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Wednesday, May 29, 2024

How South African Startups Can Successfully Bootstrap Amid Global Capital Shortage

In the midst of market fluctuations, inflationary pressures, and economic uncertainty, a global capital shortage has emerged, impacting startups across the world. Recent data reveals a significant decline in both the volume and value of funding deals in Africa, with the number of South African startups securing funding in 2023 plummeting to the lowest level in six years. Notably, 99% of South African startups are now self-funded, reflecting the challenges faced in accessing external capital.

Michael Zahariev, co-founder of Luxity, attributes this trend to the highly competitive nature of the capital-raising market. “Every year, hundreds, if not thousands, of entrepreneurs vie for funding from a limited pool of investors who must not only weigh up the relative risks and rewards of these businesses but the broader economic context in which they operate too. In South Africa, factors such as currency fluctuations and the erosion of consumer spending power further complicate the funding environment.”

“Bootstrapping, however, offers a number of advantages over other funding avenues,” he points out. “For starters, it eliminates the admin-intense funding application process. It also gives entrepreneurs greater flexibility and control over their businesses. For example, unlike funded ventures, bootstrapped startups can pivot more readily, responding dynamically to market shifts and without having to get investor buy-in.”

Moreover, Zahariev emphasises the long-term benefits of bootstrapping in weathering macroeconomic storms. “By prioritising sustainable financial metrics such as positive cash flow and profitability, bootstrapped businesses are better equipped to withstand economic shocks. This resilience enables entrepreneurs to navigate uncertainties with greater agility and emerge stronger on the other side.”

With Luxity being one of Africa’s fastest growing startup companies, he shares six tips for businessowners looking to bootstrap successfully.

  1. Cash flow is king: While a number of startups have future potential, if they are costly or have low profit margins in the beginning, this will not bode well. Having a high margin and attaining high-value customers from the get-go are vital as your focus should be on cash flow rather than growth.
  2. Keep costs low: Ensure that every additional cost is not only affordable but also value additive. Understanding your expenditure and the positive and negative effects thereof is a key differentiator in your likelihood of success.
  3. Compare and despair: While it may be tempting to compare your business to those in other markets around the world, or to those being financed in other ways, this is not advisable. For example, those who are bootstrapping need a much higher margin to counter economic headwinds such as rising inflation and currency devaluation whereas funded businesses can start with a low margin.
  4.  Be patient: Growth when bootstrapping can be slower than when a business is financed. However, this also means that you are able to build a sustainable business over time that is less prone to market conditions.
  5. Make full use of available capital: Ensure that you are efficient with every asset you have. Think carefully about your financial position when making decisions, taking calculated risks into account.
  1. Start small: While most entrepreneurs strive to be the next Amazon, it’s better to set your sights on small, achievable goals and build on your successes. Not every business can begin with an investment round, but great ones don’t need to. Start small and larger opportunities will avail themselves to you.

“The hallmarks of a thriving business are sustainable cash flow and profitability. Bootstrapping places a focus on and need for this from day one. Succeeding through bootstrapping during the initial stages serves as a far more critical factor for prosperity than solely depending on a lucrative seed round. Therefore, if your ultimate aim is to excel, the path forward should be clear – just ask the founders of Coca-Cola, Meta and Apple who bootstrapped their companies to success,” concludes Zahariev.

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