A few months ago I wrote about the difficulty of self-funding a rapidly growing startup. If you haven’t read that yet, go and do that now. I’ll wait.
Here’s the quick timeline:
- JAN 2013 — Started on the idea for ConvertKit
- JUN 2013 — Reached $2,000 a month in recurring revenue (MRR).
- SEP 2014 — Revenue declines to $1,330 per month.
- OCT 2014 — Make the decision to double down on ConvertKit. Focus full-time, hire a team, and invest $50,000.
- JAN 2015 — $3,000 MRR
- JUN 2015 — $10,000 MRR
- OCT 2015 — $25,000 MRR
- DEC 2015 — $97,000 MRR
- FEB 2016 — Growing quickly, but just barely profitable with only $30,000 in the bank. Make the decision to get profitable as quickly as possible. Goal of 3 months of expenses in the bank by July 1, 2016.
We didn’t do much to cut costs (just renegotiated a few contracts), but instead focused on efficiency so that our new costs wouldn’t grow as quickly. Basically revenue and expenses should not be directly correlated.
Growing to profitability
Since we already were on a solid growth trajectory we just needed to stop increasing our spending lock-step with new revenue.
The first step was to renegotiate every contract I could. Since our credit card processing volume was over $100,000 per month I was able to switch our payments from a flat 2.9% to a split 3.5% for Amex and 2.2% for everything else. This gave us about a 17% savings each month, which came to $800 per month at the time (a lot more now).
Then with our email infrastructure provider we were able to switch to a managed service, saving about $900 per month. That dropped our bill from $3,900 to $3,000. Though now it’s back to almost $9,000 per month—since we send 90 million emails each month!
We were also able to save about $300 a month on our affiliate management software.
Over time there are a bunch of expenses that just slip in there and are no longer needed. Since we’d been buried with growth I hadn’t kept my eye on the little things. After going through the credit card statement I was able to cut about $800 per month in expenses. Mostly from a lot of small things.
Total savings from cutting costs and renegotiating contracts were about $2,800 per month. We could have saved more by switching to annual prepay with many SaaS vendors, but that would just hurt our short-term cash situation, rather than help.
The major work came in increasing our efficiency so that we could serve far more customers with the same team size. In February we had 14 people on the team serving 2,300 customers. The team was split between 4 people on customer success, 5 developers, 3 in sales/marketing, 1 in operations, and then myself.
So the goal was to double our customer base (and revenue) without increasing headcount.
I think that most startups underestimate their own efficiencies when they are growing quickly. Honestly, we were so inefficient it’s a little painful to think about. There’s still a lot of work to be done, but on the support team there are a few changes we wanted to make:
- Decrease tickets per customer. To do this we focused on improving documentation and linking to it in the app at the right time and place. Then the dev team worked hard to cut down on the bugs and confusing issues in the app that were generating the most tickets.
- Increase replies per team member. This metric is easy to game so we don’t track it that closely. But in short the goal is to get our team more efficient and be able to answer more tickets in the same amount of time. This came from writing better canned responses, learning keyboard shortcuts, and spending more focused time in the queue.
- Improve the quality of our responses. The high volume in the support queue is often from it taking several emails back and forth to find the problem. Also tickets that are more difficult (HTML/CSS customization, etc) would sit longer in the queue as they were skipped over for easier tickets. So we held live trainings for the support team on deliverability, coding in HTML/CSS, and more advanced functions of the app. This gave even the newer team members more confidence in troubleshooting harder tickets.
We were able to take our average response time from 24 hours down to below 8 hours. Still not where we want it to be, but significantly better. And this is with supporting more than double the customers.
On the development side we had to put a lot of energy that normally goes into feature development into infrastructure. During this time we doubled our monthly email sending and page views on embedded forms, so that meant a lot more server infrastructure and more efficient code.
In theory we could have maintained our development speed by hiring more developers, but having worked on larger teams that tried exactly that, it rarely works in practice.
I have to say a massive thanks to our development team who supported massive growth while still remaining small.
Alright, let’s get into what happened on the numbers. In February we had $30k in the bank and almost no profit. Here’s how we turned it around. The projection is on the left, actual numbers on the right:
(Note: this comes from tracking our rough expenses and our bank balance each month. So they aren’t final accounting numbers, but are pretty close).
We saved up $538,000, beating our goal of $460,000 by $75,000. In May and June we pulled off over 50% in profit! The final profit in June was $162,000. I think that level of profit is unheard of for a fast growing startup.
Here you can see our MRR in blue and expenses in green:
Note: I hid the first 1.5 years from this chart because it made this into so much of hockey-stick it was hard to see the detail in the last few months.
It certainly helps to have such fast growth—we certainly wouldn’t have been able to cut our way to that level of profitability.
What are we doing with the money?
