Why Bootstrapping is better. Unicorn funding works on valuation. We have seen how most have tumbled. Losing value. So many Ed techs are going broke, layoffs etc. Unicorns that launched ipos have lost huge valuation. Why ? The focus has been on valuation.
It’s simple. When a VC comes on board, the promoter seeks good valuation; The VC seeks returns.. later on the promoter buys back his stake at an agreed price, or the VC offloads his stake at investment into x to another fund or the public via IPO. Now, obviously since the VC
Is in for profit at that point, he doesn’t care about cash burn but more about multiples of return on exit. So cash burn and projected revenue form the basis for valuation which is then sold to the retail investor. If instead the ficus was on value creation vs valuation, what we
Have witnessed with many unicorns would not have come to pass. The other factor with VC money is an influx of money. This can be used for capex but is often used as opex too. Spends on imp areas are good but having the security often compromises creativity. Necessity forces
Creativity. While we see unicorns as huge companies they are yet to touch their true potential. Hence cash burn here due to complacency undermines creativity and the tough spirit at times. We saw that a food delivery company post launching ipo started ads with movie stars.
Considering the crazy cash burn, was this really necessary? Overfunding also means hiring more people that may or may not be capable. The quantity vs quality game which is never a good thing in the long run for a company ..
Finally, VC money also means having a boss who will put his thoughts on how the company must grow. It’s vertical and horizontal expansion capabilities. This is not always a bad thing but one must remember VC are always looking at exiting.Hence they prefer fast & furious expansion
How much can a company sustain this? It’s founders, CEOs ? Temperamentally, can they handle the defocus as having multiple fish to fry in the initial stages is not everyone’s forte.
Psychologically too, a person may come into money but it takes a while to come out of one’s conditioning and develop the mindset that Is in sync with the new normal. This takes time. Focusing attention in multiple directions at a time of transition is not possible for everyone.
Finally, our traditional method of expansion has always been bootstrapping. Yes, ppl borrowed money. But that gave a sense of accountability. It encouraged fiscal prudence. Money was spent in the right areas and any extravagance was usually discouraged.
As India grows, more unicorns emerge , this model will get replicated frequently. There is enough VC money in startups. This will rise. Exits will be crafted. India’s stock market positivity will enable this faster. As investors, one needs to be wise. #Bootstrapping
• • •
Missing some Tweet in this thread? You can try to
force a refresh
