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The startup dilemma – cracking the code

By Sanjay Modi, MD, Monster.com – APAC & ME

The rosy projections for the Indian startup ecosystem are a dime a dozen. With both industry and the government rolling out the red carpet for startups, it’s projected that by 2020 there will be 11,500 startups in the country. There is no doubt, then, that the entrepreneurial spirit of young India is absolutely infectious.

startup dilemma

The tempting call of funding
But one has to face the harsh reality of startup mortality being at 50 percent in the first five years of inception. The aim for every entrepreneur as they begin their journey in materialising their billion-dollar idea is either to become as big as Flipkart, or become as successful as TaxiForSure so that the competition acquires you. So, even before they could embark upon their startup journey, it all boils down to the all-important question of funding – how much funds are required and from where the funds will be sourced to start the venture.

The source of funding is also a key factor that contributes to the overall success of a startup. The dilemma an entrepreneur faces is stark- should he part with the equity of the business to the investors so that they fund his dream venture? Or should he dare to take the bootstrap-funding plunge and enjoy the liberty of being his own boss?

Bootstrapping like the old days
The terminology itself and the analogy behind it has always amused me. It refers to pulling oneself up using one’s own bootstraps, which when one tries will certainly make that person fall backward. Interestingly, in the startup vocabulary, it has a different interpretation altogether. It refers to arranging the funds for the startup venture from one’s own meagre personal savings, and not depending on the capital from investor funding. Bootstrapping is a symbol associated with entrepreneurship. Historically, Apple, Google and Microsoft were all startups that incidentally began operations from garages and were personally funded by their respective founders.

But given the easy accessibility to huge sums of money from investors and venture capitalists, startup founders now seldom opt for bootstrapping to start their ventures. It, therefore, becomes tempting to chase your dream of getting on with a startup, but at the same time it isn’t easy to be an entrepreneur to drive the business towards its core objectives.

Bootstrapping is anything but an easy way to start a business. Through an investor funding, the founder would have enough money to get all the resources required for the project. Whereas, with bootstrapping, the startup founder has to dig deep into his own personal savings, and has limited resources. Hence, his spending is more disciplined and wise, focussing on needs rather than wants.

Flexibility, speed and ownership
What makes bootstrapping attractive, however, is that it offers you speed to market your idea. If you can source relevant funds to start the project, you can initiate the project rightaway. The time needed to seek an outside investment alone would be three to six months. Bootstrapping gives you the thrill to be your own boss and realise your vision for growth, which isn’t the case with investor funding.

A bootstrapper also has the flexibility to switch plans midway when he sees there is need to modify his business approach, thus giving a bootstrapped business more flexibility over the investment alternative. With third-party money involved, the startup founder’s approach towards mission and goals of the business clashes with that of the investor’s. Believe me, that can be a huge deterrent.

Agreed, that it’s critical sometimes to raise money to accelerate business growth or to invest in product development so as to outpace the competition. But it all depends on the type of business and the market or industry the startup venture is aiming for. An investor will readily put his money in a particular startup business when he’s assured about the return on investment and the market maturity.

For instance, a startup in mobile app-based e-commerce or service delivery model could garner investor’s financial support, whereas a startup in the agricultural domain won’t appeal much to the investor and VC community. Funny, isn’t it? Because it is agriculture that eventually would drive the growth of the global economy.

A true entrepreneur should start the venture through bootstrapping, and once he has established the business into growth path he would look at raising capital for scaling the business. With progress under his belt, he would be able to raise money at a much higher valuation than compared to starting the business with investor funding.

Classic example of not relying on investor funding is that of GoPro. Nick Woodman started the venture in 2002 with his own savings and grew the business slowly to generate revenue. He didn’t accept any outside investment for his company for almost a decade. He waited patiently to further develop his camera that could be mounted anywhere, and let the market mature. Had he taken an investor’s money, not only would he have had to give that investor a share in his company but also would have had to speed up product development to prove growth to them.

Thanks to the Internet, we are living in an era of information overload. There is so much information on what has worked for startups and what’s got them to fail. Budding entrepreneurs can learn from the mistakes of others and improvise on their business ideas to ensure its success. But I would recommend today’s entrepreneurs to not opt for the easy route of investor funding, unless your business model demands that approach.

Opt to fund your startup project by bootstrapping, and experience the struggle to convert your big idea into successful business through your own resources. The hallmark of a true entrepreneur is to intrinsically understand the risk-to-reward ratio and be able to adapt to the changing environments to create more business opportunities.

This article was first published on YourStory.com

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