From Losing Money to a Profit Margin in 5 Months
nathanbarry.com
nathanbarry.com
> I’ve been a fan and customer of Freshbooks for years. They were self-funded for a very long time until recently raising a large round of funding when they had over 200 employees. I’m pretty sure Mike’s dealt with similar problems. Unfortunately I just missed a great opportunity to ask him about it.
Freshbooks was not self funded until they had over 200 employees. One of the founders' parents put in money and a very prominent CEO of a major tech company put in money and a very large financial company put in money and then they hit 200 employees.
2nd Site Inc., the previous name, was self-funded / bootstrapped(ish). But they weren't Freshbooks for very long without no longer qualifying by any stretch of the imagination as "bootstrapped" or "self-funded".
I think this was my biggest takeaway from the article.
It's also really interesting to compare and contrast this with Buffer's very open blog concerning profitability and growth - https://open.buffer.com/layoffs-and-moving-forward/ . I believe Buffer is a few years farther down the line than ConvertKit, but it's interesting to note their decision making throughout the entire process.
Going from the VC world to bootstrap has been a night and day experience for me at the new gig. It's surprising how hard it is to get credit lines established, even if you are shedding cash.
Small banks still do business the old fashioned way. Credit isn't an issue if your cash flow supports it.
The best (banking) move we ever made was switching from a huge bank to a small bank.
There are VCs who operate the same way, e.g. Correlation ventures or DAG Ventures.
A bank only understands an ordinary business with ordinary assets that can be liquidated if stuff goes, as well as an ordinary niche in a well-known sort of market.
How much money you're making now is an impressive statistic to you. How long you have been making a steady amount is the figure a bank you be most concerned with but even, them knowing why you've made this money is important since there are lots of ways to seem like you are getting money.
A bank doesn't have the resources to research the particularities of an online business - or probably any business that doesn't have a significant history of making money. Really, banks don't research at all, they simply follow procedures, which is how they can operate on a mass scale.
It's all relative though. What seems like a lot of revenue to us is peanuts compared to these larger VC startups.
It doesn't seem fair to consider this a case of it taking 2 years to reach 3K MRR, I don't think. I assume it was more like a 5 month stretch of work, then a year mostly taken off, then another 5 month stretch with 50k invested.
I would like to hear Nathan confirm or deny this if he has time.
I guess they grew to trust each other and the business system they developed. In order to be trusted, outsiders require real evaluation, which is expensive and thus - avoided most of the time. That is something that occurs in other domains of activity too.
Which totally makes sense.
Can you provide a little more insight on this "Then with our email infrastructure provider we were able to switch to a managed service, saving about $900 per month."
What email infrastructure did you have in place before and is the managed service you are now using dedicated servers or something else?
Now that we're at $10,000 per month I was able to get another $1,500 knocked off.
We were profitable from July to December last year, but only a couple thousand each month. It felt like we needed to keep hiring and spending just to stay above water with supporting growth.
January is the only month in the last year that we weren't profitable (though most months were only $1-3k in profit).
If you want a big market, you need to implement a lot of features. That involves many many people-hours of development.
You can specialise into one market and not need as many features, but then your market is smaller, and you're high-end.
If you're selling things that cost $50-$100 a month, and you're at 10 employees, you need a pretty big amount of businesses that need onboarding to reach profitability. And it's hard to convince people to use your software! It takes a time (and of course a money) investment.
But the counterpoint is after you hit profitability you'll probably stick to it for a while. if your company is at 4-digit LTVs for customers, that's basically like selling cars.
But in order to have your "cars" to sell you need to build a lot of things, and sell to a lot of people.
Thought experiment: Your product costs $50/month. Let's say you're the only employee. Do you think you could manage selling 100 subscriptions to reach "decent" profitability by yourself?
Don't forget support! You not only have to manage implementing features and selling your product, you also need to fix bugs and help customers who may not know how to do simple things.
This is not true whatsoever. I've executed diligence services on more than 15 software companies in the last year alone. Many of these are very profitable (80% gross margin and 30% EBITDA) and growing at steady 10-20% rates....you just don't read about them on TechCrunch because they aren't perceived as unicorns.
Very easy to be profitable in the mid-to-long-term. Things like Drip, WP Engine, And here, ConvertKit all prove this. In theory you don't need 10 years. I was talking more about the initial years.
I'm wondering though, how many of those software companies were profitable in the first year? Usually the fastest way to get to profitability is to be very unprofitable at first to build up your base, and then rely on (hate the word but) virality and scale to cross the threshhold.
But totally agree that it's very feasible to build a very profitable business in less than the 8 years or so it took FB.