Making A Virtue Out Of Necessity?

The health of startup ecosystems is often measured in terms of the investment they attract. Thus, London’s position as the preeminent hub in Europe is based on the city’s ability to suck in more VC capital than counterparts and rivals such as Paris, Berlin or Barcelona.

But what if there isn’t much capital available? Is it possible for tech-led startups to “bootstrap” a path to success in global markets? Well, yes it is. It can be a tough road to travel but there are some advantages.

You can see it in action in emerging ecosystems. For instance, on a recent visit to Lithuania, I was introduced to a couple of companies that have built a successful international presence without any initial access to equity finance. Keen to find out more, I asked Eimantas Sabaliauskas of Nord Security and Tadas Burgaila of Kilo Health about the advantages, disadvantages and practicalities of bootstrapping.

Founded in 2012, Nord Security is a provider of internet privacy and security products for individuals and businesses. In September of this year, the company secured a $100 million investment and achieved a valuation of $3 billion. For most of its lifetime, however, it has grown its business by building a customer base and increasing operating revenues.

As co-founder Eimantas Sabaliauskas explains, it was an approach born out of the realities of starting a tech company in the Baltic region a decade or so ago.

“There wasn’t too much local capital accessible for us in the first place,” he says “Back in 2012, when we started, I believe Baltic startups raised around $50M combined, with the exception of Microsoft buying Skype a year prior.”

Early Profitability

And while Sabaliauskas feels the company could have raised capital, there was also an opportunity to grow without investment. “We also knew the target market pretty well. We could more or less see what was coming in the industry, with topics about security and privacy for end users becoming more critical. From the beginning, we strived to be a mission-driven business and wanted to be focused solely on making a great product for our users. And our users appreciated that – thus leading to early profitability,” he says.

Kilo Health has also achieved rapid growth. Operating in the wellness and fitness sector, it was named in the FT 1000 list as the second-fastest growing company in central Europe. Currently, it serves around 6.5 million customers in a global marketplace.

A Conscious Decision

Tadas Burgaila says bootstrapping without external finance was a conscious choice. “We’ve been profitable from day one and intentionally managed our business such that we are not dependent on external financing,” he says. “The decision to forgo VC has made a significant impact on the company’s culture and ability to adapt and develop new products as quickly and cost-effectively as possible.”

In that respect, he argues that bootstrapping has been key to the company’s success, rather than being a hindrance.

All well and good, the appeal of VC finance is the financial cushion it provides. Products can be tested and rolled without pressure to immediately break even or make profits.

“The tricky part – and this is where VC-backed startups have a somewhat easier time – is building both the company and the product simultaneously,” acknowledges Sabaliauskas.

So how can that be achieved? “We kept our expenses as low as possible and strived to make every cent count by constantly searching for unorthodox revenue streams,” Sabaliauskas adds. Understanding the target market meant that the company could seek out customers willing to pay for its VPN products. “In essence, our users crowdfunded the development of our product,” Sabaliauskas says.

Self-finance required a tight grip on the reins of spending. “When you are bootstrapping, you are forced to learn spending management skills. Every dollar spent had to return to us in at least a predetermined ratio,” he says.To that end Nord used performance marketing to get its message out to potential customers. “At first, representatives from TV advertising, sports sponsorships, and many others were unhappy about us negotiating to connect payments with performance instead of a usual flat fee. Nowadays, it has become a standard practice.”

Performance Marketing

Performance marketing, for example, was a great way to keep ourselves in check and find ways to only pay for the things that mattered and gave solid returns,” says Sabaliauskas.

Cashflow was also central to the progress of Kilo Health. “The key principles that guided us were moving fast, focusing on positive cash flow, maintaining a unified mindset, and working hard. We adapt quickly, continually analyze the needs of our users, and adjust our products to match those needs,” says Burgaila.

That last point is important. Burgaila stresses that a focus solely on profitability is not enough to deliver long-term success. Listening to user feedback and adopting products accordingly was a key factor in ensuring the revenues continued to flow in.

But is this really all about making a virtue out of what is actually a necessity? Are there any real advantages that you can associate with bootstrapping? Burgaila believes there are. “Being a bootstrapped company that is growing so fast gives us confidence and the “we can do anything” attitude. We are free to decide which risks we take. We experiment, we are ambitious, and we are not afraid to be bold and stand out. In fact, we encourage people to do exactly that,” he says.

Finding A Market Fast

Sabaliauskas says it encourages businesses to seize opportunities when they are up for grabs. One thing bootstrapping does effectively is it forces you to launch your product and find a market fit fast. You don’t have the luxury of waiting until your product is perfect, so there’s a smaller chance you will launch it too late. Perfect product, but six months too late in the market is a scenario no founder wants to find himself in,” he argues.

It would be wrong to underestimate the disadvantages. For companies focused on R&D and product development, there is constant pressure to stay cash positive.

But is there a lesson here for startups across Europe? VC capital is widely available, but are there times when it would be better to grow under your own steam?

“Both options have advantages and disadvantages. Depending on the market dynamics, the team, and the already existing resources, each new startup needs to make a calculated decision,” says Burgaila. Depending on the unique circumstances of the venture he says startups should decide whether their interests will be best served by flexibility and independence or the equity that can expedite growth.

Sabaliauskas says it should still be seen as a viable option. “In the current economic climate, maybe bootstrapping is becoming a trending topic again out of necessity, but its benefits have been transparent for a long time. If you are up to the challenge and have the opportunity to go that route, it can bring you amazing returns. For me, it is also a matter of plenty of cases I observed where founders took on outside capital too soon without first finding the right partners or synergies.”

For those who do need equity, Sabaliauskas recommends spending time talking to as many investors as possible to find those who will truly help to “elevate” the company’s path.