Self-funding or ‘bootstrapping’ your tech startup is one sure-fire way of avoiding many of the pitfalls of receiving large amounts of seed capital. Here’s why…
By Matt Hayes, CEO and co-founder of Kickdynamic, marketing specialists trusted by over 200 of the world’s leading retail, fashion and travel brands to deliver compelling, individualised customer experiences through highly personalized email, at scale.
As a relatively young industry, the tech sector has few traditions. But one which seems increasingly ingrained is the pursuit of investment at startup in order to provide a launchpad for success. Whether in the UK, India, Brazil or the US, it’s the same story – secure capital from angels or Venture Capitalists (VC) and fast track your way to success.
However, as the one-time augmented reality darling of the tech world Blippar’s recent collapse illustrates, whether from traditional VCs or their corporate counterparts, investment might not actually be what you need and the supposed lifeline entrepreneurs desperately search for could well end up choking the life out of a business.
Self-funding or ‘bootstrapping’ your tech business is one sure-fire way of avoiding many of the pitfalls of receiving large amounts of seed capital, while providing some key benefits for any business founder starting out with a new company. It’s not always the easiest route (and rarely the fastest), but it’s one that can protect you from ruinous growth too early on in your business’ life cycle, and give you a chance to learn on the job along the way, too.
Sticking to the basics
Raising funds can be time-consuming and will inevitably divert a founder’s attention away from what they should really be focussing on – their start-up’s core business function. Whether a startup is working B2B or B2C, the most important thing should always be the customer. While it might result in a cash injection for the business, taking your eye off the ball will mean your fledgling company will miss out on your vision and expertise, for however long it takes.
By not seeking funding from the outset, you can give your service or product your undivided attention. You can refine and adapt what you do, using the time saved on searching for funding to make sure your offering is the best it possibly can be, providing value and quality for your all-important customers. It’s a message championed by many, including Ben Chestnut, CEO of MailChimp, who told the NY Times back in 2016, “Run it to serve your customers, and forget about outside investors and growth at any cost.” If your customers aren’t happy, before long you won’t have a much of a business left, anyway.
Trimming the fat
A typical seed funding round will seek to secure 12 to 18 months’ operations and growth costs to make it a worthwhile endeavour for a founder (although this is changing), and the likelihood is if you have investment, the temptation will always be to spend it. Yet not having money might just be the blessing in disguise you need. Bootstrapping forces you to drive down costs and evaluate the true worth of funding decisions, the talents you see in your staff and your existing resources.
Advancements in digital tools for the workplace also mean you won’t be missing out, either. Collaboration software enables you and your team to work remotely if needed, saving on that office space; HR and accounting can be done in-house via software hosted on the cloud, so no need for an accountant from the get-go. Without the ability to say ‘yes’ to every opportunity that presents itself – whether that is relocating to a new office, hiring a new member of staff, or running an expensive marketing campaign – you are forced to “get good fast” and really weigh up what your business needs to survive and ultimately succeed.
What’s yours is yours
Your company, your targets. Growth is great, but it’s not everything. Retaining complete control of how you operate means you can manage your own growth free of external pressures. If hiring a new staff member doesn’t feel right, put it off. Allowing yourself to grow organically enables you to implement necessary changes along the way at a steady, manageable pace, so you’re less likely to find yourself out of your depth.
By cutting out the external influences that come with VC funding, you will have total control over not only what your business does, but how it does it, creating a company culture attuned to you. Fostering a strong company culture can help attract the best candidates when recruiting and help you retain talent for longer. A positive working culture will also spread from you and your team; your customers will notice it, and should the time come, so will investors.
This final point is an important one: while there are many benefits to steering clear of investment in your earliest days, there’s nothing to say there won’t come a time when a cash injection couldn’t help you take the next step in your growth. And putting it off can mean you are playing with a stronger hand when the time comes to sell a stake in your company, enabling you to retain much of the control over how you operate despite diluting ownership. Remember it’s just a ‘no’ for now, not forever.
A few tips on how to do it:
- Charge customers from day one. Don’t do free trials as they devalue your product and service, and sets a bad relationship from the start. Use that customer revenue to fuel your growth.
- Don’t spend money on fancy unnecessary stuff. When you are starting up, you do not need an expensive office, to spend money on an event or on a ‘magic’ marketing campaign – it doesn’t exist. Those things are for when you are bigger and have money – when you are nearing product market fit and building brand reach.
- Revenue and cash are different. Revenue is what you charge for your product. Cash is what is in your bank, after you and your team get paid. Don’t spend revenue, spend cash. You never know if a customer can’t pay you.
- Build a cash buffer. Shit happens in business, so having some cash reserves is very useful – also reduces ongoing cash flow stress.