Make a profit from day one: 3 start-ups share how
Can you bootstrap your business idea and start making profit almost immediately? Read on to find out how three companies got off the ground
What if you can’t get the finance you need? Or don’t want to borrow? Accessing money can be time-consuming and frustrating. Three reasons why many businesses actively choose to self-fund.
This might simply mean committing savings to fund the first months of a business that is expected to become profitable fairly quickly. Or it can involve a long period of so-called bootstrapping. This is common in the technology sector where a software company might fund long-term R&D by undertaking shorter term paying projects.
The advantage of self-funding is that you are your own master or mistress. There is not necessarily pressure from a bank to make repayments or from an investor to hit milestones.
Equally important, by eschewing investment, you also retain complete ownership and you’ll probably also become aware very quickly of the importance of making profits.
We’ve talked to three businesses that have successfully self-funded.
BrandContent: A close eye on cash
“I started with the mindset I didn’t want to get into debt for the business,” says Sharon Flaherty, founding director of BrandContent. “I wanted to try it bootstrapped and then see what I could achieve. I also didn’t want to get investment that early and give things away before I started.”
Established in September 2014, BrandContent is a Cardiff-based branded content agency providing communications services mainly to the tech and financial services industries. The company’s work ranges from producing videos through to creating white papers and running social media campaigns and thanks to recent staff hires it can now offer full video production facilities.
The company’s development to date has been self-funded but as Sharon Flaherty acknowledges this is not a no-cost option. “While I have no debts and have repaid myself the personal money I lent the business to start, I have invested a lot,” she says. “If you think about the salary you aren’t earning but could be and the hours you put in, then it’s been a big investment and much more than most people may consider when starting out or putting plans together.”
And there are psychological hurdles to overcome, not least in knowing that money set aside in a previous life – Flaherty was a journalist – is now at risk. “It’s not a nice feeling knowing that your savings are shrinking away,” she says. On the other hand, Flaherty is confident in the knowledge that she has built a company without accruing debt. Similarly, without investors she is free to re-direct the business if the market changes without having to consult other shareholders.
As she sees it, one of the keys to running a sustainable business is a laser-like focus on cashflow, and in particular avoiding the trap of late payment on the part of customers. “We have got better processes to clamp down on that,” she says. “Controlling your finances is something you need to be on top of – count the pennies and the pounds take care of themselves.”
Another trap is the boom and bust syndrome of working too hard on existing projects that you forget to keep the pipeline fed with new customers.
Severalnines: Hedging bets with two revenue streams
On the face of it, the software industry offers huge scope for early-stage self-funding. Put simply, an ambitious software engineer can work at home with nothing but a laptop, building the digital tools that might form the basis of tomorrow’s world beating company.
In practice, the investment often takes the form of protracted full-time work on a project that might not generate revenues for months or years. In the meantime bills have to be paid, and food put on the table. Often the answer is to secure seed investment.
But as Vinay Joosery, co-founder of Severalnines cautions, the often drawn-out process of identifying potential seed investors and then securing a deal can be counter-productive. “I thought of it as a distraction,” he says. “You spend time looking for investors when you should be thinking about the product and product/market fit.”
Severalnines develops tools to make life easier for users of open-source databases. As software developers, the founders were able to fund the early stages of the project by taking on paid consultancy work. Initially these paying projects accounted for the bulk of the company’s revenues but as Joosery explains, product sales are now the main earner. “In our second year, 70% of our revenues came from consultancy,” he says. “In year three, 80% of our revenues are coming from selling products.”
Keeping costs low
As a self-funded business, the founders of Severalnines were intent on keeping costs low. Their strategies included using some of the many free development tools available on the web, and taking advantage of free workspace in a university.
Severalnines also engaged post-graduate students to work on particular software projects. This provided the students with experience while keeping development costs low. The company also uses a “distributed workplace” model, which essentially means that its developers work from home. Again this keep costs down.
“We also saved on marketing by offering our own products on a ‘freemium’ basis and then converting users to paying customers,” says Joosery.
Nevertheless, it wasn’t a cost-free launch. Money was required upfront to fly developers from all over the world to meetings where they could discuss problems and issues face-to-face.
There were all the legal costs associated with incorporating a business with watertight partnership agreements. This required an initial personal investment.
Today, Severalnines’ customer base includes BT, Eurovision, Monster and many small and mid-sized businesses and the company has taken on sales people to augment its online freemium marketing activities.
And Joosery is convinced that the bootstrapped model has left the company in a strong position to chart its own course. “If you take money from an investor you have money to burn for maybe 12 months, but if you don’t hit the agreed milestone it all stops. You are under pressure to grow at any cost. We don’t have that pressure.”
Away With Tax: How to grow cautiously
Mitzi Kalinsky originally founded book keeping business Away With Tax in partnership with her aunt before taking sole ownership. In addition to bookkeeping it also provides an end of year tax returns service for a broad range of clients. Over its 20-year history it has been entirely self-funded, with the exception of a bank loan secured to 50% of the takeover of another company.
A bookkeeping business does not necessarily require a huge investment in equipment or even office space – the original business was run from home – but Kalinsky says any self-funding model must take account of the fact that it will take time to build up a base of regular customers. “You should be aware that you’re going to have to take a financial hit for a year or two,” she says.
And as the customer base builds, it’s crucial to keep a close eye on cashflow. “What I’ve done is put my regular customers on standing orders or direct debits,” she says. “That way I know I get paid, but it’s also good for the customers as they don’t have to take the time to pay the bill every month.
Kalinsky also kept a firm eye on cashflow when the time came to buy expensive computers, leasing them initially to avoid upfront costs.
As Kalinsky cautions, all businesses have rainy days – those times when customer numbers drop, sometimes unexpectedly – and as a self-funded company you won’t necessarily have a well of finance to draw upon. “It’s important to put money aside,” she says.
And perhaps counter-intuitively, beware of taking on too many customers to the extent that you need to pay for extra resources before the revenues from the new business find their way to your bank account. “Don’t grow too quickly or you will go bust,” she says.
Self-funding a business – if done successfully – can leave you in a very good place in terms of low debts and ownership. It also forces you to think about generating revenues and managing cash at the earliest stage.
This article was produced in association with Sage One. For more business insight and tips to keep on top of cashflow and small business tax visit the Sage business blog http://uk.sageone.com/blog/.
For a free trial of Sage One please visit http://uk.sageone.com/products/.