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According to different estimations, around 90% of startups collapse at some point because they fail to maintain or start to generate profit. Despite a flourishing global startup ecosystem, which today is worth over $4 trillion, the life of a such a company is rarely easy. For example, only 8.7% of startups in the Baltic States, a currently promising region in the startup sphere, proceed from pre-seed/seed to series A rounds. In the global arena, venture capital funding conditions are worsening, too. Inflation, rising interest rates and the war in Europe have already stopped 2021’s money splash.
On the other hand, VC funding has never been a promise of success. Out of 200 companies funded by top VCs, 15 (on average) generate nearly all the economic return. Most VC-funded startups face issues scaling their operations and reaching greater maturity, often followed by significant layoffs and difficulties finding a market fit.
Considering this, maybe the tightening pockets of startups’ angels can be a blessing in disguise in times of economic instability? Such names as Zoho, GitHub, GymShark and Oxylabs, among others, indicate that less “easy money” and a disciplined bootstrapping approach can offer a smoother road to the unicorn hall of honor and a solid alternative to VC funding.
The startup’s journey
All startups go through at least three main stages: the early stage (pre-seed and seed), the series A round with gradual growth and the late stage — expansion. Almost half of startups fail in the first two years — in the early or, at best, middle stages. Every stage of the startup’s lifecycle has common challenges and mistakes.
Almost any startup experiences financial insecurity at some point, no matter the stage or the chosen financing strategy. Some end up running out of funds completely. Furthermore, startups operate in the unknown for a lot of time. Most of the solutions they’re building target (or, at least, should target) a unique problem, meaning there’s a considerable experience and knowledge gap to bridge. Finally, startups must function in a fast-paced environment, constantly adapting their product offerings and observing the competition. In the intense global race, it is possible to become irrelevant almost overnight.
Early-stage startup founders often tend to stick to their initial idea emotionally, failing to commit enough resources to extensive market research and go-to-market strategy. Even if an early-stage startup attracts investments, it has limited time to show results. If the company fails to experiment, grow and adapt to the market (or fails to “fail fast”), it easily falls apart.
With the first significant investments, the startup needs scaling to reach the next maturity stage. The company ought to gain traction quickly, so the main question now is how to attract top talent — a number one challenge for emerging startups. It must also build a functioning organization, moving from the “everyone does everything” hustle mentality to at least some processes and structure, including fully functioning sales and marketing teams.
This is often the second breaking point, notably when VC funding-accelerated growth and a lack of robust organizational structure leads to over-hiring and messy performance. Some startups miss the competitive race and become stagnant, failing to support the market demand and quickly innovate.
After moving to the late stage, the odds of surviving shift favorably. Now, the main challenge is defining business priorities, vision and mission; otherwise, the company will have problems identifying opportunities worth pursuing. Especially in the SaaS market, a proliferation of products without a clear vision is often a challenge that young, ambitious companies face.
Combined, all these pitfalls create most of the roller coaster ride experience. Unfortunately, contrary to what might feel intuitive, generous VC capital funding might not act as a safety cushion during the ride. Instead, it can become a trap if guidance and business development expertise are lacking, which is the case with any startup unless one is launched by a serial founder.
The funding trap
Considering the vast array of challenges startups face in every stage of their lifecycle, it is natural to think that money will solve many problems and accelerate business growth. However, as mentioned, statistics beg to differ. Dependence on external financing such as VC doesn’t make the startup’s roller coaster ride easier. In fact, it can lower the motivation to become profitable. Bold, out-of-the-box business decisions become daunting, as investors tend to be extra cautious. Some investor-backed startup companies achieve unicorn status and still struggle to keep positive cash flows — let’s take the infamous cases of Uber, Hootsuite or Coinbase.
Reliance on external financing tends to create bad spending habits and lower self-discipline. Therefore, VC-funded startups often fail to evaluate their product’s relevance to the market and have common layoffs or management changes. In 2023, the total number of tech startups’ layoffs reached ~148k, following ~159k in 2022. This is normal among VC-backed companies as attracting large investments allows them to over-hire. Investors tend to support this practice as it maximizes short-term revenue: Spotify’s stocks jumped 5% after it announced a layoff of 600 people. Wayfair experienced a similar situation.
The ups and downs experienced by startups produce constant dynamics, adrenaline and excitement — feelings often romanticized as the “right” way to disrupt industries and build innovative companies. PR efforts and dances around investors, seen in many cases — such as the infamous Theranos — occupy more effort than precise planning, strategy and execution.
The ultimate goal of a startup should be moving from the glamorized excitement phase (chaos) to the “boring” stage where the startup sets up middle-management and efficient processes in place.
One of the ways to keep steady growth during a period of economic uncertainty and shrinking funding opportunities is pretty straightforward — bootstrapping. Although feared as too complicated, it allows startup founders to make independent decisions and focus on long-term goals. GitHub, Spanx, Zoho, Atlassian, Shutterstock, Mailchimp, Gymshark, Shopify, GoPro and Mojang (Minecraft) are just a few successful examples that followed the “I did it my way” strategy.
Lean and just a little bit boring
Bootstrapping is the practice of self-financing a business. Bootstrapped companies build their businesses from scratch using only existing resources (no venture capital or major loans). Although bootstrapping is unsuitable for industries such as manufacturing or imports, where large funds are needed to get started, it offers many benefits for digital startups in Fintech, SaaS and ecommerce areas.
Without investors to keep happy, bootstrapped startups have better control over the company’s direction and less uncertainty. Since the money primarily comes from the customers, the quality of the product or service becomes the most crucial factor. Therefore, when bootstrapping, many startups focus on developing a minimum viable product and finding the perfect market fit; in other words, solving someone’s problem.
If a startup survives bootstrapping, it builds a strong, lean, efficient and customer-focused business. As some thought leaders have emphasized, it becomes a “stallion” instead of a unicorn. Although it might look like a less adventurous approach, self-financing heals the most common ills that are haunting externally-funded startups:
- It brings motivation to find the right market fit and turn profitable as the company must reinvest net profit to keep growing;
Minimal resources ensure that the company doesn’t waste money on things that are not a priority. This leads to better spending habits in the long run;
Since the company is growing slowly and has to prioritize aggressively, it builds a more grounded and precise business vision, mission and strategy.
However, a startup founder should also evaluate possible drawbacks before deciding to bootstrap a business. First, self-funded companies face a higher risk of a stagnant cash flow and, in unfortunate cases, run out of money altogether. Second, the business growth will be slower — a startup might not want to generate too much interest when bootstrapping as it may be unable to keep up with intense, constantly changing demand due to relatively low budgets.
Oxylabs also followed the bootstrapping strategy to grow its web intelligence collection business — the company is not dependent on external financing. Almost a decade in the market has taught us some lessons that could be valuable for any startup going down the bootstrapping path (and those that don’t).
One of the most important is to think about international markets from the start. The most successful startups grew big due to their ability to conquer foreign markets. Hiring an A-level team, developing an MVP, pivoting and failing fast (if needed) are other steps critical for success. Locating resources for an RnD team devoted to experimenting and identifying new opportunities is also vital. Failing fast should be their domain, whereas core teams must be committed to maintaining and improving the main product line.
Finally, figure out a lean way to cut costs — for example, by having a remote-friendly working team, building a website in-house, offering employees sweat equity to keep paychecks affordable and spending more time on organic outreach. Scaling a startup is often not about excitement but about resilience — only a handful of companies succeed, and sometimes, one has to be brave enough to go a little bit “boring.”