Bootstrapping, another way to build a start-up4 min read . Updated: 13 Apr 2017, 09:42 AM IST
Bootstrapping your company forces you to work hard to hire and grow the right talent
There’s a meme floating around Bengaluru’s start-up circles that neatly captures the zeitgeist of the community. In it, a crudely drawn map segregates the city’s neighbourhoods based on the technology companies they house. Well-funded start-ups occupy the trendy enclaves of Koramangala and Indiranagar. Companies that aren’t flush with investor cash are relegated to up-and-coming neighbourhoods like HSR Layout or some distant suburb off Outer Ring Road.
The map is funny because it’s partly correct. In recent times, one of the surest signs that a start-up had raised money was its move to a swanky new office in Koramangala. The increase in rent was justified by the need to attract high-quality talent. Rockstar developers, the lifeblood of any start-up, don’t venture beyond a few postcodes. Or so the thinking went.
But as start-ups prioritize profitability over growth, expensive office space (and other employee perks) have quickly become liabilities. From Stayzilla’s messy shutdown to Snapdeal’s rumoured sale, Indian start-ups are dealing with the pain of scaling up too fast, too early. And yet, the appetite for venture funding hasn’t diminished. A recent survey by InnoVen Capital, a venture debt firm, found that over 94% of founders are looking to raise funds despite an unfavourable climate.
As someone who has been part of a bootstrapped start-up for the past four years, I am surprised by this fixation on external financing. Part of the reason is how much we fetishize fundraising. Media coverage on start-ups typically relates to funding activity, not actual business performance. Compare the adulatory stories on high-burn ventures with stories on businesses like Zoho, a bootstrapped company that generates over $300 million in (profitable) revenue. Rather than viewing venture capital as a means to an end, it has become a measure of success.
But accepting other people’s money comes at a cost. For one, it reduces your flexibility to experiment. Since you have traded away ownership for capital, you are answerable to your investors. And unless your start-up is one of the lucky few that nails the product-market fit early, chances are you’ll stumble through many detours. While investors may have the patience for one or two pivots, every iteration reduces your credibility. Managing the expectations of your board also distracts from focusing on the things that you should be worrying about as an entrepreneur—your customers and your product. If independence seems like a minor quibble, consider the fact that Snapdeal’s founders Kunal Bahl and Rohit Bansal own less than 6.5% of the firm.
Finally, the cushion of capital can lead to perverse results where high growth is engineered through high spending. An analysis by Mint found that 41 of India’s leading start-ups generated over Rs23,000 crore in revenue but lost Rs16,000 crore. It’s anyone’s guess how sticky the revenue will be when the funding tap is dry.
In contrast, growing a company with limited funds forces you to focus on building a sustainable business. Since your survival is directly tied to customer revenue, your product must be compelling without the cover of discounts or over-the-top marketing. As a happy corollary, your product is validated in the real world; if it doesn’t work, you keep trying until something clicks. And since your growth is completely organic, i.e. without any external inputs, your business model is sustainable by design. It really is that simple.
Without any external capital, you also retain complete control over your company’s trajectory. Venture capitalists aren’t irrational when they push start-ups to grow at all costs—they are trying to maximize the probability of one company in their portfolio of investments taking off. While that view is correct in aggregate, it may not be right for your company. Without investor pressure, you can decide on the right time to scale.
Beyond raw numbers, bootstrapping your company also forces you to work hard to hire and grow the right talent. While it’s not possible to match above-average salaries or trendy perks, you can offer something most funded start-ups can’t—generous equity packages. But more than the compensation, if done right, you will build a team that’s used to working with limited resources. Even when the company outgrows its early stage, the bootstrapped mentality stays with your employees; they will always look at the most efficient way to solve a problem.
Bootstrapping your start-up doesn’t preclude you from raising venture funds. At some stage your start-up’s growth may be constrained by capital. But as a company you’ll be negotiating from a position of strength, with a proven product and a clear business model.
But bootstrapping isn’t for everyone. Growing a company with no external resources requires a certain scrappiness. Frequently you’ll have to undertake projects that generate cash, but aren’t core to your product. It’s also a very uncertain path. Start-ups are high-risk and bootstrapped start-ups are risker still.
Lastly, to bootstrap your start-up is to be comfortable with anonymity. Accept that your company won’t grace the cover of publications or that you won’t be a featured speaker at the umpteen start-up conferences. Year after year, you and your team will toil in the shadows and maybe, just maybe, with persistence (and some luck), you will break through. But when you do, the upside will be all yours.
Shailesh Chitnis is head of product at Compile Inc., a data intelligence company based in Bengaluru and Menlo Park.