Let us first look at some facts.
When you are bootstrapped, if you make a modest exit, you still make a fair amount of money. Funded startups must exit with a multiple of what they raise in order to make a good return. Funding feels assuring initially but most of the time turns into a burden that demands too much lifting to overcome for internal (team members) and external (investors) satisfaction (return).
For instance, a startup raising $10 million, may have to exit with a valuation exceeding $20 million for it to deliver value to its stake and shareholders. A bootstrapped startup with a $100 thousand in initial founder investment and continuous reinvestment of earnings will make founders well off with a $5 million exist. The motivation of funding can turn into a demotivation for founders and the team later on when life turns out not as beautiful as it was initially imagined.
When you are bootstrapped, you are your own boss, literally. Funding is what I call the first layer of bureaucracy in a startup. Investors won’t let go without taking an interest in how the funds are used. Even if you have or are given control, you will still be responsible and accountable for explaining the reasons behind some of your decisions. Furthermore, research shows that four out of five entrepreneurs are forced to step down from the CEO post.
Loss in operational freedom can be one of the negative consequences of venture and angel investment and involvement. Bootstrappers’ destiny, in the other hand, is in their own hands. Something that can make the early company transition period, startup mode, more challenging since founders are not only bounded by limited resources but also in making small and big mistakes freely.
Funded startups can afford to decrease margins or even operate at a loss in order to increase market share. Thousands are the example of startups that reached billion dollar in valuations before even reaching half way through their break-even point. This aggressive strategy is not an option for bootstrapped startups. Such startups finance their own growth and thus every dollar counts.
Back to our question, how can bootstrapped startups compete with funded rivals?
Picking A Viable And Value-Adding Strategy
If aggressive market share acquisition is not a viable strategy under limited resources then what is? Treating every paying customer as a million dollar customer is one of companies’ most viable strategies and even more for bootstrapped startups. Matching competitors’ price is not sustainable. Instead, personalize customer experience, product user experience, and ongoing support. Be the best at what you do and not essentially the biggest.
If you are the little innovative company then be the best at it. If you’re the best company to work with because of your customer support, then make sure everyone knows this. Do not get distracted and focus on what you do best. Most importantly, trying to go hand in hand with the competitor can be the quickest route to failure.
Bootstrappers cannot afford to underestimate required resources to accomplish a goal such as closing a sale, key hire, partnerships, and product delivery. Funded startups determine a projected burn rate which is the rate at which they spend money. As a bootstrapper, I took the word Burn out of my dictionary since I have no funds to burn but to invest in the essentials.
While funded startups can go away with a few underestimations, bootsrapped ones can rarely do and maintain operations sustainably. It is thus essential for the bootsrappers to take the time for estimation then overestimating required resources either through experience or by asking questions.
Focusing On Value
Never have I or I will meet an entrepreneur with excess resources. We are all bound by time, attention span, money, skills, equipment and others. I find that the best way to manage resources is by looking at them as investments. In other words, if you have an hour and fifteen minutes for investment in the highest possible yielding activity, what would it be? It should be in the highest value-adding activity. Take 30 minutes a week to define the activities and allocate the needed resources accordingly. Efficacy in efficiency is key for bootstrapped startups.
Personalizing Customer Experience
When you’re small, you’re nimble. Some funded startups can afford to invest a ton of money in google ads, sponsoring big events, flights, etc. in order to reach the maximum number of potential customers then time decides if all or some of them are a fit. All what bootstrappers sometimes have is a cell phone and a personal computer to send and exchange emails.
A personalized customer experience doesn’t start upon deal closing. It is about taking the time to personally know leads, listening, and treating them personally. I go by the rule, if I can’t identify every active user/buyer by name anymore, I am no longer as personal as I need to be.
Leveraging Rivals’ Growth
One or two of your direct competitors are funded, what does it mean to you? One way to look at it is as a sign of validation for your market especially if more than one rival is funded. You can use this to your advantage in many ways. One way is about the pressure funded teams have in growing at the target rate. Founders can lose faith and feel undercompensated if things don’t go as planned.
Another way is about funded companies’ contribution to buyer education and in taking them through the first three stages of the sales funnel: awareness, need and interest. By the time potential buyers reach interest, they usually shop around for the best deal. That’s when you pop up. Investment inis key for every company and even more for bootstrappers. Quality content can play an important role at the customer research stage.
- The euphoria of successfully raising a financing round is temporary but not permanent. Not very soon after will funded teams recognize the pressure of having to do very well and not just well in order to keep up with the promises and increase valuation for an exist that delivers a fair compensation to them and investors.
- Bootsrapped startups are managed internally while funded ones have an extra layer of management, external (investors). If funds are not imminent, bootstrappers can use some of investors’ services, mentoring, guidance and connections, by assembling an advisory board.
- Bootsrappers usually cannot keep up with a rival’s aggressive growth strategy. Instead, they can focus on picking a viable and value-adding strategy such as focusing on customer experience, product user experience and ongoing support.
- Overestimating resources, using available resources wisely, and leveraging rival’s growth are three other ways bootstrapped startups can compete with funded ones.
How else can bootsrapped startups compete with funded rivals?