Pivoting, Bootstrapping and Currency Devaluation
Our TVC Labs MentorPitch program runs twice a year with startup founders as mentees being mentored by business angels from our TechnoVision Syndicate as a commercial and technical due diligence exercise. Here are three questions that came up during a recent session with the MentoPitch6 cohort and the answers I gave which some of the founders asked me to share. Please let me know what you think.
Question 1: “What signs might indicate it’s time for my startup to consider pivoting?”
Signs that might indicate it’s time for your startup to consider pivoting include but are not limited to:
1. Stagnant Growth: If your user base or revenue has plateaued and isn’t showing signs of growth despite your best efforts, it might be time to reassess your business model or product offering.
2. Poor User Engagement: If users are not interacting with your product as expected or there’s a high churn rate, it could indicate that your product isn’t meeting their needs.
3. Negative Feedback & Complaints: Pay attention to customer feedback. If you’re consistently hearing the same complaints or suggestions for improvement, it might be an indication that a change is needed.
4. High Customer Acquisition Cost: If it’s costing you more to acquire a customer than they’re bringing in lifetime value, this is a clear sign that your current business model is not sustainable.
5. Market Shifts: Changes in the market, technology, or customer behaviour can all necessitate a pivot. Stay attuned to industry trends in your market and be ready to adapt.
6. Inability to Scale: If your product or service is too complex or costly to scale cost effectively, you may need to pivot to a more scalable solution.
7. Investor Feedback: While not the only factor to consider, feedback from investors (or lack of interest from investors) can be a valuable signal. They see a lot of startups and can provide insights into potential challenges or areas for improvement.
8. Low Morale: If your team is losing enthusiasm and belief in the product, it can be a sign that something fundamental needs to change.
9. Burn Rate: If your startup is running through cash too quickly without seeing proportional growth or value creation, it might be time to pivot.
10. Competitive Landscape: If a competitor has taken a dominant position in the market or there’s an oversaturation of similar products, you might need to pivot to differentiate your startup.
Remember, pivoting is not admitting defeat. It’s a strategic move to position your startup better in the market based on the learnings and data you’ve gathered. The key is to be flexible, listen to feedback, and be willing to make tough decisions when necessary.
Question 2: “Which is better, bootstrapping or raising external funding?”
Deciding between bootstrapping and raising external funding is a significant decision and depends on various factors related to your startup’s unique situation. Here are some considerations that can help guide your decision:
Bootstrapping
Pros
Full Control: You retain complete control over your company without external influences.
Equity: You maintain 100% (or as close as you have now) ownership of your startup company.
Focus on Profitability: Forces you to focus on revenue generation and profitability early.
Lean Operations: Encourages a culture of frugality and efficiency.
Cons
Limited Resources: Growth might be slower due to limited financial resources.
High Personal Risk: You, your co-founders, family and friends have to put your own money into the business, which can be risky.
Limited Network: You might not have access to the business networks and mentorship experience that investors can provide.
Raising External Funding
Pros
Access to Capital: Provides the necessary funds to scale quickly.
Business Networks & Expertise: Early stage investors (i.e. Angels & VCs) can often provide valuable connections and advice.
Credibility: Having reputable investors on your cap table can add credibility to your startup.
Resources to Scale: Allows you to hire top talent, invest in marketing, and improve your product offer.
Cons
Dilution of Equity: You will have to give up a portion of your ownership of the company.
Returns Expectations: Investors will expect a return on their investment, which can add pressure.
Potential Loss of Control: Depending on the terms, you might have to give up some control over decision-making.
Time-Consuming: The process of raising funds can be long and distract you from running your business.
As you and your co-founders ponder on whether to bootstrap or raise external funding to grow and scale here are some questions to consider:
How quickly do you need to grow? If speed is essential to capture market share, external funding might be necessary.
How much control are you willing to give up? If maintaining control is important to you, bootstrapping might be the better option.
Do you already have access to capital? If you have adequate funds from founders, family, friends, fans &… or are generating enough revenue, bootstrapping could be feasible.
What is the Market Opportunity? If the market opportunity is large and time-sensitive, seeking external funding to move quickly might be beneficial.
Are you prepared for the responsibilities of having investors onboard? If you take on investors it means regular updates, meetings, and managing relationships.
In the end, there is no one-size-fits-all answer, and it depends on your personal preferences as founders, the nature of your startup, and the prevailing market conditions. Some startups have found success through bootstrapping, while others benefit from the resources that investors bring. What I recommend is you take the time to weigh the pros and cons I’ve outlined and choose the path that aligns with your vision for your startup and your personal values. I trust that helps.
Question 3: “How do you address pricing in a market like Nigeria with currency devaluation when you have imported parts of your product offer?”
Operating in an environment like Nigeria where the currency has been devalued presents unique challenges, especially for startups that rely on international services (e.g. cloud & hosting) and imported supplies. Adopting an effective pricing strategy is crucial to maintain stability and ensure the sustainability of the business. Here are some strategies that you might be able to use:
Cost-Plus Pricing
Description: Add a standard markup to the cost of the product.
Application: Regularly review and adjust the markup based on changes in currency exchange rates and supply costs.
Benefits: Ensures that you cover costs and maintain margins.
Considerations: May result in frequent price changes, which could confuse customers.
Value-Based Pricing
Description: Set prices based on how much the customer believes a product is worth.
Application: Understand your customers’ perception of your product’s value and price accordingly.
Benefits: Can lead to higher margins if customers perceive high value.
Considerations: Requires deep customer insights and may still be affected by cost fluctuations.
Multi-Currency Pricing
Description: Price products in the foreign currency in which costs are incurred.
Application: If your customers are international, consider listing prices in a stable foreign currency like $, Euro or £.
Benefits: Transfers currency risk to the customer and maintains your margin.
Considerations: May not be applicable if most of your customers are local.
Building Inventory
Description: Stock up on supplies immediately
Application: Purchase and store essential imported supplies in bulk.
Benefits: Provides a buffer against further currency devaluation.
Considerations: Requires additional storage and might lead to obsolescence.
Sourcing Locally
Description: Find local alternatives for imported supplies.
Application: Invest in research and development to source or even create local substitutes.
Benefits: Reduces dependency on the imported supplies and exposure to further currency devaluation.
Considerations: Quality and availability of local supplies might vary.
Price Locking with Suppliers
Description: Negotiate long-term contracts with fixed prices with your suppliers.
Application: Leverage strong relationships with suppliers to secure stable prices.
Benefits: Provides cost predictability.
Considerations: Requires negotiation skills and might lock you into higher prices if the currency strengthens.
Tiered Pricing
Description: Offer products at different price points with varying features or quantities.
Application: Create a range of product options to cater to different customer segments.
Benefits: Captures more customer segments and maintains affordability for some customers.
Considerations: Requires careful product differentiation and communication.
Navigating a startup in a volatile economic environment requires agility and strategic planning. Regularly assess your cost structure, stay informed about Naira movements, and be ready to adjust your pricing strategy as needed to maintain stability and protect your margins.
