Theranos is a case study in how venture capital funding goes awry. A company that says it has developed a revolutionary blood-testing technology has raised about $724 million from investors. It was valued at $9 billion before it collapsed due to a fatal flaw in the company—its product didn’t work. It was all hype with no real value. Even if VC-backed founders aren’t scammers, there’s a tendency to prioritize funding and scale over product.
I founded my company Jotform over 18 years ago. Without external funding, this growth has been slow at times, but today we have over 25 million users worldwide. I learned a lot about bootstrapping and how it creates the right combination of pressure, frugality, and creativity to develop great, profitable products. Here’s a closer look at why venture funding can lead startups to produce bad products.
Where Venture Funding Goes Awry
People often assume that the terms “small business” and “startup” are interchangeable. But ask any founder and they’ll likely tell you their ambitions are huge. Bootstrappers are no different. In fact, according to recent report from startup lender CapchaseSoftware-as-a-service companies are growing as fast as their venture-backed counterparts, despite spending only a quarter of what venture-backed companies spend to acquire each new customer.
Moreover, research show that 64% of the top 100 unicorn startups valued at more than $1 billion are not profitable at all.
As the Capchase report explains, the best-performing startups focus their efforts on product-market fit before investing in growth. This means finding a match between your product and the people who need it. This, in turn, creates satisfied customers, high demand and organic, sustainable growth. Amazing 34% of startups fail because they don’t find product market fit. A brilliant idea doesn’t always pay off.
Let’s say you’re a venture-backed startup and you’re not seeing the growth you were hoping for. You may be spending more on sales and marketing campaigns, leaving you with a shorter runway (the amount of time your business can stay afloat on cash reserves alone). And perhaps you will achieve the desired effect (attracting customers), but it is risky, and the long-term return is uncertain. If you are a downloader, you don’t have this option.
So what do you do instead?
What bootloaders do differently
Loading yourself may seem messy, but in many ways it’s a luxury. As a bootstrapper, you have the luxury of obsessively focusing on your product and not having to answer to anyone.
When I first started my company, I loved our original product, online forms, because I saw it as having the potential to make people’s lives easier. This factor—ease of use—was my main concern, hence our original tagline, “The Easiest Form Builder Ever.” I loved this product so much and got such joy out of seeing people use it that I gave it away for free (while working a 9-5 at my day job). From February 2006 to March 2007, we did not have a paid version of our product. However, this was a turning point for the company.
Why? Because I listened to early adopters and received invaluable feedback on how they were using our product and how I could improve it. I refined and iterated even before I released the paid version. Because people genuinely saw the value in our product, we grew our customer base before spending a dime on marketing.
If I had investors who required me to meet arbitrary KPIs, I would have spent my early days learning PR and sales. I wasn’t an expert in any of these areas and I didn’t like them. I believe the company would not be successful if I had to focus solely on these aspects of the business.
Your most important stakeholders
Today, having mentored several founders, I always split my 50/50 rule: spend half your time on product and half on growth. I also encourage founders to release their most important features as soon as possible so they can get them into the hands of users. They can then get critical feedback on their product before they even ask people to pay for it.
This is another takeaway: never stop listening to your users—your most important stakeholders. When people become too attached to their product and ignore whether it meets the needs of its users, they are doomed to fail. Growing your business organically requires putting your ego aside and understanding that even smart products won’t succeed if they don’t meet the specific needs of your target audience.
Another thing that bootstrappers do differently is that they focus their efforts on making an impact. The Capchase report, for example, found that the healthiest companies don’t spend the most on sales and marketing, but rather have an “accurate” understanding of which channels and campaigns have the biggest impact and show faster returns. In the early stages of a launch, refining your product has more impact than flashy marketing campaigns. With tighter budgets and smaller teams, bootstrappers tend to apply this mindset to everything they do. That’s why I tell entrepreneurs and team members To automate your busy work— devote more time to the “big things” or more meaningful work that changes the course of your company or career.
Latest reports show that venture capital funding will reach a six-year low in 2024. This may have caused a shiver among startups, but it shouldn’t have happened. Bootstrapping is a safer and more reliable route. And perhaps most importantly for your company, it creates an optimal environment for developing a better product for your customers.
Another must-read comment posted by Luck:
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