I found an old email the other day with some thoughts on bootstrapping our project management software company that I’d written to a mate. I thought it was interesting reading over what I’d written, so decided to repost the thoughts here… Here goes!
Regarding bootstrapping, It’s a hard balance. We put lots of time into systems and development, but sales suffer… or we focus on sales and then development suffers… Bootstrapping is fun to a point, then if the intention is to bootstrap through to profitability, the issue is 100% correct allocation of resources between development, sales, systems and marketing.
We don’t have a lot of wasted resource, only a tight team, no flash offices and a few contractors but we do A LOT with what we have. We have a good number of dedicated servers in California and one in NZ, are in profit and have no debt. So the years of hard work are paying off. Not an industry legend yet, but we’ll get there.
The biggest problem I see in our local market is the high number of software/SaaS co’s trying to scale, but using (old school) high inertia sales and marketing.
Ie: people having to sell, or visit companies to sell. Or going to trade shows and exhibitions, travelling etc…
All this is fine, but the underlying business model HAS to be low inertia, otherwise, it’ll scale, but so will the costs and expense… and profit will never come. This is just good sense!
To be in NZ and compete in SaaS globally, there needs to be minimum expense per sale, and as the revenue grows, the margins need to expand as well. If your business’s margins shrink with scale, you’ll hit a lid and have no profitability long term… Expanding margins mean you can scale faster as you grow.
Some companies I know of think that ‘Speed to market’ is the key. You must grow fast! – Not necessarily true… Long term sustainability is the key. We’d rather be smaller and healthy rather than rush things with the wrong model only to find out that we’ve scaled up too fast on a bad model and the only path to profitability is to take round two funding (and lose more control).
We track our competitors (as it’s a competitive market) and probably 20-30% of the ones I track have disappeared in the past 12 months. Gone! We don’t want that to happen to us…
In my personal opinion, Founders should also take a company to profit BEFORE taking investment to scale – otherwise you simply give away too much of the company and the investment goes into R&D (Investment should go to Sales/marketing). Not only that, but it’s those bootstrap years that help you truly discover the ‘profit recipe’ of your business. You can’t spend needlessly – every dollar out must return. This thinking can be lost or clouded if too much investment comes in too early.
THE SUCCESS FORMULA
Ultimately there is one formula we ALL must adhere to to succeed long term.
Cost to Aquire Sale < Must be Less than Average Revenue from Sale
Where most companies get it wrong is on the ‘Cost to Aquire a Sale’ part. They make plenty of sales, but when you look at their model and costs, with trade shows, print ads, high sales costs etc they can blow 30x or more the monthly revenue they’ll gain.
Ie: A software company may spend (if analysed) $2000-4000 in time and company resource to land an average $100 per month sale. This means they’re not in profit until that customer has been with them 30 months. On this note, every company has a different ‘Average Customer Retention’ time. This may be 3 months or 2 years, but simple maths will tell you that if it takes 30 months to get to profit and the ‘Average Customer Retention’ time is 12 months… Guess what… you have a problem… and you’ll be chasing 2nd round funding sooner or later to stay afloat.
Understanding the key metrics around ‘Cost to Aquire a Sale & Average Revenue from a Sale’ is a key issue we all need to focus on – every day…
That’s my 2 cents for the morning… Time for a coffee!
About The Author:
Julian Stone begin_of_the_skype_highlighting end_of_the_skype_highlighting is the CEO of ProActive Software, developers and creators of the leading web based project management software http://www.proworkflow.com.