous for them along the way, they have come out the other end with a stronger business model that can survive in the hardest of situations. What's more, founding teams of frugal firms have managed to amass far more experience than they would have had as just the CTO or a marketing head of a company. Through cross training and juggling of multiple roles, many of these men and women have found themselves at the forefront of smart businesses and sustainable growth models, that might not have been possible for them had they started out with a funded company instead.
If the countless stories of "invisible unicorns" (startups that make it big without bagging much VC money) aren't enough to convince you, maybe what the world's richest man has to say, might. According to Jeff Bezos, the ninth principle of Amazon is in fact frugality. Among other principles that he follows, frugality is something that he swears by for having helped Amazon ace the uphill climb to global success. Clearly, there is merit to this idea, and perhaps this is what will help startups tide over the hard times the investment space seems to have fallen into.