Impact, revenue, and profits; once the key metrics of business and financial success, have seemingly been replaced with lightning-fast scalability, whopping injections of venture capital, and bloated valuations based on perceived future economic success. But, despite how it may look in the media or your news feeds, there’s no defined path, no right or wrong or one-size-fits-all way to build and scale a successful company.
In fact, we might actually benefit from taking a step back and re-considering the merits of a slower, steadier, and ultimately, more sustainable approach to scalability and profitability. How might going back to basics and bootstrapping the founding of a company affect the longevity of a company? How might growing at the pace of cash impact business development, as well as the lesser emphasized impact on the health and well-being of founders, executives, and most importantly, the employees doing the day-to-day work?
WHAT DOES ‘BOOTSTRAPPING’ EVEN MEAN?
The term bootstrapping originated in the early 19th century from the expression “pulling up by one’s own bootstraps”, implying an obviously impossible feat. Later, it became metaphorical for success with no outside assistance. In the context of business, it characterizes building a company from the ground up with nothing but personal savings and the cash generated from its first sales. Studies show that more than 80% of startup operations are funded by the founders’ personal finances, with an average of $10,000 capital to get a company off the ground.
This traditional, low-budget picture of entrepreneurship stands in stark contrast to the highly publicized and celebrated venture capital (VC) funding stories flooding our LinkedIn and Twitter feeds. While VC funding and start-up accelerator programs were originally launched to help entrepreneurs foster innovation, simply getting an introduction to VC investors these days can take months, or even years. Not to mention the all-consuming process of endless networking and meetings, meticulous market research, carefully crafted business plans, complex financial structures, and quarterly performance reviews. The ideal environment for buttoned-down professionals and MBA graduates – not the real world of the everyday entrepreneur.
THE NOT-SO-HIDDEN COSTS OF SCALING.
In his bestselling book, Zero to One, famed tech entrepreneur and venture capitalist Peter Thiel said, “If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution.” Yet, popular tech-driven, direct-to-consumer brands like Away, Glossier, Harry’s, and Casper, which are creating ubiquitous products and rely solely on the model of mass online distribution and social media advertising are being artificially sustained by billions of dollars in venture funding.
Under the guise of disrupting traditional retailers and sales channels, these millennial-friendly brands were able to capitalize on the breakneck rise of platforms like Facebook and Instagram. Now, these brands are struggling to keep up with the mounting pressures that come with accepting too much capital, the high cost of distribution, and standing out and scaling an increasingly crowded online space.
The truth is, few entrepreneurs start with a truly original concept. And VCs that are hell-bent on finding and funding the next proverbial unicorn have fostered a toxic, unsustainable, and counterproductive precedent for startups all over the world.
THE NEGATIVE IMPACT ON YOUR BIGGEST ASSET.
For most entrepreneurs without powerful, cash-laden VCs backing them, or breathing down their necks, startup success looks like landing that first big client, or launching that bootstrapped product. Securing enough revenue to scale to the next level – bringing on production help, hiring more sales staff, or amping up your marketing spend.
This stands in stark contrast to the “fund now, profit later” model, where companies race to get that foosball and beer cart loaded brick-and-beam office, go on a hiring spree, and only then work on generating any revenue. They’re taking the “it takes money to make money” saying to the nth degree, when in reality, most companies shouldn’t need millions in funding to start making money. A seed-funded startup gets automatically caught up into the fundraising cycle after being injected with cash and expected to grow as fast as possible, only in order to justify the next round of investment. Generating cash flow, or returning a profit is irrelevant – it’s all about hypergrowth and scalability.
Additionally, many companies fail to recognize the negative impact the pressures rapid scalability has on their most powerful asset – their employees. Elaisha Green, a Toronto-based social media strategist and travel blogger went from working for years at one of Canada’s largest and most successful tech companies, to a fast-growing startup producing online content around the burgeoning cannabis industry. Despite having all the superficial bells and whistles you’d expect from a startup in a hyper-growth sector, Green likened her experience there to working at a sweatshop, and describes an executive staff “that burned through cash like no other company I’d ever seen before, with no plausible business model”. Instead, she claims the company was “spearheaded and propelled forward with flashy headlines, a great PR company, interesting branding, and viral videos”. Green eventually left the startup as a result of her experience there leading to severe anxiety and depression.
Highly skilled and experienced employees that contribute their time and energy to their employers need to understand the inherent, and literal value they hold not just for generating revenue and profits, but also to raise funds. “Many of my former co-workers would be used and leveraged in pitch decks to VCs. ‘So and so worked at Vice, Facebook, Shopify, or Microsoft’…that really helps startups secure funding. People need to understand that they are just pawns in the game when they’re working at a company that’s not profitable”, claims Green.
THE BENEFITS OF BOOTSTRAPPING YOUR BUSINESS.
In light of the potential financial and mental-health detriments of the sensationalized VC-funded model, what are some of advantages and disadvantages of the lesser publicized bootstrap model?
Firstly, for better or worse, bootstrapping your own venture means you’ll typically have greater control of your company’s finances because, ultimately, it’s your money that’s being used to fund business activities. Though some might consider this a disadvantage, as they’d rather use and risk “someone else’s” money, self-funding forces you to be more mindful and careful about your spending, investing primarily in areas of the business that are most likely to generate revenue and return a profit. The disadvantage here is that if things don’t work out, you’ve lost that money. But, on the brightside, you wouldn’t be liable for any financial damages, or having to pay back any creditors.
Self-funding also enables you to exercise greater executive decision-making power, and creative freedom. Since you aren’t beholden to any investors, you’re able to use your own money as you see fit. But, with great freedom comes great responsibility, and therefore requires diligent financial management.
Lastly, and perhaps most importantly, bootstrapping and self-funding forces you to grow at the pace of cash. Though this slower speed may mean you’re unable to release products, scale new divisions, hire, or break into new markets as fast as your competition. It does ensure that as you reinvest revenue back into the company, scale, and grow, you’re doing so in a sustainable way, with enough self-generated runway to approach inevitable business and financial challenges. And, instead having to dilute equity, founders can retain their ownership, and not incur undue pressure on themselves or their employees in order to generate a return for external investors.
Regardless of whether entrepreneurs choose to bootstrap and self-fund, or raise outside capital, sustainable financial and business development practices are imperative to correcting what’s become an unhealthy, misdirected, and foolish obsession. Founders need to consider the holistic impact of their funding decisions beyond scaling at any cost, and lining the pockets of their investors.