Dmitry Volkov is a Doctor of Philosophy, serial entrepreneur, investor and Founder and CEO of Social Discovery Group.
For many startups, securing financing is more difficult than ever. Following a decade of highs culminating in 2021 and a precipitous drop in 2022, financing norms have changed. VCs, still flush with cash, are now more selective. Because exit opportunities are so limited, VCs are anticipating longer investment periods and choosing to focus more on their current portfolios. For new investments, measures like EBITDA and cash flow are more important. But if you don’t want to finance, or if you’re not ready, another option for startups is bootstrapping.
How The Path To Raising Capital Has Changed
Over the past decade, startups were raising record amounts of money. Having an interesting idea was enough to garner some absurd valuations, whether or not a clear business model or path to revenue had yet been established. According to CBInsights, 2021 was a record year for global and U.S. venture funding. Deals reached record highs, funding more than doubled year-over-year, and the unicorn count approached an unprecedented 1,000. At the same time, global IPO activity hit an all-time high.
Then came 2022, when we experienced an abrupt shift. CBInsights reports that funding dropped 35% from the year prior—with the last half of the year down 64% year-over-year. New unicorn births fell to a six-year low. The global IPO count dropped by 31%. What happened? It was the sum of many things, including higher interest rates and historic inflation, ongoing supply chain challenges, the global disruption caused by the Russian invasion of Ukraine, and the lingering impacts of Covid-19 lockdowns.
Bootstrapping
So, what can startups do to position themselves before a raise? This is where bootstrapping comes in. Bootstrapping is defined as running a company using only personal finances and/or operating revenue. You can do this by “cutting costs, personally financing operations, cutting back operations or looking for other creative short-term financing solutions.”
Bootstrapping requires being vigilant about the four T’s: TAM, team, tech and traction. In my experience, these are your most important areas of focus to establish your product.
1. Total Addressable Market (TAM): The problem/market you select is the most important decision you’ll make. The problem you are solving needs to be important and in big enough markets to build a viable business. By estimating the size of the market, you can determine scalability, which leads to total revenue potential.
2. Team: Great teams build amazing products that change the world, so hiring the right people and building a strong team are fundamental. The same goes for strong founders, with the vast majority of unicorn companies being home to more than one founder.
3. Technology (Your Product): Build a minimum viable product (MVP). This is an early version of the product with enough features to be usable. Early customers can provide product feedback to guide your future product development. Don’t be afraid to launch fast, fail fast and iterate quickly. Equally important, test product-market fit. Be sure you are offering something that consumers want desperately. Product-market fit is an important milestone; once you hit it, it can allow you to start scaling your business efficiently.
4. Traction: As you engage with your first customers, define, measure and grow your KPIs. These evolving KPIs will showcase how capital will help to accelerate growth. The more quantitative you can be, the better. Numbers don’t lie.
Finding Your Unfair Advantage
The essence of bootstrapping is finding and recognizing your unfair advantage. We all have unfair advantages, so recognize what your unfair advantage is and then go! That advantage may be as simple as knowing the customer. Capitalizing on your first unfair advantage can lead to more, such as having insight into your customers’ businesses and being exposed to opportunities.
For example, when I was building my company, our opportunity came through a customer who specialized in mail order dating catalogs. They wanted to automate their catalog creation process. Instead, I proposed moving the business online. (This was at a time when the internet was not as prevalent.) The owner thought I was crazy; she believed the value of the business was in the paper catalogs. So we made a deal and took this offline product online. At the same time, we shifted our revenue model from hourly to a commission model. The online revenue ultimately led to us owning the online business outright.
For startups today, bootstrapping is an option to consider. What I’ve found to be the best about bootstrapping is that you typically have more control and ownership of your company. You can be more focused on the product, and it’s easier to pivot as needed. Plus, you are forced to build a business model that really works—and you’re obviously highly motivated to turn a profit. Does it work? Yes—just ask companies like GoPro, Github, Meta (Facebook) and others who are examples of successful bootstrapped companies.
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