2009 M Bleyleben Red Herring

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?


They Were All Boostrapped
Startups
 Contrary to popular perception, many of today’s
market leaders initially built their companies
through ‘sweat equity’


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


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


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


Investors Have Become Thin on
the Ground...
Angels have
gone to
heaven
VCs are holding
back
reserves for
their portfolio
companies


the Ground...
Debt markets
are frozen
Small cap stock
markets
remain firmly
shut


the Ground...
Fair-weather
investors, lik
e hedge
funds, strate
gics, have
taken cover


... 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

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


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


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


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


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


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

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


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


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/


2009 M Bleyleben Red Herring

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