Theranos is a classic example of VC funding gone wrong. The company raised $724 million in investment from investors, claiming to have developed a revolutionary technology for blood testing. It was valued at $9.5 billion before it collapsed due to a fatal flaw within the company – its product didn’t function. It was all hype and no real value. Even when VC-backed entrepreneurs aren’t frauds, they tend to prioritize funding and scale to the detriment the product.
Jotform was founded over 18 years ago. It’s been a slow and sometimes difficult climb without outside funding. But today, we have more than 25 million users around the world. Bootstrapping taught me a lot. It’s a great way to create a balance between pressure, creativity, and thrift. Here’s a closer examination of why VC funding can lead to startups making bad products.
Where VC funding fails
Many people confuse “small business” with “startup”. Ask any founder, and they will likely tell you that their ambitions are big. Bootstrappers have the same ambitions as venture-backed businesses. In fact, according to a recent report from startup lender Capchase, bootstrapped software-as-a-service businesses are growing just as fast as their venture-backed counterparts–despite spending only a quarter of what VC-backed businesses do on acquiring each new customer.
studies have shown that 64% of unicorn startups, those valued at more than $1 billion, are not profitable.
The Capchase Report explains that before investing in growth, the top-performing startups concentrate their efforts on nailing product-market fit. This means finding the right fit between your product and those who need it. This creates satisfied customers, high demand and organic, sustainable business growth. 34% of startups fail due to the lack of product-market fit. A brilliant idea is not always enough.
Imagine you are a VC-backed start-up and you don’t see the growth you hoped for. You could increase your spending on marketing and sales campaigns, but this would leave you with a shorter runway. This is the amount of time that your business can stay afloat solely by using its cash reserves. You may achieve the desired result (customer acquisition), however, it is risky and uncertain in the long term. Bootstrapping is not an option for you.
What do you do instead of that?
What bootstrappers do different
Bootstrapping sounds shabby, but it’s actually a luxury. Bootstrapping allows you to focus on your product without having to answer to anyone.
I was excited when I founded my company because I loved the potential of our first product, online forms. I saw how it could make people’s life easier. This factor, ease of use, was my primary concern. I loved the product and got so excited when I saw people using it that I gave it to them for free. We didn’t offer a paid version from February 2006 to March 2007. This was a pivotal time for the company.
Why? I listened to the early users, and I received valuable feedback on how our product was being used and how I could improve. I refined and iterated my product before I released a paid-for version. We grew our client base before we spent a penny on marketing because people saw the value of our product.
If I had investors who demanded that I meet arbitrary KPIs in my early years, I would have spent them mastering PR and Sales. I was not an expert in these fields, and I didn’t enjoy them. I’m sure the company would not have taken off had I been forced to concentrate exclusively on these aspects of the business.
Your most important stakeholders
As a mentor for several founders today, I always share with them my 50-50 rule: Spend half your time working on the product and half on growth. I also encourage founders release their most important features quickly so that they can get them in the hands of users. They can then get critical feedback about their product before asking anyone to pay for it.
Another thing to remember: never stop listening to your users, who are your most important stakeholders. People who are too attached to their product and ignore whether it meets the needs of their users will fail. To grow a business organically, you need to let go of your ego.
Bootstrappers also focus on making an impact. Capchase, for example found that the healthiest companies don’t spend as much on marketing and sales, but instead have a “razor sharp” understanding of the channels and campaigns that have the greatest impact and show the fastest return. Early on in the startup stage, a better product is more important than flashy marketing campaigns. Bootstrappers are more likely to think this way because they have smaller budgets and fewer employees. It’s for this reason that I tell entrepreneurs to automate the busywork — so they can devote more time to the “big stuff,” or meaningful work, which moves the needle in your company or career.
According to recent reports, VC funding will reach a six-year-low in 2024. This may have sent shivers through the startup world, but it shouldn’t. Bootstrapping is the safer, more reliable way to go. It creates an ideal environment for your company to develop a better product.
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