• Saturday, June 15, 2024
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How bootstrapping can fuel startup success as VC fund slows

How bootstrapping can fuel startup success as VC fund slows

The search for funding is crucial to a startup’s survival, especially in its early stages. However, while this is valid, seeking investment from venture capitalists (VCs) is not the only way.

According to a 2023 annual report by PitchBook, the global VC funding market saw a significant decline in the latter half of the year, making it challenging for startups, especially those with unproven ideas, to secure investments.

This unavailability of funds disenfranchised many startups from accessing funding from VCs. According to experts, it is now more critical than ever for them to employ other bootstrapping means to raise funds for their startups.

Bootstrapping involves financing a business through internal resources and revenue. According to a Kauffman Foundation study, nearly 50 percent of all new startups in the US are self-funded. The study adds that just 0.04 percent of all startups secure VC funding, highlighting the intense competition for investment dollars.

Several high-profile companies, like Mailchimp and Github, started with bootstrapping and succeeded significantly. These examples demonstrate the viability of this approach.

“As a startup founder, you should only look towards investment funding after you have exhausted all your bootstrapping options,” said Olajumoke Oduwole, co-founder and chief executive officer of Alajo, during a panel session at the Innovest Afrika Investment Summit.

She added that if you (the founder) cannot self-fund your startup, why should anyone do it for you?

In 2023, funding raised by startups in Africa declined by 31 percent to $4.5 billion from the $6.5 billion raised in the previous year. Data from the latest Venture Capital Activity in Africa Report by the African Venture Capital Association revealed that many startups that had raised funding had to close up as they could not raise follow-up rounds in the year.

Suara Abass, a strategy and corporate innovation consultant, noted that although external fundraising is now a metric for success among founders, it should serve as a last resort.

He told BusinessDay, “Raising funds from venture capitalists is a coveted milestone for startups. However, there are other paths to success.

“Bootstrapping or self-funding through personal finance or revenue generated from operations can be an alternative. Also, it allows founders to retain control and avoid diluting equity. It could also build a culture of frugality and resourcefulness among founders.”

He explained that starting lean and building a sustainable model from the beginning will help startups run for longer.

“Doing this not only speaks to the viability of the business but also showcases the founders’ ability to execute with limited resources. The mindset of doing more with less can be a valuable asset even after raising venture capital. Founders who successfully navigate this phase demonstrate their ability to tackle scarcity and make tough decisions, traits that investors highly value,” he added.

Davidson Oturu, managing partner and Venture Capitalist at Nubia Capital said the decision to raise funds depends on the startup’s stage, sector, and goals.

“An early startup that hasn’t secured an Intellectual Property (IP) patent for its product, built a Minimum Viable Product (MVP), or validated its product should not necessarily be looking for venture capital funding as VC funding is profit-driven and may not be interested at that point,” he argued.