Fast-to-free-cashflow startups

Startups are often defined as companies designed to grow fast, usually taking investments from venture capital (VC) funds.

This is contrasted with "lifestyle businesses", "ordinary businesses" or "mom & pop" businesses, descriptions which often carry a whiff of disdain, even though small and medium-sized businesses (SMBs) usually employ a large chunk of the working population and generate a sizable portion of total revenue.

Go big or go home

VC-backed startups are a brutal business, both for the founders and investors. Founders bet a number of years of their life on a very risky endeavor with a low chance of success. Many of them live and breathe their startups and put everything else — their life — on hold.

The VC angle is unenviable as well. Most startups they fund will fail, so they need a few large successes for their fund to work out, and to be able to raise another round in the future (yes, VCs raise money, too). Add to this large fixed expenses and the time pressure (usually 5 to 10 years) and the math starts to get ugly.

But the few successes, the exponential returns, the global dominance, the drama, is what catches the eye of many a would-be entrepreneur. Starting a new tech company? Go big or go home!

Small giants

It doesn't have to be this way. If we take a wider view of startups as organizations formed to search for a repeatable and scalable business model, and if we're interested in a lower-risk, lower-reward SMB business model, we can see there are many other paths besides the all-or-nothing VC-backed model.

Vaughn Tan, who runs a startup incubator in Singapore, calls these companies fast-to-free-cashflow (FFCF) startups: startups designed to reach free cashflow fast and then intentionally stay SMBs.

Rob Walling in Start Small, Stay Small calls them "micropreneurs". Paul Jarvis calls them, somewhat hyperbolically, Company of One, and Bo Burlingham calls them Small Giants. Germans call them Mittelstand, and most people would just call them "businesses".

FFCF startups are different from VC-backed startups that couldn't quite reach orbit and need to settle for the consolation prize: their strategy from the start is to stay small(er). This informs the approach to product, market, hiring, and every other business decision.

But there isn't really a good, well-oiled process to fund them.

The funding gap

Bootstrapping and organic revenue growth through reinvesting the profits is great once you get it going, but isn't viable for the first few months, or if you need more starting capital.

VC isn't a good fit, despite some valiant efforts, due to the skewed returns and the need for big hits mentioned earlier.

Crowdfunding campaigns can work for some products, if you nail the marketing. Many companies either aren't 100% sure about the product, offer a service instead, or have some other detail that makes them a lousy fit for crowdfunding.

Debt is sometimes an option — maxing out credit cards, taking on a mortgage — but it's a high-risk one. Any startup is uncertain (if less so than a VC-fueled one aiming for the Moon), and founders must usually take the debt on themselves, so the price of failure is high.

Finally, there are various SMB-specific grant programs, on a regional or national level, in many countries. While these are usually too small to fully fund a startup (and in many cases, require matching funds from the founders or outside investors), they can help, especially if initial capital needs are modest.

I do hope that one day we collectively figure out a funding process that's a great fit for these companies. For the time being, they have to make do with some combination of the above.

FFCF is an option

The biggest obstacle to founders choosing this type of business is lack of awareness that it's a possibility: with so many Silicon Valley "keyboards-to-private-planes" stories, the VC-backed startup approach has mostly overshadowed the alternatives.

Thus, many startups that could be great "free-cashflow" (or "lifestyle") businesses instead chase fundraising, aim for the Moon, then crash and burn. For VCs, a moonshot that may crash and burn is preferable to a "nice little business" that turns a profit but never delivers a 100x return for the investors.

But for founders, a "nice little business" that turns a profit year after year might be just the thing.