In a world of insane valuations and mega-fundraising, does getting started still matter?
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With an overwhelming number of tech startups turning to VCs to fund their growth, and a growing number of investors pouring unlimited amounts into startups, this might seem like the “right” way to start a business. Entrepreneurs, of course, usually turn to venture capital funding early on, convinced that it’s the only way to get off to a quick start.
Bootstrapping, meanwhile, has suffered from a certain stigma: there’s a common misconception that if a fledgling startup is profitable too soon (before getting a VC injection), then it’s not growing. enough. “Why didn’t they jump on the VC train and go further and faster than they could have done with their own limited funds?” could be the resulting question.
However, while the venture capital success stories of unicorn companies are often the ones that make it to the front page, there are also some amazing and successful companies that got their start with the startup. And while crazy valuations and exaggerated fundraisings are much in the spotlight lately, there is enduring value in the bootstrap, which actually offers many advantages over VCs.
The danger of insane valuation
Unfortunately, a company’s valuation isn’t always based on solid data, such as revenue. Rivian, the up-and-coming electric automaker, is a prime example of an inflated valuation. The company made history when, just days after its November 2021 IPO, its valuation soared past $100 billion, suddenly surpassing gigantic automakers like GM and Ford. The crazy part is that Rivian has no material revenue to speak of at the moment, with a valuation simply based on the belief that this was the next Tesla. Amazon even jumped on the bandwagon by pre-ordering 100,000 delivery vans from the electric carmaker (still undelivered at the end of the third quarter). Investors who have contributed funds to Rivian have done so on a leap of faith. They weighed heavily in the hope that the electric car market would become more profitable than the gasoline sector – that their current dollars would be worth a hundred times later. These are high hopes; and if Rivian doesn’t keep its promises, it could spell the end of the young company.
And therein lies one of the dangers of overfunding companies that can’t always deliver: it puts tremendous pressure and high expectations on a startup to grow exponentially and quickly, or cope to the music.
Related: Fundraising Vs. Bootstrap: How to Decide What You Need for Your Tech Startup
Not all success stories started with an influx of cash from investors. Including Craigslist and GitHub, there are plenty of very successful businesses that have chosen to forego investments – to start with a great idea and no upfront outside funding.
When you think of email newsletters, one company comes to mind: Mailchimp. The Atlanta-based giant, which now has nearly $700 million in annual revenue, also had humble beginnings. In 2000, co-founders Ben Chestnut and Dan Kurzius were laid off from their web design jobs and spent the next seven years painstakingly building this part-time business. In 2007, they were finally able to focus exclusively on Mailchimp, which paid off massively; it is 100% owned by the founder, which helps increase hard-earned profits.
Brooklyn-based co-founders of Tough Mudder, Will Dean and Guy Livingston had a crazy and risky idea, invested $10,000 each, and made it a reality too. The company is incredibly successful, hosting annual extreme endurance events around the world. Building without crowdfunding or venture capital was a huge risk, but they managed to turn a dream into a lucrative success, while maintaining control.
Related: 7 ways to start your business to success
Why Getting Started Still Matters
The successes of the businesses mentioned above underscore why starting up is always a critical decision. Some of its advantages:
• Stay in control: A fool and his equity are soon separated. As a business grows, investors often step in to provide financing and sales opportunities. Entrepreneurs need to think carefully about these options, make their decisions at the right time, and only accept money if they know exactly what they will do with it. Until then, keep your hand on the wheel and navigate the ups and downs from the driver’s seat.
• Increased creativity and confidence: Getting started means meeting challenges without having the cushion of venture capital to catch up. It pushes people to think outside the box, find unique solutions, and make significant sacrifices, which builds entrepreneurial confidence. You spend less time worrying about letting investors down and more time focusing on growth.
• Creating a close-knit team: working alongside people who have skin in the game and who are deeply invested in the smooth running of the company creates bonds and loyalty. The cohesion of challenges and fun solutions creates a staff full of energy and commitment.
• Ingenuity and Experienced Intent: Building a business without venture capital keeps you on your toes. You stay resourceful and think long and hard about decisions that affect business and growth. You hire thoughtfully, outsource strategically, and learn to do more with less.
Related: How to make the most of fundraising in 2022
While venture capital remains a crucial option for entrepreneurs who need significant funding to get started, bootstrapping is making a serious comeback. Thanks to new business concepts such as product-driven growth and lean startups, it is increasingly possible to grow a business without raising funds (and donating equity). However, it is important to consider the nature of the business, your financing needs and your growth potential before deciding whether you have the capacity to start or whether venture capital is the best strategy.