August 23, 2018 | 4 minutes read

Why venture-backed startups should have a bootstrapping mindset

By: Sagi Paz
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You just secured funding from a top-tier VC and can switch into spending mode. Though you should most definitely spend money to grow your business (after all, that’s why you raised money in the first place), you should be very mindful about how you deploy your capital. It may be a bit counter-intuitive, but unless your company’s model relies on extreme hyper-growth to become successful (think Uber, Facebook, etc.), you should take note from companies that have not raised a single dime.

As bootstrapped companies don’t have access to external capital, they must become extremely capital efficient. Forced to develop scrappy instincts and a hustling mindset, they consider every possible way to save a buck and keep the lights on. Even with significant funding, you should act similarly to minimize burn rate and create more value before your next round. Straightforward actions — such as reducing recruiting costs by hiring within your network, hard negotiating with vendors and being careful with not going overboard with perks — should be viewed as good hygiene. It is also advisable to consider a bit more radical ideas that may fit your specific situation. Some companies, for example, find it useful to drastically reduce burn rate by working remotely and hiring overseas. This particular solution, however, usually works well only under very specific scenarios (one of them is hiring remote engineers for a simple product and having prior working relations with that team).

Not having outside funding also creates a strong sense of urgency. Bootstrapped companies get their products to market fast and are forced to move into monetization immediately. Today too many well-funded startups are laser-focused on scaling and postpone optimizing monetization to a later stage. Even though this approach may work (after all, WhatsApp never figured out a stand-alone business model before being acquired by Facebook for almost $20B), most companies would be better off start experimenting with monetization very early on. Iterating on things such as pricing and bundling from the get-go, improves fundamentals and put the company on a path for becoming a sustainable business.

Founders of bootstrapped companies also tend to have a strong sense of ownership & accountability. Without board meetings and external stakeholders, they are effectively forced to make decisions and take responsibility for everything that happens. Don’t get us wrong, having experienced investors that are financially motivated to grow your business is great, but they should be viewed as advisors and not key decision makers or scapegoats when things go south. You should know your business better than anyone and have more motivation to make it work. This sense of ownership/accountability needs to translate into a willingness to roll up your sleeves to get things done. You should be ready to step in whenever needed and doing things like jumping on a red-eye flight to meet with a client when your sales rep left without any prior notice (true story that happened in one of our portfolio companies). It also means you should not rush into taking things off your plate. Early on it may make sense to wait with hiring people for things that are perceived as non-core, such as finance or HR, as they can help you maintain control and keep your finger on the pulse.

When running a bootstrapped company, you also have no choice but to focus on the KPIs that matter. There is no room for vanity metrics and only things that can improve the business count. Being true to what is important can help you optimize things that may otherwise go unnoticed, such as improving the time it takes to capture revenue from your customers or reviving non-active users. You should also be precise about your goals and what needs to be measured. One of our portfolio companies, for example, initially prioritized the size of its overall user base and usage figures as its core KPI. It made sense for them as they build a social-based platform, but they were unable to scale due to poor retention. It was only after they started focusing on specific user demographics, which was initially a small portion of the overall user base but seemed more engaged, that they were able to turn the corner. By measuring and prioritizing this core subgroup’s engagement level, they were able to align the entire business around them, and dramatically scale the platform.

There are more lessons to take from bootstrapped companies, but hopefully the above provides a good start. After all, there is no secret formula for spending capital wisely, but treating it as a scarce resource is the right first step in putting it to good use.