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

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
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2. What Do All These Companies
Have in Common?
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3. They Were All Boostrapped
Startups
 Contrary to popular perception, many of today’s
market leaders initially built their companies
through ‘sweat equity’
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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
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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
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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
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7. Investors Have Become Thin on
the Ground...
Angels have
gone to
heaven
VCs are holding
back
reserves for
their portfolio
companies
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8. Investors Have Become Thin on
the Ground...
Debt markets
are frozen
Small cap stock
markets
remain firmly
shut
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9. Investors Have Become Thin on
the Ground...
Fair-weather
investors, lik
e hedge
funds, strate
gics, have
taken cover
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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/
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