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

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2009 M Bleyleben Red Herring

  1. 1. 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
  2. 2. What Do All These Companies Have in Common? Authorised & regulated by the Financial Services Authority
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. ... 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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

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