We need bootstrappers
This post gets a little bit political but I’d like to think it would have appeal from across the political spectrum. In fact one my favourite things about the world of bootstrapped startups is that there is plenty to offer both the libertarian and the social-democrat.
If we are going to unify our world, bootstrapping is one of the arenas we can find plenty of common ground in. And to be honest, in our increasingly fractured society, that is reason enough to take it seriously.
The status quo
There is a pervasive narrative in our society about startups. When I say our society, I guess I mean the UK, but it echoes throughout the West and likely even further. The narrative is that in order to start a company “you need capital”.
There may be some businesses, perhaps even industries, where this could be true. Biotech comes to mind due to the expense of the technology and specialist materials, and the high probability of failure. But for a lot of businesses and industries – particularly those working in the digital economy – this message is simply wrong. Not to mention even in biotech, it has been done. Here’s a great story from Oxgene about how they managed to go from bootstrapped startup to market leader.
Despite the (seemingly anomalous) existence of bootstrappers being evidence to the contrary, the pro-capital narrative seems to have already won. The mindset is everywhere. It shapes policy, national infrastructure, government schemes, financial services, and worst of all: us. If you believe you need capital to start a company, and you don’t have a readily-available ample source of it, you’ve failed before you’ve even started.
This messaging is an aspiration suppressant. And in this post I want to explore both why it’s wrong, and why it’s bad.
I’m not a purist when it comes to bootstrapping though. Bootstrapping is all about pragmatism. Having access to a small pool of money definitely makes certain things easier when starting a company. But the nature of the capital matters a lot. And given the zeitgeist so heavily emphasises the importance of venture capital, the needs of bootstrappers is almost entirely overlooked.
A small easily accessible credit facility, business loan or overdraft is no bad thing to keep your cashflow buoyant. Especially if the % rate is low, repayment terms are generous, and you don’t need to jump through a hundreds of hoops to acquire one – or hold your house ransom as part of a bricks-and-mortar security deal.
But these debt facilities don’t really exist. They wouldn’t be profitable enough for high street banks, and governments would fear possible misuse and the associated newspaper headlines of dodgy startups taking taxpayers for a ride.
This leaves a couple of options. For most small independent small businesses they borrow a bit from the mainstream lenders, suffer the strings attached and stay small. Limited by the financial and social infrastructure around them, and by their own beliefs. For those with great determination and grand aspirations, they seek out the seemingly only viable alternative route to success: venture capital. Startup capital has become practically synonymous with equity.
There are some benefits of equity over debt too. I’m not going to pretend otherwise. You don’t need to pay investment back – not as cash anyway – which gives your business the temporary freedom to double-down on growth and not initially worry about financial sustainability.
The whole system is geared up to matchmaking startups with equity capital. Be it from angel investment groups, VC, PE, incubators and a plethora of associated government schemes aimed at greasing the wheels of equity.
Why this is bad
Undoubtedly, there are some cases where venture capital is the right choice for a startup. I am not absolutely against it. My problem is with it being the de facto choice. In this regard, there are a few problems I want to highlight:
1) A ceiling on ambition
This is the foremost reason we’d never want venture capital at IAM Cloud. Investors are more than happy to give you their money, but they are going to want control over your business and assurances of ways to get the money back. In the UK, most investors look to invest between 3-5 years. A few will go a little bit longer than that. But it’s rare, and those investing longer than 5 years often don’t do so out of choice but rather because they’re waiting to find the right opportunity to exit. This means that VC-funded startups are organized and directed in a way that maximises potential return after 3-5 years.
Fair enough from the investors’ point of view. If I was going to give my money to someone, I’d want to know when I could get it back. But which globally successful company rose to greatness in 5 years?
Microsoft is 48 years old. Apple is 47. Google is 25. Even the ‘meteoric’ riser Tesla is 20 years old. If you want to create something great, you need to think long-term. Long-term thinking and venture capital are like oil and water. Ok, maybe that’s extreme, they aren’t always mutually exclusive. For example, Tesla themselves have heavily benefited from VC funds, albeit quite a bit came from Elon’s pocket himself as one of Tesla’s early investors. But this kind of scenario is uncommon. And long-term thinking is all but absent from the majority of the UK’s investment landscape.
