Investment is widely considered to be an opportunity for fast-tracked growth when starting a business. Self-funding is understandably not always as appealing in the short-term but can provide much-needed stability in the long term, as well as increased profits.
Why playing the Monopoly game is bad for business…
Within a world economy where global giants that began as garage projects dominate our day-to-day lives, it can be easy to think that success can only be found by growing exponentially and saturating a market by owning the monopoly. While there is no doubt that growing quickly is a significant aim for every start-up business, the company stories that are circulated as case studies are very rarely realistic or relatable for the vast majority of new businesses. Like the rise of self-help books throughout the 2000s that promised readers solutions to any and all of their problems, the sharp increase of best-selling books aimed at those looking to start or grow a business tend towards promises of mind-boggling monopoly growth. While these books often provide an exciting and inspiring read for business owners, what they often fail to address is the long-term price of an instant-fix solution for business growth.
Is Rapid Growth Problematic?
Like the classic fable of the Tortoise and the Hare, moving rapidly introduces risk. While this lesson is something that we are all more than happy to accept in most areas of our lives, we are often less willing to do so when it comes to business. As the alluring growth strategy of Silicon Valley, the fast-paced pursuit of monopoly is very rarely questioned or its failings highlighted. This is likely because the success story companies that demonstrate this strategy surrounds us in our day-to-day lives have dominated their respective markets, whilst those that aren’t so lucky are unknown to the world. There are, however, those that achieve this idealised rapid growth but still demonstrate the common problems that can be found on the road to monopoly, as has been seen recently with Uber and Lyft.
Uber-ridiculous!
While each of these companies offered something new to the urban transportation market through their handy apps, their growth has relied on enormous initial investment. With practically limitless capital, both companies have offered hugely subsidized fares for passengers in their relentless climb to the top, crushing their competition in the process. But what many do not know about both Uber and Lyft is that, in spite of their rapid growth, both companies are losing money just as quickly and may never become profitable.
How do Successful Companies Lose Money?
In the scramble to dominate a competitive new market, invested capital does not simply go towards developing the product or service at the centre of the company. To shut out the competition, capital must be relied upon to offer an unmatchable and artificially-priced cost of service to customers. In the case of Uber, this is demonstrated by the price of their service not covering their operating costs. This is because, unlike markets without monopoly or duopoly where prices rise evenly and the best products or services end up on top, companies like Uber rely on obtaining the largest share of the market no matter the cost. So while mass investment may allow a company to rise to become the biggest player in the market, there needs to be continued investment to keep fighting off competitors that are also following a similar business model of haemorrhaging profits to get to the top. Ultimately, this approach leads to a “valuable company” (based on artificially inflated multiples), rather than a profitable one. Whether rapid growth monopolisation can ever lead to profits, particularly on the scale of a company the size of Uber, is still up for debate. My personal view (at least at this stage), is that it is not sustainable.
Why is Self-Funding a More Sustainable Route?
In stark contrast to the rapid venture capital investment growth that LinkedIn founder Reid Hoffman advocates in his book best-selling book, Blitzscaling, self-funding works to create sustainable growth and control for businesses. While growing in a way that is proportional to the success of a product or service is inevitably slower, it is also a safer route for the longevity of a business. This is because, when growth is related to the success of a product or service, the space of the market that is occupied by it is less competitive. Similarly, without the sizeable financial backers that are required for rapid growth, there is less of a reliance on continued exponential growth to return investments.
Even after a market has been monopolised, without the stability that only time can ensure for a business, mass investment and artificially subsidised costs of a product or service are still required to remain unchallenged. This ultimately means that businesses that have monopolised a market without turning a profit get caught in a feedback loop of mass investment and unprofitability to guarantee continued exponential growth.
When a business self-funds, there is significantly less pressure for growth and, fundamentally, the business’s value can be determined by its profitability alone rather than its projected exponential growth that is propped up by investors. Without the external pressure that investment creates, business owners can drive and define their growth by their passion for their product or service.
What are the Benefits of Self-Funding?
This kind of natural growth ultimately improves profitability, mental wellbeing, equity control, and market share stability. Profitability is achieved by not having to artificially price products or services at a loss to dominate market share. As a result, this also means that a self-funded business’s market share is solely dependent on the quality of the service or product provided, rather than its ability to artificially out-price competitors. This market share stability is also bolstered by equity stability. With venture capital and angel investors usually expecting large portions of equity, the benefits of rapid growth are much less valuable for business owners in the long term. Having more control of a company and its future will also have a positive effect on mental wellbeing which is vital to running a business.
Tips and Guidance for Self-Funding
Just like any start-up journey, there are a large number of things to consider when considering self-funding to ensure success. While there are plenty of tips that will overlap when it comes to starting a new business, such as cutting overheads and guaranteeing good margins on your product or service, there are key areas to consider that are unique to self-funding that are worth being aware of.
Start in a Big Market
Perhaps one of the most important areas worth being aware of when considering self-funding is the determined market size for your product or service. While demand is always important in business, it is especially important when self-funding. If you have a completely new and unfamiliar service or product that you are trying to enter into the market, you will need to spend a disproportionate amount of capital on getting customers to understand what your business is and why it is important. Cutting out this step by providing something that is clearly useful within a market while still occupying a small niche can mean that you are profitable from the get-go. Achieving this goal stems largely from understanding how best to develop the relationship between what your business does and what customers need. Once a balance is struck between these two elements, a business works in a way that is both unique and in demand.
Partnerships are Vital
In the same way that mass investment can ensure that your product or service is seen straight away through funded marketing campaigns, so can choosing strategic partners. Whether this is a formalised company partner that will be directly involved in the running of the business or a brand ambassador, picking the people that have some influence within the market that you are entering can help you gain traction straight away without taking investment.
Start by Selling Your Time
While it is important that your business evolves quickly so that it is not entirely dependent on you, it is important to understand that giving as much of your time as possible to your new business will give it a strong foundation that can be built upon. In the same way that depending on investors for growth is problematic, so is relying significantly on others to carry out tasks that you may be better equipped to handle. While selling your own time initially is limited by the amount of hours you are able to do, you are in full control of that time. Once this foundation has been built, you can focus on the necessary transition between selling your time to someone else’s to ensure further growth.
If you create a service based on your time, you are then able to define your worth. Unlike products that can be on the whole similar and it’s very much feature-led, selling your time allows you to hybridise a service that you are essentially then able to self-define the hourly rate, based on the value that you bring. Selling your time via bootstrapping means you can dictate your terms and not have them dictated to you by a VC fund or angel investor.
Summary
The choice between self-funding and mass investment is less of a choice between stagnation and rapid positive growth but rather between stable development and risk-ridden monopoly. While the short-term perks of fast-tracked growth are appealing, maintaining peak position within a market can result in a long term reliance on investors. It is also important to remember that, whilst mass investment offers a tangible route to quick growth through the injection of capital, rapid growth can be achieved through self-funding and a business that is of value to customers.
Bootstrapping articles you should read:
Jotform.com article on bootstrapping.