You can Build a Healthier Startup Without VC Money
By Jess Rovello, CEO and Co-founder, Arkadium
Venture capital spending reached an all-time high in 2018, at roughly $131 billion across nearly 9,000 deals. For a founder in this environment, it’s hard to imagine not going the VC route. But VC funding doesn’t guarantee you success, and it isn’t right for everyone.
Consider, for example, that one-fifth of startup founders are outright replaced after accepting VC funding, and 60% are no longer leading their company by the time it undertakes an IPO. What’s more, those founders who do survive to IPO often hold less than 10% equity.
My company was a VC-backed startup. I founded Arkadium with my husband Kenny 18 years ago with an investment of $2,800 from his mother to bootstrap the launch. In 2013, we acquired a Series A funding round representing a minority stake in the business. At the time, we thought we had to go that route. With very few options presented in the market, founders are often made to feel that taking VC investment is the only way to grow, be taken seriously, and make an impact. Wrong. (We recently bought out our investors.)
While venture capital has a role in the startup world, I firmly believe bootstrapping is the better and more responsible way to build a business. Growing off of your own success and profits requires a lot of slow and difficult work. But after experiencing both sides of the equation, I know bootstrapping offers enormous advantages over the VC-funded route.
There’s nothing wrong with being in business to make money – that’s the end result and goal – but you can’t equate the amount raised with the success of your business. The “go big or go home” mentality pervasive in the VC world is producing many more dysfunctional, money-losing companies than it is unicorns.
When a startup begins to ramp up, so do its issues and challenges. One easy-to-track metric is the customer acquisition cost to lifetime value ratio. The more money you spend to grow, the less return you see per customer. The math is simple, but it’s often overlooked in favor of “hyper-growth.” Landmark research by the Startup Genome Project back in 2011 found that premature scaling leads 74% of high-growth startups to fail.
Alternatively, a founder-led and funded business has the opportunity to grow at a steady and reasonable pace. Startup founders with an owner’s mindset can instill a culture of taking direct responsibility for the business’s financial and potential fiscal hardship that carries through the entire staff. The founder is not working for the board or a group of outside investors. They are working to keep the company and their vision alive.
The path is methodical, but from a financial perspective, it’s solid. A November 2017 study by Bain & Co. spanning a 25-year period found traditional founder-led businesses perform 3.1x better on average than non-founder-led companies. Meanwhile, a number of incredibly successful startups, such as MailChimp and Tuft & Needle, are proving the benefits of staying founder-funded. High-growth startups might begin with impressive growth rates, but they can quickly drop as years of a “scale no matter what” mentality lead to higher operating costs and lower returns.
Uber is a great example. While its year-over-year growth is strong overall, quarterly growth has stalled out, scaring investors. In 2018, the company brought in $11.4 billion in total revenue, but Q4 revenue rose just 2% compared to Q3. On top of that, the company still isn’t profitable, is losing billions per year, and recently laid off 400 employees to slash costs. This is a company that raised more than $20 billion in outside capital pre-IPO.
Bootstrapped startups and self-starters, by contrast, have a “make money” mindset instead of a “raise money” mindset. They’re disciplined to manage cash because it’s coming straight from their own pockets. I know this from experience. Founder-led and -funded companies are front-line-obsessed and focused on pleasing employees and customers rather than a board of outside investors. Their reputation is on the line, and they want their business to live and breathe their core values.
There is no one template on how to grow a successful business — although you may be led to believe otherwise. If you’re a founder who’s interested in building something that lasts, making your customers and employees happy, AND getting rich, there’s a better way than the VC route.