Venture Capital was once seen as the pot of gold at the end of the rainbow, a distant dream for entrepreneurs. Now, a growing number of startups are recognizing that this treasure is not all that it’s made up to be. More and more startups are bootstrapping their business and are abandoning the pursuit altogether.
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A new generation of entrepreneurs are bootstrapping their startups and it’s no surprise why. Seed investments have dropped by $1-5 million over the past three years, in funds, deals, and dollars. Startups have lost faith in follow-on funding — of the ~8,000 firms who received seed, angel, or accelerator money in 2018, 6,600 of them didn’t receive a penny more in subsequent fundraising rounds. And that’s not to mention the shocking difficulty for women to lay their hands on VC from round one.
3 reasons why more startups are bootstrapping business
The truth is, VC has been available to just a slim fraction of startups, with very few successes. Now, even those startups want out.
1. It can be a waste of time
While Venture Capital and accelerator programs were originally launched to help entrepreneurs foster innovation, these days merely getting an introduction to VC investors takes months, sometimes years. It’s an all-consuming process that most startups do not have time for. Effort spent on trying to secure funding is time spent away from building the company. Many entrepreneurs are therefore disregarding opportunities, such as seeking out VC funding, as they are aware that the time and energy required to simply get their foot in the door would be better focused elsewhere.
Raising money involves endless meetings, events, networking, pitching. It also requires that you figure out ways to be introduced to the right people. By prioritizing these endeavors, the CEO’s risk losing grasp of their actual company, their employees and their product. Company build can be easily neglected, and startups are refusing to let that happen.
Gramener, a design-led data science company that generates insights in data storytelling, decided not to go down the VC funding route and chose to bootstrap their business. The company started early on in the data space in 2010 and therefore wanted to try out the market first. The put all their focus and resources on customer adoption and impact before venturing out for funding. This allowed them to excel while remaining grounded as a company.
“We felt accepting anyone external at this stage would clip our freedom and leave very little room for pivoting or experimentation,” said Naveen Gattu COO at Gramener.
2. There are pressures of hypergrowth
A seed-funded startup is automatically thrown into the VC bubble. With fundraising comes high expectations of even higher results. A startup will be fed with cash and then expected to grow as fast as possible to justify the next round of investment. There is absolutely no emphasis on being cash flow generative, or even making a profit. It’s like steroids for startups: They have to be bigger, faster, and show more aggressive growth than the competition. It, therefore, forces startups to chase high-growth at any cost.
The VC approach of striving for check after check only works for the successful billion dollar companies. Uber, for example, is running on billion-dollar year losses each year and only survives thanks to its next round of funding. The pressures of hypergrowth are often too much for startups and the majority of these investments lead in startup failure. Startups are recognizing the importance of growing and chasing growth. They are bootstrapping their business to grow at their own pace, without external pressures and VCs breathing down their necks.
Algo.ai, a startup connecting artificial intelligence, augmented reality, and automation to retailers, distributors, and manufactures denied several informal offers and interest from angels investors and VCs that they had met through events to stick with their steady pace of customer-funded growth. “We wanted to maintain control of our company, our vision, and culture,” said Nikki Hallgrimsdottir, co-founder of Algo.ai. “We were also lucky to have paying customers right from the start who believed in us.”
3. The need for follow-on funding
Reliance on VC funding gives the entrepreneur no control over their company’s destiny. Whether a company succeeds or fails is up to VC investors. Therefore fewer entrepreneurs are looking to put themselves in such a position. They are aware that many VC-funded startups have fallen. This is not because the fundamentals of their company were flawed. However it is because they were not excelling at a rate to justify another round. At times, it can simply be a matter of funding shortages.
Hyperloop startup Arrivo just recently closed its doors as it failed to secure new funding. The futuristic transportation startup, launched in 2017 by former SpaceX engineer Brogan BamBrogan, announced a $1 billion deal in the summer of 2018. However, the company’s inability to set up more immediate series A funding led to its laying off workers and eventual closure at the end of last year.
Entrepreneurs are bootstrapping their business by taking a cash efficiency approach and leaving VCs out of it. A wave of startups is returning to the traditional values that created the startup ecosystem today. This new generation of companies is producing more resourceful entrepreneurs. Additionally, they are focusing on business models that do not require vast amounts of capital to survive. They are taking smarter turns towards growing slowly, but in control and in profit. The overall result is a sustainable company that is not tied to the whims of external investors.
Jonathan Breeze, CEO of AardvarkCompare.com, a travel insurance comparison site for seniors.
