This is a follow-up to my article earlier this week titled “Competing With Venture Funded Rivals”. In response to that article, I received several comments.
The following are two comments I’d like to respond to in this article:
Sheamus: “…you might consider including in candid open terms as to whether or not the dot-bomb played any significant part toward the survival and success of your firm.”
Ehcolem (from reddit): “I worry about drawing too many conclusions from the bubble days - where a well funded company was likely encouraged to spend the money very poorly by VCs rushing to an IPO. Does the author think a current well funded company is a different competitor than the ones he encountered during the 90's bubble?
I would paraphrase both these comments as the following question:
Are venture-funded startups of today savvier than those from the bubble years and how should you compete with them now vs. then?
Overall, my answer would be: Yes, they’re smarter, but not by as much as you’d expect.
Generally, I think startups (including those that are venture-backed) are more capital efficient today than they were during the bubble. Gone are the days of extravagant launch parties, 7-figure marketing budgets (before a viable product) and other silliness that happened during the bubble. As such, if you are a bootstrapped startup, it is more difficult to compete with venture-funded rivals than it was back during the bubble years.
Having said that, there are two few things that still have not changed because they are intrinsic to the VC and startup dynamic.
- Venture investors have a portfolio: As was the case back then, and is still the case now, VCs are able to diversify their risk across a portfolio of startup investments. What makes their portfolio math work is that they expect a large percentage of their investments to go down (or sideways) and a limited number (perhaps 5-10%) actually be successful and generate meaningful returns. The idea is to have the successes be huge successes so as to make up for the others that end up being duds. There is a subtle point in here that is important. In order for this math to work, every company in the portfolio must be “swinging for the fences” so that one or two of them has a chance of hitting the big time.
- Startup founders have all their eggs in one basket: Contrary to the VC, a startup founding team has all of their eggs (including eggs they’ve borrowed from friends and family) in one basket – their company. They are not risk-diversified. As such, their best interests lie in protecting that basket and trying to mitigate risk. The astute readers will recognize that this is in direct conflict with the VCs desired startup behavior. Startup founders are better off playing a “safe” game whereas VCs need their startups to be shooting for the moon.
So, why does this have any bearing at all on how you, as a bootstrapped startup deal with VC-backed rivals? The answer is simple. By recognizing this inherent tension between a startup and its VC investors, you have an advantage. You can (at some level) predict how most of your VC-funded competitors will act and respond (regardless of whether or not it makes sense). Even post-bubble, a VC-backed startup is generally driven towards scaling fast, spending quickly and taking their shot. If a startup raises outside capital, it is expected to do something with that capital – not play a conservative game, spend their money frugally and keep their bank balance high. This simple fact has not changed. So, even in the post-bubble world, you can still expect your venture-funded rivals to hire aggressively, have a larger marketing budget and give away their product and service to build market-share. They are not looking to quickly get to cash-flow break-even like you are. This is both good and bad news. The bad news is the same as it was back in the bubble: A VC-backed startup is going to create a lot of noise and visibility. The press is going to write about them. Customers are going to hear about them and your potential employees are going to consider them. They have the advantage of resources. The good news is that you have the advantage of time. You don’t have to spend aggressively or shoot for 10X growth to deliver returns to your investors. Instead, you can focus on the real problem and meet customer needs.
So, I posit that though startups in general are more savvy than they were before, VC-backed startups still have to deal with delivering a return to their investors. The cash certainly gives them certain advantages, but there are certain obligations that go with it. As a bootstrap, your job is to understand your strengths and play a different game. You can’t outspend them. You can’t out discount them. You can’t out PR-them and you can’t out-market them (in traditional terms). But, you can out “execute” them. It’s not easy, but it’s possible.