by Anand Srinivasan, founder of LeadJoint.com
While most of the startup blogs and magazines focus on the VC fundings and their million dollar valuations, the truth is that a whopping majority of entrepreneurship stories are never shared. These are the little known bootstrapped start-ups that continue to operate through debt and personal savings. These stories are inspirational, no doubt; but are they always the most pragmatic?
The truth with bootstrapping is that business owners always tend to operate on extremely tight budgets. What this often translates into is that their operational efficiency leaves a lot to be desired. Take the example of a SaaS provider who has been talking to a number of prospects in the industry. A good chunk of the sales and marketing activities may be automated using tools like Marketo and Oracle Eloqua. But this automation does not come cheap and often costs several hundred dollars a month.
In the case of a VC-funded startup, adopting these automation tools is a no-brainer. While this costs money, it also helps them grow much more exponentially. The result is a business that meets its market share targets more efficiently. On the other hand, a bootstrapped startup could still be making use of more rudimentary sales and marketing tools that saves money but could take up a lot more time. In such a scenario, the business may not reach its targets and may risk losing market share to a funded startup rival.
This can have further ramifications. A business that has higher market share often has the upper hand in dictating prices. In a lot of industries, especially ecommerce, businesses that have higher market share trigger sustained price wars with the hope that this will edge out all the competitors. This helps the larger businesses consolidate their position further and potentially raise prices with little adverse impact.
Does this mean all bootstrapped start-ups should strive to get VC-funded? Not necessarily. To a lot of business owners, running a business is a matter of lifestyle. A VC-funded startup many times is like being employed since the targets your boss sets for you, is now done by the funding company. On the other hand, bootstrapped start-ups can grow at their own pace and with a culture they desire.
More importantly, today, the resource gap between funded start-ups and bootstrapped ones are gradually reducing thanks to cloud technology. Nowhere is it more evident than in the area of resource planning. Back in the nineties, ERP applications were solely used by large corporations that could afford hundreds of dollars in implementation costs. Today, alternatives like Net Suite software are available on the cloud which can be accessed at a far lower monthly subscription price.
Thanks to cloud technology, the operational expenses for running a business today is far more manageable than what it was even half a decade back. This in turn has helped bootstrapped start-ups become more competent. But this is just one side of the story.
Bootstrapping a business has another unintended consequence – a sustainable business model. Since these businesses do not have the luxury of burning the VC dollars till they figure a way to make money, most of these businesses operate from day one with a sustainable operating model. On the other hand, the pressure of growth numbers often force funded start-ups to change priorities from making money to notional growth figures. Consider the popular examples of VC-funded start-ups like Twitter. For years after the startup launched, Twitter earned near to nothing. Can you call Twitter a success today? Of course. But is this model replicable? No. Not everyone can get as lucky.
On the other hand, a sustainable business model from day one helps you keep your finances in check and more often than not, helps you weather the tides more effectively than a start-up whose VC funds have dried out.
At the end of the day, both the models have their fair share of success and failure stories to tell. There is no really good answer to the question of which model to pick. But do bootstrapped start-ups have to compromise on competency? The answer is a resounding no.
Anand Srinivasan is the founder of LeadJoint.com, an online lead generation tool for digital marketing agencies. He is also a part-time marketing consultant and has previously worked with some of the most promising Indian startups.
