First Stage Investor

Investing in Lean, Mean Startups

Investing in Lean, Mean Startups
By Adam Sharp
Date December 13, 2018

As regular readers know, I believe the world is headed for an extended period of chaotic financial times.

Corporations, people and governments are bloated with more debt today than ever. This creates a fragile economy and financial system.

At first, investing in startup companies may not seem to make sense in such an environment.

But let’s think about it.

In many industries today, the big incumbent companies are loaded with debt, pension plan obligations, outdated software and other challenges that will be hard to overcome. Many of these dinosaurs will be shrinking or going away altogether if credit conditions tighten (see General Electric at $7).

This situation opens the door for startups to take market share in hundreds of different markets.

With good startup investments, you get high growth potential from companies that are disrupting the old guard.

So when you invest in a promising startup, you’re buying an asset that has the potential to grow more quickly than even high inflation rates. After all, inflation is one of the effects we will see if the Fed continues to employ “creative” monetary engineering.

So a successful startup investment can act as a great inflation hedge.

Another benefit is that you get scrappier entrepreneurs during harder financial times. The best founders learn to run lean, mean businesses. By the time the cycle turns positive, these companies (and their investors) should be sitting pretty.

Knowing that credit could tighten soon, it pays to invest in lean companies with growth potential – companies that have earned significant traction with little or no outside investment.

Lean, Mean Startups

My absolute favorite startup investments are “bootstrapped” ones – startups that got off the ground with little or no outside investment. The founder(s) may have put in their own money or simply built the business in their free time.

Great bootstrap opportunities don’t come along often. But when they do, there’s no better type of deal to invest in. The founders have demonstrated that they can spend smartly and grow while operating lean.

A good example from our previous Startup Investor portfolio is Privy. Privy makes software tools for marketers. When Privy began in 2011, it was a small, lean operation run by the founders. Privy didn’t raise outside money until 2013. When Andy recommended Privy in 2014, the company was growing nicely and had built an impressive suite of tools. Today, Privy has 30 employees and just raised $4.25 million from respected venture capital firm Accomplice.

Recent First Stage Investor recommendation Hemster is another good example of a lean startup with significant growth.

Two investments in my personal portfolio stick out in this regard. The first is Chariot, a San Francisco ride-share startup whose founder bootstrapped his way to a few hundred thousand dollars in just six months using his own money. I invested in the first round of funding, and Ford acquired it after just a few years. It was a nice exit.

The other one is FabFitFun, a health and beauty subscription service I invested in back in 2015. The founders bootstrapped the business to millions in revenue, and the cash injection from its investment round allowed it to scale up incredibly fast. Today, it has more than a million customers and $1 billion in revenue.

So whenever I come across a company whose founder has bootstrapped it to significant revenue and nice growth, I pay very close attention. In these cases, I don’t care much what the business model or industry is, as long as lean growth is there.

It’s good to invest in lean and bootstrapped startups at any time. But it’s especially important when financial conditions look like they could get dicey in the near future.

So if you have a long-term perspective, you shouldn’t avoid startup investments when things get rough. You should simply be more selective.

Today, I’m on the lookout for more high-quality, lean startups to add to the First Stage Investor portfolio. And I’ll let you know as soon as we find them.

Good investing,

Adam Sharp
Co-Founder, First Stage Investor

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