Not much. The goal was to have cash in the bank to give us peace of mind. Now that’s taken care of we’ll continue to be cautious with spending. Though we are loosening the purse strings in a few areas:
- Team retreat. I’ve been wanting to get our entire remote team together in the same room for a long time. Up until now we haven’t felt like we could afford it. Now the retreat is happening in late August in a small mountain town north of Boise.
- Personal finances. I’m personally still at a net-negative from ConvertKit, meaning I’ve invested more money into the company than I’ve been paid. Since I let my training business taper off over the last 1.5 years I haven’t made much since focusing on ConvertKit. So I’ll be repaying my initial $55,000 investment in the next month or so.
- Paid Acquisition. During this time we’ve spent very little on paid acquisition (about $1,500 per month). This is a huge channel for many startups, so we’re ready to give it a try.
- Hiring. We’ve recently grown from our small group of 14 to 20. Our new team members are joining in design, development, content, sales, brand/community, and customer success.
Hiring seems to happen in spurts for us. We grew quickly from 4 to 14 between October and January, but then stayed steady between 13 and 14 until June. Now we’ll jump up to 20, but we’ll try not to get much beyond that for at least 3 months.
The goal is always to keep our team as small as possible, without hindering growth.
Did we sacrifice growth to pull this off?
Yes. I’m certain we could have grown faster if we’d been spending aggressively on Facebook ads, hired faster for our customer success team, and attended or sponsored more conferences.
There’s no way to know what we missed out on by not spending the money. Everyone agrees that it was something, but there’s no way to know if it was a few thousand a month in MRR growth or something significantly like $10k-20k or more.
Slower growth in June
This may have contributed to slower growth in June. Our goal was to add $60k of new MRR in June, and we closed out just shy of $40k. This has us working hard to get more robust systems and tracking in place for growth. I think we’ve been able to get by with looser processes since everything has been going so well.
This could also be purely a seasonal change. December was a big month because everyone was making plans for the new year. June may be slower because everyone is taking off for the summer. Our growth is still too new to really predict seasonal changes.
So was it worth it?
Outside cash is expensive. Let’s say we raised this $500,000 from investors instead of saving it. Back in February our annual run rate (MRR x 12) was at $1.8m with a monthly growth rate over 20%.
But the publicly traded SaaS companies had just taken a huge hit (remember when LinkedIn lost half its value in a day?) and hadn’t yet recovered. So all the VCs were talking about cuts in valuations. Also running a remote team, outside of the valley doesn’t help.
I think if we really tried—mainly because of the growth rate—we could have had a 8-9x multiple on ARR (though most of my conversations never got that far).
That means roughly a $15m pre-money valuation. To raise $500,000 I’d need to sell 3.3% of the company. Though at that stage, major investors wouldn’t want to invest so little. Instead they’d want to buy 15-20% for it to be worth the partners’ time.
The more I considered that path the less I liked it.
Would raising money force us toward an exit? What if I want to take distributions from the company? Would the new board of directors be against that? (Most likely).
Other than a salary of $63k/year that started in January of this year I haven’t been paid anything from ConvertKit. Instead of continuing to just make a salary until a hypothetical acquisition date, I’d like to also get paid well along the way. I gave up a lucrative book/course business to focus on ConvertKit and I miss that revenue.
By saving our own money I still have options. If ConvertKit stops growing at any point in the future then we still have an amazing business with $300,000 in revenue and half that in profit. That will do just fine.
Bootstrapped is harder
There have been a few times when I’ve been frustrated at how the startup world doesn’t support bootstrapped companies. The two more recent times include:
- Amazon AWS denying us access to their Activate program since we aren’t VC funded or haven’t been through an accelerator. This program gives startups $15,000 to $100,000 in AWS credits
- Silicon Valley Bank declining to talk to us about a line of credit since we aren’t VC backed—even though our profitability, cash on hand, and growth are far better than most VC backed startups.
I totally understand the business reasons for their decision, but some days it feels like the game is rigged against bootstrapped companies.
Factors in profitability
Now we do have some distinct advantages by not going the traditional route:
- We don’t have an expensive office or any of the costs that come along with it.
- We hire outside of major markets so we can pay competitive salaries that are still lower than NYC or SF.
- We focus our benefits on flexibility, quality of life, and a great team over the highest pay.
- We aren’t spending someone else’s money. The team and I worked hard for every dollar that’s in our bank account. Because of that we think carefully about each expense.
Focusing on profitability was incredibly healthy for the company. We learned to be disciplined with our money. Every company should learn that. Only the companies with best profit margins can put off having to learn that lesson—or you just keep spending someone else’s money.
I hope our story of increasing our bank balance by 15x in 5 months gives a different perspective of what can be possible with startups.
Finally, I want to say a huge thank you to David, Marc, Matt, Nicole, Ashley, Val, Brad, Noel, Darrell, Blake, Violetta, Steven, Newbill, Dani, Jure, Dylan, Alexis, Barrett, and Morgan. You are all amazing. I couldn’t ask for a better team.