7 Facts from Survey Results: Should #bootstrapping be made compulsory for #startup #entrepreneurs? Why so?

The backdrop: In startup lingo, bootstrapping is when an entrepreneur puts his idea into action with minimal capital, wherein that capital is essentially his own money. In today’s age when there has been a flush of external capital available from angels and VC funds, the notion of using primarily one’s own money to fund a business idea has been largely ignored – especially in the much hyped consumer sector. However, many angel investments made in recent years struggle to clock healthy exits – which highlight the quality of the underlying idea and execution. In such a situation of struggling exits, the entrepreneurs often escape scot free as they had minimal capital at stake while the external funders struggle with capital burn. This has given rise to the debate that bootstrapping should be brought back as an essential part of the startup investing process and in fact – made compulsory!

The objective: What is the exact thought-process amongst the stakeholders in the market? We conducted a primary survey to assess what are the views of people who are related to the world of startups and angel investments. The survey comprised of eight questions which tabulated their views. Below is a summary of the findings:-

Fact 1: All respondents said that bootstrapping at over 50% of the initial capital should be made compulsory for a startup entrepreneur. Within this, close to half of them said this should be above 75% of the initial capital. These numbers pretty much answers the overall thought-process running in the respondents’ minds.

Fact 2: All the respondents felt that having one’s “skin in the game” would make entrepreneurs take better grounded business decisions. That says a lot about the faith of the investors on the business acumen of budding entrepreneurs.

Fact 3: Profitability is a struggle amongst the startups being run by the respondents, as only about 40% said their startup (which may/may not be bootstrapped) has seen a ‘best’ net profit margin in the range of 0 to 10%. The rest returned negative profit margins. These numbers are quite suggestive about the basic workability of the underlying business models that have been launched of late – one reason why external investors remain piqued.

Fact 4: When it comes to what comprises the best learning for any entrepreneur during the bootstrap period, almost two-thirds of respondents answered better cost management and focus on profitability. This says a lot about how financial conservatism comes to the fore when one’s own money is at stake! The rest of the respondents answered developing new skills/competencies or better growth in topline, as a result of bootstrapping. At the same time, entrepreneurs also face challenges in the support they receive, as sometimes the mentors were not authentic.

Fact 5: Almost half of the respondents felt that while they would still have had this learning (as per the point above) had their startup not been bootstrapped, bootstrapping helped enhance it further. Moreover, a minority also felt that they would never have thought of these new skills had they not been bootstrapped. Both these are points in favour of bootstrapping as a means to enhance the learning quotient of an entrepreneur. The rest of the respondents said they would still have acquired these skills, and bootstrapping had nothing to do with it. However, that raises the question on their fundamental ability to deliver results, given the low profit margins achieved.

Fact 6: Almost half of all respondents felt it is justified that if bootstrap is made compulsory, then only those with an existing corpus can walk the entrepreneurial path. This point is subject to debate, as the others maintained that it should be kept flexible because sometimes the proof of concept and business models is indeed exceptional. The suggestion is to make it on a small scale initially which the entrepreneur can handle himself. If the idea reaches profitability at that scale, then design a plan to scale it up in a profitable manner using external capital. That would prove the idea works and there is a business case for it – a win-win situation for investors and entrepreneurs both.

Fact 7: An overwhelming majority of the respondents felt making bootstrapping compulsory would ensure that “unworkable” business ideas get filtered out more, as many people today try entrepreneurship only because there is adequate external funding available. Correlating this with the dismal profit margins paints a complete picture!

Fact 8: Almost all the respondents felt compulsory bootstrapping would ensure the longevity of the VC/PE/Angel investment industry through multiple cycles of exits & reinvestment cycles. That is a very crucial point in the context of the struggle many funds are currently facing to see healthy exits from recent investments.

At the end, any survey will always have the limitation of sample bias. Due to anonymity clause, personal data of the respondents or their profiles could not be gained except for the fact that they were a mix of entrepreneurs, investors and media. In terms of the region their business or investment was primarily focused on (only for entrepreneur or investor), the options most clicked were India and South Asia, apart from North America.

By: Sourajit Aiyer

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