We’ve all heard “cash is king” for businesses, but is this really true? If you are an entrepreneur, you understand how delicate startups are. They are growing entities that should be handled with extreme caution and care. The obvious goal of this growth is to work towards profitability, but caution, growth is something you shouldn’t rush. Startups can learn so much more about their core business by pulling themselves up by their bootstraps.
Venture capitalist opportunities are exciting for startups because it is the first indicator of success. But the truth is, these are opportunities will often fragment your business strategy by, what I like to call “bottle rocketing” your business, instead of planning for long-term vitality. Venture capitalists make their money by investing in companies and selling them off as quickly as possible. This often means a short-term goal structure which guides your business along an aggressive sales course to “pump up” your financials. If your business doesn’t use cold calling, why would you dilute your image by trying to solicit sales?
Now for some businesses this isn’t necessarily a terrible idea, but for many entrepreneurs who value their startup for providing value to their customers, it doesn’t work. Entrepreneurs are hit with the fabled “bottle rocket syndrome,” a term which describes a startup’s steroidal funded growth coming back to reality post venture capitalist backing. Both, from a strategic decision making standpoint and a financial planning standpoint, being patient and learning about your business is almost always the best decision.
We are inherently creatures of habit. We make business decisions based on past information, trying to learn from our mistakes as business owners. It’s impossible to have a “mistake-free” business startup, but accepting funding from an outside investor may be a mistake that is hard to Band-Aid. They not only un-focus your business, but they put your corporate strategy in jeopardy. Take this in to consideration, according to Journal Star, “70 percent of all lottery winners will squander away their winnings in a few years. In the process, they will see family and friendships destroyed and the financial security they hoped for disappear.” This illustrates the fact, that we as people act differently post-money. Whether it is something as small as not being cost efficient with your payroll processing or something as big as reshaping your startup’s product offering, venture backed startups definitely have different mindsets than their bootstrapped counterparts.
The truth is most startups don’t come from money so having to earn it must come naturally, according to The Anatomy of an Entrepreneur, “less than 1 percent of startups come from extremely rich backgrounds.” Now I understand each situation is completely unique. Your startup’s industry may require initial investments of hundreds of thousands of dollars, and in that case venture capitalists might be needed. Determining whether you should bootstrap or accept outside funding should come within your business; for consumer driven product businesses that are looking to create intimate relationships with their customer base, bootstrapping is the way to go.
Regurgitating profits and working overtime to get your business running is frustrating. Venture capitalists are like that piece of chocolate cake, waiting to be eaten. But don’t give in to the temptation; your long term growth will be set back. It may seem great to “pump up” your business and drive sales to get your name out there, but the only functional benefit of angel investors are the potential synergies associated with shoring up manufacturers and clients. Ultimately, bootstrapping will prep your business for long term growth by creating habitual routines with your strategy and business processes that are customer centric and ROI driven.
Matt Krautstrunk is an expert writer based in San Diego, California. He writes extensively for an online resource that provides expert advice on purchasing and outsourcing decisions for small business owners and entrepreneurs such as payroll processing services at Resource Nation.