Bootstrapping and Venture Capital Funding To Alter Growth
This article is written by Clinton James, a Contributor Author at Startup Istanbul.
Bora kizil is a highly experienced, trilingual, entrepreneur minded engineer and HEC Paris MBA graduate. He has been a country manager in Turkey for one of the largest VCs in Europe, Rocket Internet. Rocket Internet launched 6 businesses in Turkey with a team of 400 people
Growth is a very important aspect of every business, however, should not be the only aspect looked at. As a startup there are two options of obtaining funds for growth. Venture Capital (VC) funding and bootstrapping. Bootstrapping involves trying to come up with one's own technology and trying to grow alone. It is steady, stable and less risky whereas VC is high risk, high reward.
From the Startup Financial Cycle seed capital can come from Family, Friends, Fools (FFF) and Angels. Once the company has begun to grow and have broken from the valley of death and thus need more funding, they look to other sources for example, acquisitions or mergers, VCs and strategic alliances. VC funding is often very alluring as it ensures ultra-fast growth.
However, according to the U.S Bureau of Labor Statistics, 50% of new companies die within the first five years. Also according to a study done by Shikhar Ghosh, seventy five percent of VC backed firms fail within the first five years. These are all because, within the first 5 years of operation, the company is trying to pay back the initial investment. In fact, ninety five percent of VC backed companies never pay back initial investment.
A VC investor invests with the knowledge that only 1 out of 20 investments will bring back money. With this, investors will push that one investment to ensure that it brings back all his money including that from the failed 19. Thus this one investment now owes the investor 20 times more on the initial investment. The push is a good thing for some companies.
However this ultra-fast growth is dangerous as it shifts attention from the business path to just one KPI, growth and not on income. A lot more money is being spent as compared to what is coming in. This is referred to as burn rate. Most companies with VC do not see this as investors encourage them to spend more money as they believe that more money spent means growth.
This happened to Steve Jobs. He was spending much more than what the company was
bringing in and he was kicked off the board. With VC, the owner of the company gives up some control over to the investors as they have to keep track of how their money is spent thus must have one or two seats in the board.
So what happens when one does not have the money to grow and still run a successful
business while retaining full control? Be smart. Be Inventive. Automate. Anything or Anyone that can be replaced by an automated, more efficient system that requires no manual input, ought to be replaced. Come up with solutions for problems that customers bring forth and efficiently.
However, no way is the right way. It is all about making a very informed decision and asking these questions; do people want what you are selling and will they pay enough for it?
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