Moreover even if you accept that a VC is generally always going to want to have an exit point at the 3-5 year point, the method of exit also matters a lot here.
If the primary goal were to float the company so that its founders could autonomously continue progressing their long-term vision having parted with the early-stage investors, that would be one thing. But this is rare, especially in the UK. Only 41 companies in total listed on the LSE in 2022. That’s 41 out of tens of thousands of tech startups & scaleups alone in the UK.
For the most part, IPOs aren’t on most startups’ roadmaps whatsoever. The end-goal for nearly all “successful” VC-invested companies is acquisition.
Now some serial entrepreneurs mess themselves at the idea of M&A. That’s the dream. They get the company up and running, score some decent growth and hype, and then they get it acquired and make themselves a few million quid/dollars. Then they probably do it again. Or change their LinkedIn profile to ‘thought leader’ and go around preaching to others how to get rich like them. Maybe even write an e-book and star in their own podcast.
Each to their own, but nah.
Not only is this not appealing to me in the least on a personal level, it’s also not good for business at a national level. Particularly if this is the rule rather than the exception.
But the real problem here, aside from the impact of this mass homogenization of companies, is that the whole system serves to cap ambition.
As an entrepreneur, why would you dream big if you knew that the best thing you could realistic hope for is someone acquiring your business and making you a few million?
The US startup culture isn’t quite so bad for this, it has a lot more IPOs than the UK for one. But even those in Silicon Valley tech circles tend to acknowledge they could do better. We just have to face the fact that there is a real problem with this ambition-capped short-termism that derives from the predominant mode of startup financing.
As a consequence, I want you to answer this question: What is the biggest UK-owned tech company?
Right? I am pretty plugged into the UK tech scene and I honestly couldn’t tell you. In any case, not many spring to mind. And if you exclude pharma and finance from ‘tech’ then your options are even more limited.
If you asked the same question of the USA, your only problem would be knowing which of the huge ultra-successful companies happen to be on top of the market this week.
Now I’m not advocating for the proliferation of mega-corporations. They have their own problems too. But I’m just pointing out the contrast. And the sheer scale of the difference is kinda weird, given the UK is full of very smart innovative people, perfectly capable of creating tech companies to rival those in Silicon Valley.
If the UK is to ever regain its status as a world leader in, well, pretty much anything except maybe finance, its businesses are going to need to think bigger and longer-term.
For that to happen, there either needs to be a monumental shift in the finance industry in a way that to some degree goes against its own best interests. And let’s be honest, that isn’t happening. Or at least it would take a government with some courage and a progressive twist to make it happen, which also looks unlikely.
Without either of those options, we’re going to have to take the initiative ourselves. Bootstrappers are going to have to try to make their own way without any help. Like we always have done. The good news is that this is still very much achievable. Especially if growing communities of bootstrappers can help support each other.
2) Faded halos
I’m anti-monopoly. Our company is a Microsoft Gold Partner, and half of me loves it and half of me hates it. But the reality is that big companies do bring certain benefits. Particularly if they’re able to be big without being overly monopolistic at the same time.
A lot of large companies create a kind of “nucleation” point that generates hundreds if not thousands of other opportunities. Like a cascade of ripples in their wake.
Apple has an AppStore that allows hundreds of thousands of application and game developers to create products for it. Microsoft has an enormous partner community that helps facilitate IT worldwide. Google paved the way to massive content creator and SEO industries. Amazon has helped thousands of small retail businesses via its marketplace.
The early success of a few major companies in Silicon Valley and Seattle sowed the seeds for a succession of further businesses growing there. They created a halo effect, which ended up feeding itself growing ever larger.
Which British companies have done that?
Not many.
Sure, the large UK finance industry preempted the UK’s successful fintech industry. But to be a little scathing on this, despite the massive potential, I look at a lot of fintech and see little real innovation. Mostly just the app-ification of banking products and processes that have been around for years. In other words it’s more fin than tech. There’s still value in that of course, and I mean no disrespect to the entrepreneurs making successes out of it.
