Sarasota, Florida | February 02, 2023 09:25 AM Eastern Standard Time
By Caroline Hunter, Content Writer (at NetReputation)
In the world of tech startups, venture capital (VC) often acts as a gatekeeper, providing the keys to market entry and the pathway to eventual success. The initial investments from VC groups can come at a high price for many entrepreneurs, typically with significant ownership stakes. Despite the costs, most startups do not have the necessary experience and financial backing to build and operate their company, leaving them vulnerable to VC interests.
Although it’s mutually beneficial, venture capitalists do have the upper hand in the relationship with green founders. VCs understand the anxiety that comes from bringing new ideas to market and VCs can exploit the situation for ownership.
The percentage of startups partnering with VC groups in early growth stages is, in reality, considerably low. According to Marc Andreessen of VC giant Andreesseen Horowitz, of the 4,000 startups seeking funding from major VCs each year, only about 200, or 5%.
Despite the low percentage of startups who qualify for and receive outside funding, it's a common misconception that in order to succeed in the tech sector VC endorsement is necessary. The VC stamp of approval can open more doors and provide the fuel to accelerated growth, but brute growth isn’t always the better path.
Despite the familiar pattern of VC and startup relationships, occasionally, a business comes along that balks at convention. Invoice Home is an innovative company with two experienced co-founders funding the operation out of pocket. It is not often you see two individuals opt for a bootstrapping approach in competitive sectors like the tech industry.
VC vs. Bootstrapping and the Invoice Home Choice
Despite notable exceptions like GoPro, VC is the traditional financing method among tech startups. The approach is less risky and provides greater opportunities for success, but it is not all rainbows and unicorns.
Venture capital arrangements usually stipulate new founders to give up some control in their company in exchange for funding and mentorship. In some of the worst deals, product creators lose most, if not all, controlling interests in their company. That said, VC is not all bad, and it definitely has many benefits over the bootstrapping approach, including fewer risks.
The Invoice Home founders chose to bootstrap after their own experience dealing with big investors and corporate institutions in their previous companies. The owners reviewed their financing options, concluding that the deemed more difficult and longer road was best for them and their business model as they wanted full control in shaping the product from its inception.
Venture capital is financing, a form of private equity, that can fund companies at any stage, but investments in tech startups or small businesses have been on the rise in recent years. Capital investments usually come from wealthy investors, financial institutions or other investment banks. That said, VC is not always monetary. Sometimes, capital comes in less tangible forms, such as talent, knowledge, and experience.
Regardless of the capital form, investing in a startup is risky, even if it has potential. Founders also face considerable risks with how potential partners justify ownership asks. Many VC deals include limited partnerships, which a VC firm defines.
Venture capital agreements have pros and cons. The pros include:
Early-stage financing for bootstrap operations
No proof of cash flow or assets needed to secure funding
Mentoring and network often part of the arrangements
Despite the benefits, VC agreements can lead to a few cons. Some of the possible negatives include:
The demand for company equity
Loss of creative control of product
Pressure to exit the investment ahead of growth
The founders of Invoice Home, Jiri Hradil and Petr Marek, weighed the pros and cons of VC and decided the traditional route of other tech startups was not for them or their idea. These two entrepreneurs chose a more challenging road to success, bootstrapping.
Bootstrapping is usually a more gradual road to success and presents greater risks earlier on for startup owners. A person bootstraps when they attempt to build and grow their business using only personal finances or operational revenue.
Both Hradil and Marek have extensive professional experience in the tech industry, specifically with building niche financial software in the FinTech space. Their expertise, independent finances, and knowledge in the current market likely played a role in the decision to step away from VC.
Invoice Home Throws Norms Out the Window
To Hradil and Marek, relinquishing any control of their business, especially during the beginning phase of product development, was premature. The partners knew what they wanted from their program and service — a simple way to create, organize, and send invoices to customers.
The pair knew that partnering with VC firms would cut into their controlling interests. The last thing they wanted was to create a platform that didn't conform to their initial thought for the startup.
Because each of them had several years in leadership roles at their own successful businesses previously, they knew the risks involved with starting a company without private equity financiers. However, because of their experience, they understood they could mitigate some risks.
The primary issue was patience. The co-founders knew that without VC, the business could take time to mature and reach its potential. After proving the concept and fully committing to operations in 2013, Invoice Home now has over 7 million global users, retaining and growing its user base through the pandemic.
Not giving up the control on the product proved to be the right decision, as the simplified invoicing tool found a perfect product market fit with freelancers and micro-businesses.
VC Is the Norm, But It Doesn't Have To Be
Venture capital is the traditional way of making it in the tech industry, but it doesn't have to be. Invoice Home is only one example of startup owners making the right decision for their product and bootstrapping their way to success.
True, not every startup or tech creator can afford to take on the personal financial risks associated with starting a business. Also, many startups do not have the leadership experience to bring a product to market or identify lucrative channels.
There is a place for VC in the tech industry, but it shouldn't be the automatic approach and sole path to launching a tech business.
For young startups or creators, there is a lot to overcome when starting a new company. First-time founders often rush into VC partnerships in the beginning, particularly if they have the opportunity. But the faster road to success doesn't always mean it's the better option long term.
Other financing and operational pathways may seem out of reach, depending on the founders and their circumstances. Before committing down a set path, try market testing a product on a smaller scale. Put the operational revenue back into the company to see if the product concept works in the current market.
Creating a tech product and building a company without VC funding will be slower, but steady, consistent growth can prove to have a better long term outcome.
This article was originally published on Benzinga here.
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