2009 m bleyleben red herring
Post on 12-May-2015
2.288 Views
Preview:
DESCRIPTION
TRANSCRIPT
Authorised & regulated by the Financial Services Authority
Bootstrap Your Way Through the Cycle*For Red Herring Europe 2009
April 2, 2009
*And why bootstrapping and venture capital are compatible funding strategies
Authorised & regulated by the Financial Services Authority
What Do All These Companies Have in Common?
Authorised & regulated by the Financial Services Authority
They Were All Boostrapped StartupsContrary to popular perception, many of today’s
market leaders initially built their companies through ‘sweat equity’
Authorised & regulated by the Financial Services Authority
In Fact, Four of Them Spent Their First Years Fighting a Recession!Microsoft ('75) - founded off the back of the oil
crisis / stock market crash
Oracle ('77) – launched right into the '79 energy crisis. Tight US monetary policy led to a recession that lasted until '82
Broadcom ('91) - product of Black Monday and the early 1990s recession
Authorised & regulated by the Financial Services Authority
Bootstrapping: Some Definitions
Company that has raised little or no
external funding
Equity mostly held by
founders
Growth funded from cash
flows
Break-even by necessity
Authorised & regulated by the Financial Services Authority
This means a leaner, meaner business
Why Bootstrappers Do It Better, For LongerCustomer focus is baked into the company’s DNA
• Product/service is by definition market-tested
• Outstanding customer service is a necessity, not an option
Management is more focused, has to prioritise ruthlessly
• Problems dealt with quickly, not glossed over with money
Founders retain more control over the business, and the degree of risk they take with it
Authorised & regulated by the Financial Services Authority
Investors Have Become Thin on the Ground...
Angels have gone to heaven
VCs are holding back
reserves for their portfolio
companies
Authorised & regulated by the Financial Services Authority
Investors Have Become Thin on the Ground...
Debt markets are frozen
Small cap stock markets
remain firmly shut
Authorised & regulated by the Financial Services Authority
Investors Have Become Thin on the Ground...
Fair-weather investors, like hedge
funds, strategics, have taken
cover
Authorised & regulated by the Financial Services Authority
... And the Goalposts Have Moved Investors now want to see innovation, traction,
ambition and:
• A countercyclical market opportunity
• Proof of a working, mature sales model
• Demonstrated, recent resilience in tough markets
• Short path to break-even
Hardest hit: early-stage ventures
Authorised & regulated by the Financial Services Authority
How To Bootstrap Your Business Through the Cycle Start with tactical revenues to fund development
• Consulting, NREs, projects
Develop a single, simple product/service and perfect it
Target recession-resilient markets if appropriate, eg education, healthcare, niches in eCommerce or SaaS
• Follow the stimulus money (in US) or equivalent in Europe!
Keep development costs down
• Use cheap infrastructure – hello cloud and open source
Look for a short or negative working capital cycle, eg get paid before you pay your suppliers
• Good examples of this are eCommerce companies like BuyVIP
Rely on creative online lead gen, guerilla marketing, social media promotions
• For an example, check out Bonobos
It’s mostly common
sense
Authorised & regulated by the Financial Services Authority
But Bootstrapped Companies Eventually Run Out of SteamCan’t invest to accelerate growth in a recovery
Founders become overly risk-averse as the value of their nest-egg grows
Top-flight executives are hard to recruit without a strong capital base
Lack of external advisers, independent board can lead to ‘tunnel vision’
Non-contributing shareholders (departed founders, family and friends) can hold the business back and become a distraction
Authorised & regulated by the Financial Services Authority
Case Study: GoViral Set up by 2 founders in Denmark in 2005 to seed viral
videos on blogs and other web sites
Initial revenues generated from consulting projects
• Development of platform funded gradually
The business grew quickly and ran profitably, building out a large publisher network for video distribution
Eventually GoViral reached a tipping point, where
• It needed more experienced management
• It wanted to expand its geographic footprint
• An external board could contribute strategic direction
The company recruited senior executives from Leo Burnett and TradeDoubler, and raised €6.5m, adding an institutional investor to its board
Viral video example:
Fifa Street 3
Authorised & regulated by the Financial Services Authority
Timing Is Key – Recognise the Inflection PointDon’t raise capital when you need it, raise it when
you don’t
• This means you take less risk with your equity
Positive external factors
• Customers are buying
• Market growth is accelerating
• Acquisitions are possible
Positive internal factors
• Sales model or customer acquisition model works and appears to be repeatable
• Constraint on faster growth is internal management capacity
Authorised & regulated by the Financial Services Authority
A Digression on the Importance of the Sales Productivity KPI We call it the Growth Velocity Predictor or GVP
It tells you very simply whether it is worth diluting your equity holdings to invest more in sales
• It’s a measure of the scalability of your business
The formula is: gross profit ÷ cost of sales, eg
• Revenues of €800k @ 70% gm = €560k
• Cost of 2 sales people & marketing = €290k
• GVP = 1.9
• You can apply this to aggregate numbers (historic, forward), or to specific deals/projects
Anything above a 2.0 or 2.5 is great and an equity investment in sales should yield positive ROI for founders
Between 1.7 and 2.0 is OK provided fixed operational costs in the business can be held low
If your GVP is below 1.5 it’s worth reviewing your sales model and pricing strategy to find improvements before raising money
A similar model can be applied to consumer Internet companies using the cost of customer acquisition as the cost of sales
For consumer Internet
services, substitute
gross profit for a measure
of your customer
lifetime value
Authorised & regulated by the Financial Services Authority
Good, Saleable Reasons to Raise Capital Today Expansion of proven sales model with high GVP
Acquisitions or partnerships that lead to rapid acquisition of customers
• In this cycle critical mass is going to be more important than ever
Bolster balance sheet in an otherwise profitable business
Take out non-contributing shareholders
Less good reasons:
• Significant cash out for working founders
• Development of a completely new product/service
• Speculative expansion to multiple territories
Authorised & regulated by the Financial Services Authority
What VCs Dream of FundingBusinesses with:
Recurring revenues and controlled churnSmooth revenue growth and variable costs, no lumpsStandard, documented, repeatable sales modelStrong ‘recession story’Low customer concentrationNegative working capital requirements, eg your
customers pay you first!Realistic business plan with growth in the low-side
case and significant upside if all goes wellClear understanding of, and contingency plan for, the
downside scenario
Authorised & regulated by the Financial Services Authority
If You Can Bootstrap Your Way Through Half that Checklist… ... You can raise capital from a position of strength
As the markets recover, the leanest, meanest companies will become tomorrow’s winners
Authorised & regulated by the Financial Services Authority
Growth equity for US and European TMT businesses
• Capital for sales expansion, acquisition finance, shareholder liquidity
Over $500m under management from offices in London and Silicon Valley
Max Bleyleben, Managing Directorhttp://maxbley.typepad.com/http://www.kennet.com/
About Kennet
top related