UK technology companies raised $3.6bn from venture capitalists in 2015 – 70% up on the year before. There is strong investor appetite for London-based start-ups and this has meant record levels of tech investment.
The hype around funding means it’s tempting for companies to see it as the only route to success. If you have a great idea, all you need to make it happen are the right people, a lot of hard work, and the funding to get your venture off the ground.
But securing investment isn’t the only way to build a successful technology business.
There’s a big potential problem with seed funding, and the rounds of funding that inevitably follow. Each round of funding, and each investor that takes a stake in your company, limits your flexibility.
Investment in a startup is not like a simple transaction – it’s a negotiation between the startup and the investor. The investor will obviously want to ensure that they get the best return possible on the money they have invested, and this will inevitably mean strings will be attached to the deal –certainly a stake in the company, but also potentially change to the board, the business model or more.
Once a startup has accepted funding for an idea, then it will be to some extent shackled to that idea. That initial idea, and the proposal that was borne from it, is after all what the investment was meant to turn into a reality.
However, it’s not uncommon for young companies to ‘pivot’ and make a fundamental change to a company. This could be – but isn’t limited to – a change in the target market, or fully focusing on a part of the business that was previously just a part of it.
Pivoting isn’t new – Nintendo used to make playing cards while Nokia started out as a paper mill. In the dynamic world of technology, being lithe and agile is vital to growth.
A self-funded company can simply pivot when necessary, whereas a company that has taken on funding has to convince more people that a shift is necessary, slowing change.
Plus, with funding often comes a 3-5 year window to start delivering on what was promised – a radical change to the business plan can make meeting this deadline incredibly challenging.
Staying the course with BCSG
I know about the value of pivoting and running a self-sufficient tech business, through my own experience at BCSG.
Before 2010, BCSG’s core business was offering training and customer support services. With exceptionally good knowledge of the banking and telecoms market, we saw an opportunity in providing cloud services to these verticals. We were able to build out an existing, more narrowly-focused part of the business, which eventually became BCSG’s primary offering.
Now the company has customers in 18 countries, including a significant U.S. footprint. With a big part of the business in the fast-growing fintech market, a significant U.S. presence and positive revenues, BCSG has been an attractive investment prospect. However, during this early growth phase, we chose not to take on investment. We were lucky enough to have a viable company with products, customers, and cash flow.
This allowed us to grow rapidly and steadily, but without relying on outside investment for an injection or forcing constraints. It afforded us the flexibility to be patient and ensure the long term prospects of the business, and its employees.
Critically, it has allowed BCSG to be able to build company value without an outside investor pricing the company through their investment. This has allowed us to alter our focus and models as the market has shifted.
The five challenges of building a self-sufficient tech business
Despite the up sides, being a self-funded, ‘bootstrapped’ company does come with some major challenges, and it’s a careful consideration of these challenges that will help young companies decide whether or not to seek funding:
- The founders must take on more personal risk – are you comfortable with more risk?
- The company can only scale where the confidence to scale exists, rather than simply where opportunity exists. Agreements that ensure a strong cash flow need to be prioritized and executed. Are you happy to be patient?
- A certain myopia about start-ups can put you at a disadvantage – funding means headlines in publications like TechCrunch and all of the ‘exciting’ startups have headlines in Techcrunch. Are you happy to counter this misconception?
- More legwork is necessary to build connections – you won’t have the investor network to tap into. Are you willing to get out there, go to events and ‘press the flesh’?
- Company maturity is often judged by the stage of funding – seed, series A etc. Without that guide some may not recognize your true value. Are you worried about this perception?
Funding, or self-funding?
Choosing whether or not to seek funding is not a ‘forever choice’. BCSG has not yet taken on investment, but we recognize that our next stage of growth may require it.
Startups that are planning exactly how to get their business idea off the ground should be wary of blindly falling for funding hype. Careful consideration needs to be made of the pros and cons, of the additional risks and trade-offs. If there’s potential to self-fund, then it should be strongly considered.
Future opportunities for funding will still be around if you wait – the hype may die down a little, but technology, and fintech especially, will be a good bet for investors for some time yet. In this dynamic market, retaining as much flexibility as possible is vital to making a new business a success.