Andy Cockburn, CEO of Mention Me, on how technology entrepreneurs can bootstrap their way to scale.
All too often entrepreneurs mark their success by how many funding rounds they’ve been through. The badge of honour at meetups and conferences is whether you’re at Seed, Series A or Series B. This is an entirely unhelpful way for entrepreneurs to judge success.
My co-founder and I were very aware of the risk of this. We actively avoided raising any money until we had product market fit and we’ve always fixated on growing the business out of cash flow. We knew that raising early would be expensive – in terms of equity – and would be a huge distraction from doing what we should be doing. We’ve now grown to a profitable team of 45 people in five years and we’re looking to add another 30 people this year. We’re growing rapidly and all of that growth is out of cashflow.
There are a number of key decisions that we made along the way that have made this possible.
Get the foundations right
You have to start with the goal of growing profitably as you’re considering the type of business you want to build. There are some businesses that lend themselves to be grown out of cashflow and there are some that need investment earlier. Typically B2C businesses are more likely to require investment. If you need to buy stock that you can then sell, it increases the likelihood even more. B2B businesses, and particularly software-as-a-service businesses, are much easier to get going without the need for significant investment.
You also have to have the right founding team in place. If you start with founders who between them can create the business plan, build the product and sell it then you can do most of the early stages without the need to spend much money. You also need for the founders to be able to have enough cash to go without a salary for 12-18 months. If you don’t have this you can waste the first year spending most of your time raising money in order to fund founders’ salaries and to get someone else to then build the product.That time is much better spent finding the right co-founders rather than raising money.
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Getting these foundations right isn’t easy, and sometimes it simply isn’t possible. If it isn’t possible then it is invaluable to use early funding to minimise the need for later funding so that it is a positive option rather than a do-or-die necessity. Ultimately to win in start-ups, founders should fixate on minimising the risk of needing to raise at the wrong time.
There is a lot to be said for following a test and learn approach. We followed the Lean Startup framework and it meant that we rigorously tested ideas to prove that different components of the business worked before we started thinking of scaling the business. We did this by finding the most cost effective way to test something. We set ourselves nine tests for the first two years and said we’d close the business if we didn’t pass the tests (fortunately we did!). That test and learn approach is now built into our DNA and is hugely valuable.
Don’t invest in growth until you’ve achieved “product market fit”. There is no point in spending money marketing a product that isn’t right for the market. We invested two years with just the two founders in the business, building and testing the product and making sure our product worked for our first twenty clients before expanding the client base and the team. As an entrepreneur this felt uncomfortably slow. All entrepreneurs are racing to prove success (particularly when you’re not paying yourselves) but taking the time to get it right meant we avoided wasting resources on bad ideas. With hindsight, this was the right thing to do even though at the time we were beating ourselves up for not going faster.
Cash is the the key metric
It’s critical that you focus on the right metric. Even though we’re proud of being profitable, it is not the key to growing without investment. Cash is the key metric. This means you need to fixate on cash. You need to understand and optimise your cashflow dynamics. You always need to know your 13 week cash position so that you have time to adjust the cost base if you need to. You need to focus on the levers for cash and not just the levers for growth and revenue.
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Raise when it’s right
Even though we’re talking about growing without raising money, that’s not to say that you should never raise. The key is to raise the right amount at the right time. We raised an angel round after a couple of years as we started to hire because we knew we wanted buffer if we were asking people to join us and that was a good decision. We will also likely raise in the future because we’re now at a scale where some of the big growth opportunities that we’re looking at require more cash than we’ll be able to generate. Raising at this stage – on our terms and because we want to accelerate the growth of the business, rather than because we need to – could be a great thing for the business.
The point is that raising money is not bad in and of itself. Financing is hugely beneficial at the right point. The risk is that getting on the investment treadmill too early means that you will forever be on that treadmill and that you will spend a lot of time and energy in making sure you don’t fall off it. It will also almost always lead you to chase growth rather than profitability and that isn’t necessarily right for all founders, all stages or all businesses.
Growing a successful business without raising and doing so profitably out of cashflow is incredibly satisfying. More founders should consider it as an option rather than jumping on the investment treadmill too early.