Startups that remain agile, innovative, and attuned to customer feedback achieve sustained success.
Unfortunately, founders who precipitately seek venture capital often find themselves pushing forward with unsubstantiated assumptions in an attempt to impress or appease investors. In this instance, startup founders may also find themselves overly dependent on venture capital.
"As the past few years have shown, raising money for a startup is easy," says Ryan Smith, contributor at Harvard Business Review. "But building a profitable, sustainable business is still really hard. Public and private markets alike are starting to remember this, correcting for years of overly exuberant startup funding. As financing dries up, entrepreneurs would do well to remember the benefits of bootstrapping."
The world's top tech companies — Airbnb, Spotify, Uber — achieved massive success by solving problems with limited resources. In fact, Uber grew its customer base by hosting tech events in San Francisco, offering free rides, and relying on word-of-mouth referrals. The company acquired significant user numbers and secured product-market fit before going to investors.
Here are five strategies used by lean startups to scale on a budget:
Scaling Lean: 5 Strategies to Bootstrap Your Startup
Validate Your Product
The most successful startups validate products before going to market. In fact, most startups follow a build-measure-learn feedback loop. How does this lean methodology differ from typical growth strategies?
Many startup founders build a product that they think consumers will want. They might spend months or even years building a product without ever asking for customer feedback. Unfortunately, in this instance, once the product goes to market, the founder is shocked by the level of customer indifference. You can avoid making these mistakes by creating a minimum viable product and validating that product with customer surveys, online crowdfunding, and more.
"The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible," says The Lean Startup team. Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect question."
By conducting incremental validation experiments, you will learn to reform your initial hypotheses about your business model, your product and your strategy for growth.
Do you have a billion dollar idea? Learn how to scale like a tech giant in the Startup Unicorn Checklist.
Learn to Hustle
Scaling on a budget requires a bit of grit, hustle, and perseverance. Most early-stage startup founders wear multiple hats. From sales and marketing to product development and customer service, it is not unusual for startup founders to switch between multiple departments. You may find yourself becoming an "expert" in more areas than you ever imagined.
“Bootstrapping brings out the best in entrepreneurs and the best in those they work with, too," says Anita Campbell, contributor at Small Business Trends. "They are enthusiastic, passionate, and relentless. They don’t give up on their dreams and they never stop learning. They also end up learning a lot more about themselves along the way and end up accomplishing a lot more than they might have originally thought possible."
The most successful founders embrace the challenges that come with bootstrapping and enjoy the variety of continually learning something new. Without a genuine passion for what you are doing, maintaining a consistent hustle will be a struggle.
Evaluate Every Expense
Lean startup founders measure every expense against the expected return on investment. How will this investment influence my startup's growth? Is this something that will really turn the needle for my company? Is it absolutely required to get to the next stage of growth?
By answering these and other questions, you are more likely to spend money on the tools, services, and products that you actually need to grow. When faced with a choice between a premium or basic purchase, always go for basic. Software programs like QuickBooks, Dropbox, and Slack have free versions. Purchase refurbished computers. Instead of burdening yourself with a costly commercial lease, choose coworking.
Focus on Profits
Startups embracing a lean methodology should focus on profits before growth. Not only will this make your company more attractive to potential investors, but it will exercise your muscle for creative ingenuity. Once you have learned to fuel growth by profits alone, any additional capital you eventually receive from investors will simply be an added bonus.
"When my cofounder and I created our startup we used $10,000 of our personal funds instead of immediately seeking outside investors," says Rodrigo Santibanez, cofounder of EAT Club and Fast Company contributor. "It took 10 months to go from $0 in revenue to a $300,000 run rate, but then only six weeks to get funding once we showed that traction. If entrepreneurs play their cards right, they can achieve significant growth and a payoff that’s well worth the wait."
One famous tech company that fueled astronomical growth exclusively through profits is MailChimp. Cofounder Ben Chestnut scaled the startup to $400 million in revenue without ever taking a dime from venture capitalists. Other startups who found success following a profit-driven model are Basecamp, DesignPickle and ConvertKit. Focusing on profits allowed each of these companies to maintain control of their own destinies, as opposed to feeling beholden to VCs looking for a quick exit. With that said, their independence from investors did not come without a trade-off. One of the biggest contributors to staying profitable during the early years is remaining slow to hire.
“I know this seems obvious but I promise you that even smart people forget this when talking about profitability," says Mark Suster, venture capitalist with Upfront VC. "Seventy to eighty percent of the costs of most startups are employee costs so what you’re really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue. If you don’t have a strong balance sheet and can’t hire more people that’s fine — but understand this may lead to slower growth."
Will there always be a trade-off between profits and growth? Absolutely. However, the growing consensus appears to be that the advantages of prioritizing profits over growth outweigh the disadvantages.
Avoid Traditional Office Spaces
Finally, lean startups save money by avoiding the costs associated with traditional office spaces. The average commercial lease agreement is five to seven years and comes with a hefty penalty fee for breaking it. Office spaces also come with hidden expenses like the cost of furniture, utilities, and insurance.
Not only do these costs add up quickly, but they also prevent startups from remaining agile in the face of incoming data. What happens when you find out your early assumptions were incorrect, you have to restructure your entire business model and half of your capital is wrapped up in a lease agreement?
Conversely, savvy founders stay flexible by working in coworking spaces. With more than 10,000 coworking spaces now available to choose from worldwide, there is a space to fit nearly every personality, industry and budget. RocketSpace is a niche coworking space built exclusively for Seed to Series C-funded, tech startups. Our members pay a small fraction of what they would for a traditional office space and enjoy the added benefit of growth-oriented networking events, introductions to top investors, and equity-free accelerator programs.
Stay Lean with RocketSpace
Startups who validate their products, learn to hustle, evaluate expenses, focus on profits, and avoid traditional office leases have the best chance of success. At RocketSpace, most of our London and San Francisco tech members practice the lean startup methodology. We do not think it is a coincidence that 90 percent of the startups who have ever called RocketSpace home are still in business today.
"RocketSpace is a one-of-its-kind campus and ecosystem that fuels innovation by fostering connections with startups, like-minded corporate innovators, and industry thought-leaders," says member Paul Campbell, VP of Innovation at Schneider Electric. "Beyond the benefits of being immersed in its unique community day-to-day, our collaboration has resulted in key partnerships with startups that are creating real business value."
Do you want to surround yourself with the best in tech? Our global network of technology campuses and services are specially designed to help the world's top tech startups grow. If you are a Seed to Series C funded startup founder, with a proven MVP, we invite you to come check us out.