2009 M Bleyleben Red Herring
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2009 M Bleyleben Red Herring

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Kennet's bootstrapping message from Max Bleyleben, as given to attendees of Red Herring Europe, 2009 in Berlin

Kennet's bootstrapping message from Max Bleyleben, as given to attendees of Red Herring Europe, 2009 in Berlin

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2009 M Bleyleben Red Herring 2009 M Bleyleben Red Herring Presentation Transcript

  • 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 Startups  Contrary 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
  • Why Bootstrappers Do It Better, For Longer  Customer 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 This means a leaner, meaner business 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, lik e hedge funds, strate gics, 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 It’s mostly • Consulting, NREs, projects common  Develop a single, simple product/service and perfect it sense  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 Authorised & regulated by the Financial Services Authority
  • But Bootstrapped Companies Eventually Run Out of Steam  Can’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 Viral video videos on blogs and other web sites example:  Initial revenues generated from consulting projects Fifa Street 3 • 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 Authorised & regulated by the Financial Services Authority
  • Timing Is Key – Recognise the Inflection Point  Don’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 For consumer  It tells you very simply whether it is worth diluting your equity holdings to Internet invest more in sales services, sub • It’s a measure of the scalability of your business stitute gross  The formula is: gross profit ÷ cost of sales, eg profit for a • Revenues of €800k @ 70% gm = €560k measure of • Cost of 2 sales people & marketing = €290k your • GVP = 1.9 • customer You can apply this to aggregate numbers (historic, forward), or to specific deals/projects lifetime value  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 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 Funding  Businesses with: Recurring revenues and controlled churn Smooth revenue growth and variable costs, no lumps Standard, documented, repeatable sales model Strong ‘recession story’ Low customer concentration Negative 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 well Clear 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
  • About Kennet  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 Director http://maxbley.typepad.com/ http://www.kennet.com/ Authorised & regulated by the Financial Services Authority