From Oliver Verhage – Kennet Partners (@olivierverhage)

Isn’t everybody saying that the costs involved with setting up a company are increasingly declining and that it’s so simple to launch a business these days? And don’t you frequently read about easier starting points, better scaling technologies and how new software development tools and the rise of inexpensive PaaS solutions dramatically drive down the costs of launching a startup?
Although the costs of launching a startup are said to be declining, the size of early stage funding rounds continues to increase. As presented by CB Insights in the graph below, the median size of an early stage round has doubled over the past two years. 

Many first-time entrepreneurs just seem to take the cash for granted and raise more than they initially need because it’s just there or because investors are pushing for a bigger war chest. As a growth equity investor, I always look at historical funding as a key indicator for future success.  Although it may sound great to raise a first big round, it may actually hurt you in the long term. In this blog I’ll outline why capital efficiency is important and how a bootstrapped DNA can help you become a real winner.

Bootstrapping forces innovation and creativity

Capital efficiency forces innovation and forces the founder to spend time in front of customers. It pushes teams not to expand too quickly. I know it’s easier said than done when so much capital is floating around and it feels like it will ease up everything. I don’t blame you for taking more than you need, but if you take $10 million to get some initial traction, I can tell you that almost certainly you will spend your money inefficiently.

Bootstrapping delivers better returns

This may sounds obvious, but I assure you that it is a lot easier to make a 10x return on capital on a company that has only raised $10m then it is to make a 10x return on capital when a company has raised $100m. When a company can become cash flow positive on a small amount of capital, say less than a couple million, and grow over 100% YoY without raising a single dollar, well that’s a silent killer.
Many articles have been written on the thoughtful vision of bootstrapping, but I feel it’s easy to neglect for most entrepreneurs. So if you do agree with the arguments indicated here, how do you actually bootstrap yourself? What are the key points to building a profitable and successful technology company? I’ll outline a few things here that should help you to build a more cash efficient business:

1. Focus on sustainable unit economics and manage your cash efficiently

You must achieve profitable unit economics; only invest substantial dollars in marketing efforts with positive return on investment; curtail unnecessary expenses; collect cash from customers religiously or bill your customers upfront; maintain an upside and a downside plan that ensures the business to have enough cash to survive in the downside case.

2. Raise prices and focus on sales

Increase your pricing (and justify it). Sell sell sell. Get as much practice as you can. Force yourself to practice. Force yourself to learn how to make money as early as you can. You may hate it in the short-term, but it’ll make you a great businessperson in the long term and research has shown that CEOs who previously had jobs in sales build bigger and better businesses.

3. Do everything you can to mitigate churn and focus on upsell

You should aim to build the best customer success organization, structure pricing plans properly, plan the right product roadmap, cultivate a diversified customer base, and ensure customers achieve positive return on their investment. Also, an often neglected part of sales is upsell. It’s often easier and relatively inexpensive to sell a larger contract to a customer you already have. Get a dedicated upsell and customer success team (or a single person if you don’t have the resources) to create that extra value. It’s an easy win.

4. Be creative with marketing

Bust your ass at content marketing and get more new customers in the door. Know who your customers are and use reference cases for customers in the same category. And if you are horizontally focused, introduce a new vertical theme every month. For example, if you are in enterprise software, write a blog on how your product can help and save money in the airline industry. Use a successful reference case of one airline customer and reach out to all other relevant customers in that category. Next month, do the same but focus on a different vertical.

Don’t think you’ll build the next unicorn
No, you probably won’t. Don’t raise unicorn cash for it and don’t tell your investors that you want to build a billion dollar business, don’t talk about the next big thing or a 15x return. Of course it does happen, but the chances that you are actually going to build the next big thing (Spotify, Shazam or BlaBlaCar, to name a few European unicorns) are virtually zero. If you show a realistic business plan and aim for a solid 3-5X return in 3-4 years, you’d be amazed at the credibility you earn with investors.
It’s important that you think long term and that you position the business so that it can always be in a good position to raise capital or cut costs to achieve profitability quickly. This means running an efficient go-to-market organization. I hope the points outlined above will help you to achieve that.