One question that has often baffled me is why so many seem to perceive bootstrapped startups as less valuable than their venture-funded counterparts. While having ample capital is advantageous, does the absence of it diminish a startup’s worth compared to that of other venture-funded startups?
The valuation of a startup should be based on its potential to benefit the founder rather than how others, such as investors or the media, perceive its value. However, our discussions often revolve around how outsiders perceive the value of our startups. This skewed perspective is reinforced by a lack of understanding about the number of startups that actually secure funding and survive the journey. Consequently, we fail to recognize the true value of bootstrapped startups. Often, investment is made using inflated values, and that can have a skewing impact on the perceived value of a venture-backed startup.
Did you know that only 1% of startups secure venture funding?
To determine the perceived value of only venture-funded startups, it’s important to understand how many startups actually receive venture capital. It may be a few hundred thousand, right?
Wrong. What if I told you that 99% of startups never secure VC funding? In the United States, only between 1,000 and 4,000 venture investments are made each year, while millions of startups are launched. Many without funding become meteoric successes, while many with funding fail and vice versa.
Let’s look at the tale of two startups. Imagine one with $10 million in funding and one entirely bootstrapped by personal savings, with the owners toiling away from their basements. Which is more valuable? You would assume the one with $10 million in funding but why? We don’t know the financial position of the bootstrapped startup, nor do we have visibility into their future earnings or market potential. We evaluate strictly based on $10 million on the bank and the perception of the investors that provided that funding.
Does the value last forever?
It is easily possible to overlook an important aspect of the assertion that the $10 million startup is worth more—the long-term value of that $10 million startup. This is where first-timers and outsiders misunderstand the startup ecosystem. Our focus is often limited to the initial funding rounds, neglecting the entire lifecycle of these companies and their future potential, as I previously mentioned.
Every startup may appear immensely valuable when they receive a substantial infusion of funds. But that is short-term thinking. The crucial question is whether that startup will retain its value in 5 or 10 years, or even at all.
When startups receive venture funding, they are under immense pressure to perform and earn a significant return on that investment. This is a significant challenge and tends to lead to a high rate of burnout and unfavorable outcomes for everyone involved. This pressure and the associated expectations cause a variety of issues and can lead to overspending and unsustainable business practices that value growth over profitability, sacrificing the long-term prospects of the company for short-term market gains.
That leaves us asking, where is the value?
While investors may perceive a venture-funded startup as more valuable, that doesn’t create a reality. It may be more apt to get more investment dollars from other investors or more press around its inflated value, but business is business. The value is in long-term profitability, and maximizing that is far more important to the business owners and stakeholders than the appearance of growth.
If you’re like me and own one of the 99% of startups that are not venture funded, don’t worry. Focus on building and growing a sustainable and profitable business, and the rest will work itself out. If your business is growing and successful, you will be able to find investors should you decide to go that route in the future. You do not need venture capital to launch a successful startup. You do need great ideas, talent, and grit.
If you have a wonderful idea and you simply don’t have the funding to bootstrap it, there are resources out there like Seedology. We’re not a traditional venture capital firm. Our approach here is fundamentally different. We partner with great creators to help take their businesses and business ideas to the next level. If you need help getting your idea off the ground, check out.
