How do Bootstrap startups manage to succeed?

Proud of the motherland on which you are born? Another fact to add in your bucket list that you can be proud of while referring to India is that currently India is the 3rd largest startup ecosystem in the world, with only US and China left to be surpassed. 

In the past one year, our economy has added 3 unicorns every month, taking the total count of unicorns to 51, surpassing the UK and Germany. A unicorn startup is one that is privately held and has a value of 1 billion $ or more.  

Our visionary PM tweeted a few months back while referring to startups that “We have a million problems, but at the same time we have over a billion minds to address them”. Our country is blessed with brilliant minds who, time and again, design agile business models even with all the problems that the Indian demography faces. 

However, being a startup founder, one has to climb uphill several times in the light of looking for funding, which often feels like finding a needle in a haystack. There are several alternatives available for funding, let's have a glimpse upon each one of them and discuss bootstrapping at length.

What is Bootstrapping?

Tom Preston-Werner co-founder of Github sets the tune well to define “Bootstrapping as a way to do something about the problems you have without letting someone else give you permission to do them”. In simple words bootstrapping refers to a process whereby the founder relies on his personal capital, starts the business, earns revenue streams and re-invest the same in the startup for growth prospects i.e. they do not dilute any equity stake of their venture.

Every bootstrapped startup goes through 3 phases- The first one being the beginning stage where the founder relies on his personal savings to fund the working capital and fixed assets. The next stage is where money from customers is used to fund the operations, once operating expenses are met, growth will speed up. Post this stage is the stage when the promoter must realize that in order to stay competitive and survive they must dilute a certain proportion of their holdings and look out for fundings.
Just like beyond a point every river is deemed to meet an ocean to manifest a magnificent waterbody similarly beyond a zone bootstrapped startups might become stagnant and hence the only way for them to thrive is to look for funding alternatives.

 As every other thing in this world, bootstrapping also comes with its own sets of pros and cons. The advantages of bootstrapping are that it allows flexibility of operations and decision making in the hands of the promoters, also their stake in the entity is not diluted which fosters chances of high returns for them over the years; but financial management lays the concept of risk and reward going hand in hand, hence high returns are also acquainted with high risks. A successful bootstrapped startup requires a sound business idea backed by personal fundings, future trajectory of revenue outlines and how these could be re-channelised into the startup for funding the further growth activities. Starting a venture and bringing it to thriving fruition takes a great deal of patience, perseverance, sound business ethics and like-mindedness of management personnels to achieve the objectives.

Startups that are funded by Venture capitalists, angel investors etc have huge piles of investments to allocate towards the desired outcome whereas bootstrapped startups have to plan their bag of tricks as per their budgets and to the best of one’s abilities to achieve the goals with minimum allocation of the investable corpus. Hence at times bootstrapped startups get delayed gratification whereas funded startups can reach the skies in a shorter span of time if things go bang on as per the plans. Bootstrapping as a funding alternative is not feasible for asset heavy and capital intensive business models, for example consider a startup who wishes to explore the upcoming 2-W EV markets in India and wishes to manufacture and source these vehicles to logistic hubs like flipkart, amazon, zomato etc. It is very unlikely that for such a business model a promoter will opt for bootstrapping.

Top Bootstrapped Startups

Now that we have a gist of what bootstrapped startups mean, let us glance through a few success stories that have had their golden days  without looking for funding alternatives-:

Zerodha: Founded by Nithin Kamath, Zerodha was incorporated in 2010 and is headquartered in Bangalore. The company currently is valued at over $1 billion, is the largest brokerage firm in India by active client base and contributes more than 15% of daily retail volumes across all Indian stock exchanges. While speaking to the public at large the CEO has time and again said that a big reason for the success of the brand has been its low dependency on external parties whether for IT funding or for funding.

He said that initially, bootstrapping was not an option but the only arrow in the quilt since raising funding was very gruelling, but later when the business model took pace they got funding opportunities but they wanted to continue their freedom of operations and act as per their guts hence they preferred being bootstrapped. 

The founder believed that at Zerodha we rely less on marketing and advertising because the aim was not merely to open demat accounts but to manifest growth of those investments for their in such advertisement can barely help by any means. Data speaks for itself, a few months back NSE claimed that Zerodha is serving over 8.47 lakh clients, surpassing ICICI Securities’s client base number of 8.44 lakh and many other peers like Motilal Oswal, HDFC securities amongst many others. Zerodha is a perfect example to quote for startups that have made very big in spite of being bootstrapped for a larger part of their existence.

Grab-On: GrabOn, the brainchild of Ashok Reddy was founded in Sept 2013.It is an Indian coupons and deals marketplace connecting with subscribers and merchants, headquartered in Hyderabad. The startup has around 2,000 clients and most of them are giant names- Uber, Paytm, Freecharge, Snapdeal, Flipkart, Jabong, Swiggy, Mobikwik being few among many others. The initial steps on this venture were small, it started with 6 interns but now is exploring a dominant market space in the segment.They have expanded their portfolio of products by marking their presence in the e-Gift Card space, providing discounted gift cards from Amazon, Myntra, BookMyShow and other leading e-commerce platforms. 

In FY 2015-16 they had to make a tough choice when they had VC’s who agreed to fund them but they were resilient in their approach and decided to take the headwind, but soon in same year it had raised its first round of funding of $1 million from Ivy Cap Ventures and Unicorn India Ventures, and claims to have grown 32X since then. Grab-on seemed to have reaped the fruits of the philosophy that Nick Woodman gave about bootstrapped startups which says “ As long as you can bootstrap, at the sacrifice of competitive advantage, bootstrapping is a really powerful tool because it allows you to totally stay devoted to your vision ”. The moment Grab-on realised that by taking external funding they could dominate the competitive landscape, they modified their approach towards getting funded by VC’s.

Conclusion

Bootstrapping provides the flexibility of operations by non-dilution of equity, but it also needs a prosperous human resource who is ready to give its best without hefty pay scales. Jack Ma says that for such kinds of startups you need the right people with you, not the best of people.

Bootstrapping is effective but everything in this world has an end beyond which if the approach doesn't change growth becomes stagnant. Promoters must realise that beyond a point the opportunity cost associated with bootstrapping will exceed the benefits it reap and that is the time when they must open their arms wide to opt for various funding alternatives that are present in the startup ecosystem.