Who else?
AstraZeneca and GSK (biotech) in the Greater Cambridge region, kinda. AMRC, Rolls-Royce and Boeing (advanced manufacturing) in the Greater Sheffield region, kinda. And, well, Boeing isn’t British and AstraZeneca is only half British.
For one of the world’s largest economies, the big leagues are looking sparse.
So it’s a slap in the face when a British tech company defies the odds, and breaks through to reach worldwide recognition and success – I’m looking at you ARM – they’re sold off to a foreign private equity firm. So all its future profits make investors in other countries wealthy. The fact that the UK’s most successful and innovative tech company of all time is not actually a British-owned company is right on brand for the UK. Grumble, grumble.
3) Pain = gain
Creating a successful bootstrapped startup is hard. It needs a lot of thought, skill and will probably demand a bit of pain from you at one stage or other.
Having a large pool of capital from a VC makes running a business easy-mode in the early days. But if you want to take a look at business from a Darwinian perspective, VC funding is like adding a protective layer of cotton wool. It’s tough out there, and businesses need to be lean, dynamic and resilient to succeed. VC-backed companies are often none of those things. They’re soft. This doesn’t matter so much if the business is going to be acquired anyway, but if the plan is for it to stand on its own two feet VC-funding can actually be an inhibitor.
4) Self-fulfilling prophecy
The skills, knowledge and processes required to run a VC-funded startup are very different to those needed to be a successful bootstrapper. Since the predominant narrative is that capital is an essential requirement of starting up a new business – most advice, training and support is geared to help people down this path. Bootstrappers have the tougher challenge, but also get less help.
5) Monopolies, homogeneity, and the concentration of wealth and power
The vast majority of VC-funded startups are on a journey of amalgamation. Their fate is to be absorbed into and under other companies. The founders lose independence and autonomy. But everything they lose is gained by someone else. VC-funding essentially serves to homogenise what would otherwise be an extremely diverse and resilient community of independent businesses into a small number of monolithic giants. It serves to further concentrate power and wealth into the hands of those who already have it. It suppresses innovation, ambition and social mobility. And ultimately as monopolies continue to grow through acquisition, it reduces competition and consumer value. It is bad for markets and economies. Not to mention the fact that a lot of the investments come from overseas, so profits and capital gains are squirreled away out of the UK / domestic economy.
Why it matters
All economies are founded on domestic industries. Without them, your country’s ability to afford a robust welfare state diminishes, your services sectors will slowly fade, and the dignity that comes from hard work will be eroded – ultimately turning a proud ‘working class’ into an increasingly listless and adrift ‘lower class’.
In order to create strong domestic industries, we need strong domestic companies, and in order to have strong domestic companies we need to stop selling our best performing high-growth startups to foreign owners, conglomerates, multinationals and private equity firms.
A VC-backed company is in essence a company-for-sale. Even if that sale isn’t happening right now, it is pretty much written in the stars. It contributes to the economy, yes, but it doesn’t really help build the economy.
We need more domestic bootstrapped companies who can maintain their independence, be ambitious, innovate and grow over decades, invest in local people and supply chains, and become major players in their industries. And in doing so inspire the next generation to continue this trend and build upon it. That is how you build a strong economy.
I say all of this from a UK perspective. But the same is true everywhere. And indeed perhaps most especially in areas where the need for economic development is highest. The whole world needs more bootstrapping, and governments everywhere should look at ways to better support it, rather than the plethora of schemes incentivising venture capital instead.
So,
Governments: You need to engage with both successful and unsuccesful bootstrapped companies. Better understand them and their challenges, and begin to shape new policy that can facilitate the meaningful growth and proliferation of self-owned companies.
People: Don’t wait for governments to help you. Don’t fall for the lie that you need capital to start a company. There are many roads to success. Believe in yourself. Work hard. And take one step at a time. Bootstrapping is enormously rewarding as well as beneficial to local communities and the wider economy. Good luck.