Lesson for Fund-starved Startups: Self-help is the best help

Fund-StartupWhat can the current crop of startups that are staring at a dip in funding learn from a turn of a phrase that was used in the early 19th century United States?

Plenty, perhaps.

“Bootstrapping,” which meant completing an absurdly impossible action (origins are from the phrase “pull oneself over a fence by one’s bootstraps”), is a way to support the operational expenses and growth needs of the company, through finances that are self-invested or through the sale of the startup’s products and services.

Trying to grow a startup without external funding in this day and age, when there are so many different sources of funding, might seem absurd, and trying to achieve it might seem like an impossible action. This is what Chennai-based Zoho Corporation (which started off as AdventNet in 1996), attempted in the early 2000s during the telecom bust, when its core business of infrastructure management was down and out. Zoho has survived two economic and tech bust periods and having been completely bootstrapped, has now grown into one of the most successful Indian software product startups, butting heads with giants like Google and Microsoft. Other successful examples include FusionCharts, Wingify and Kayako.

Bootstrapping maybe a good idea considering India’s current startup funding scenario. Till a few months back India saw a glut in early stage funding. If you were a startup, you were wooed by everybody from seed investors, angels, Venture Capitalists (VCs), hedge funds and even the government. Angels, seed investors and VCs invested a total of $778 million over 695 deals in 2015, compared to $538 million invested across 374 deals in 2014. In an attempt to grow at a blistering pace, startups need to burn a ton of cash in a short time, and after the initial money invested by ‘friends, family and founders’ is exhausted, they rely on external funding for expansion. With funding drying up, startups need to depend on internal accruals for survival, and growth has to be self-funded.

Bootstrapping maybe the best solution. It has several advantages.

Doing it on one’s own rather than relying on external sources for funding gives an entrepreneur a sense of achievement, independence and satisfaction of owning most of the company. Growth through bootstrapping might be slower. But it is more sustainable than using external funding, because the survival of the startup is not in the hands of investors, who can decide to stop funding anytime, putting its survival at risk.

Bootstrapped startups can also be nimble and change direction when they want to. They are not wedded to the original direction they plotted, as they are bound by the wishes of VCs, who may perhaps not bless strategic direction changes without asking tough questions. Since bootstrapping involves focusing internally on execution rather than an external focus on raising funds, entrepreneurs have the opportunity to perfect their products and services rather be anxious about VC presentations. Bootstrapping is also great for financial prudence. Every rupee spent needs to be justified and should ideally lead to the creation of an extra rupee. A lot of funded startups get blinded by the millions in the bank and end up spending money on marketing campaigns, expensive hires and swanky offices (think Housing’s Rs 120 crore “Look Up” marketing campaign). Cash burn rates are high not because the business demands it, but because they were lucky to raise a big round, when the market is flush with funds. VCs are known to invest at inflated valuations just because of the fear of missing out or because there’s money to be invested.

Jon Yongfook writes on why he bootstrapped his press release delivery platform startup  Pitchpigeon. Some of his reasons included how being bootstrapped forced him to focus on revenues (instead of spending), learn the value of money, keep ownership, avoid dubious early stage investors, grow organically, increase leverage for funding in the future and save time that is usually spent on raising funding. Paying attention to Yongfook might be a good idea because his startup turned profitable and was acquired in 2014.

Stories of successful companies that use the bootstrapping method seldom get told, because it is “sexy” for the media, to report that a unicorn received hundreds of millions of dollars in funding than report the slow progress of a bootstrapped startup. With the success of Zoho, which is perhaps India’s first bootstrapped unicorn, bootstrapped companies might start getting the same attention that startups that get multiple rounds of funding get.

But bootstrapping may not be for every entrepreneur and every kind of startup. Entrepreneurs who bootstrap are disciplined, highly organized, financially prudent, patient, not swayed by the lure of easy money. They are focused on the bottom line, rather than be concerned about topline growth that may add customers, but doesn’t yield profits. They do more with less, and have a history of cost-cutting, maximising resources and a habit of swapping bells and whistles for the bare minimum. If an entrepreneur does not possess these traits, then he or she is wasting their time pursuing this direction.

Some type of startups do yield to bootstrapping, especially when they require huge amounts of upfront capital investment in human resources, infrastructure or IT equipment. Starting a hotel, going up against an already established competitor, launching a micro-finance company or a bank and manufacturing IT hardware or semiconductors. In these instances, external funding is required.

It is also important to consider some of the downsides for opting to bootstrap. First up: it is huge risk, because an entrepreneur is investing his own resources into the startup; if the startup fails, all the money lost is his alone. Bootstrapping means working with less resources, so it is tougher to hire top talent, invest in infrastructure, marketing or acquiring new customers.

Quite often, an investment is strategic, meaning that an entrepreneur opts for a certain VC because they have invested in a similar business earlier and mentored the startup to a successful exit. Other than mentoring, VCs may provide a suite of other services like legal, human resources, IT, tax and compliance. They also open doors for strategic partnerships and provide handshakes with potential customers. The money becomes incidental; the relationship is more valuable than the money invested. Investment from marquee investors ensures media attention, respect from peers, customer trust and easier to make potential key hires.

When it comes to bootstrapping, it is best to take a “horses for courses” approach, meaning it works for a tiny sliver of startups and entrepreneurs. But those who succeed, reap rich dividends, and respect.

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Source – Kotak Business Boosters

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