Today too many startup entrepreneurs dream and seek the VC-funded path of least resistance. At the same time the media lavishes “credibility” to such companies that are either unproven, unprofitable or both.
Upon obtaining funding, these firms often pursue a strategy of blasting copious amounts of cash at every challenge. For the principal shareholders, the goal is to achieve quick market dominance before scrambling toward a lucrative exit.
In theory, there’s nothing wrong with this. In fact, some of you may find it an attractive option.
In reality, this strategy is not an option for most startups, especially small companies -- in part because in reality, capital is funneled to trendy “sharing economy apps” and “unicorns,” and the like with hopes for huge returns. Not average businesses. The average startup will never be valuable enough, fast enough, or exciting enough, to merit a VC firm’s attention.
Despite the press given to Silicon Valley startups, the total number of new companies (as a share of all U.S. businesses) fell 44 percent between 1978 and 2012.
One reason for this trend is the financial industry’s shift from lending to speculation -- a symptom of the increasing “financialization” of the American economy. Another symptom: companies that do receive external funding tend to be less creative. A Stanford University study found that, after tech companies go public, innovation falls by 40 percent.
Is money the root of mediocrity?
No, but acquiring too much money, too quickly, may eliminate the incentives to find creative solutions to the myriad challenges facing every new company.
At my organization we shunned VC & private equity funding, and instead bootstrapped our way to profitability and numerous national accolades in a highly competitive industry. Could we have grown faster with venture capital? Possibly, but I’m convinced that bootstrapping helped make me a better leader, entrepreneur and build a more sustainable, agile business. Here’s why:
1. You’re incentivized to succeed.
When entrepreneurs put their own money, reputations and livelihoods on the line, it creates a sense of urgency to pull out all the stops. You either find solutions to your short- and long-term challenges or you go out of business. It’s a mindset of no retreat no surrender. Failure is not an option because you are forging ahead with minimal safety nets. After selling my house and downsizing my life to finance my company’s birth, needless to say, I was very motivated.
2. You make customers your top priority.
When you raise external capital, you’re naturally beholden to your investors. You must make their needs a top priority. I’m a believer that, when you’re bootstrapping a company, you must reinvest profits back into the business. This requires that you make customers’ needs the top priority. Finding new ways to please clients becomes vital to your survival, which in turn, fuels your growth. From day one, we met with clients, discovered their needs and built customized services and products that our bigger competitors wouldn’t touch (they weren’t cost effective). These customers became big fans, spreading our reputation throughout the industry.
3. Innovation becomes a must.
Given our limited resources, we had no choice but to adopt low-cost and creative marketing strategies, including social media, cold calls, email and networking. VC-funded firms don’t have to do this. They receive instant credibility because of their connections at high levels. Would I have rather hired a pricey marketing communications firm? No. Thanks to our humble origins, we created a dynamic DIY culture that still drives our marketing to this day even though we are now able to meet with top level executives.
4. You must budget more efficiently.
We didn’t have the luxury of hiring someone to fill every position. We had to wear many hats and be smarter with resources. Because so many ACD personnel had to learn multiple facets of running the business, our employees are now better equipped than many of our better-funded competitors’ to serve the evolving needs of customers. A highly trained efficient team is much more cost effective than simply throwing headcount at a problem.
5. You retain control.
When you accept external financing, you lose control of some of your company. Bootstrapping lets you retain total control of your direction and vision. In my opinion, there’s nothing worse than having your investors bring in outsiders with no experience (and possibly a different vision). I believe it hurts the company culture. We have a strong vision of a unified tech platform that keeps evolving and improving, and our reputation for excellence is stronger than ever.
Now before you assume I’m completely against investors, private equity and venture capital, I have personally met with well over 50 investment firms just over the past year -- with many wanting to invest in our company. I’ve built some great relationships and in fact at some point in the future, there may be a fit should we wish to acquire another company or further accelerate growth.
I do however, believe that if you can continue to grow a highly profitable business without private equity or funding there’s no pressing need for it. Sure it will be tougher at first, require ingenuity, sound fiscal management, determination and smart decision-making but what doesn’t?
So entrepreneurs, don’t fall into the trap that if you aren’t raising money, grabbing prestigious investors or flying high on some tech blogs that you can’t win or succeed. Focus first on building a sustainable viable business that has a market and profitability.