This month (May 2016) for the first time since we started this company we are going to have a profitable operation. We currently host a team of 12 people in two countries, and have an annual run rate of almost half a million dollars.
Balancing growth vs profitability is a delicate science and it can literally make or break your business. It’s a choice startup founders need to make and it’s very much related to the direction that the company is headed; you’ll probably hear/read hundreds of stories of which path works best… this is just ours.
To put things in perspective, here's a summary of what we do:
What is Slidebean?
- Seed/F&F funding raised: $250K angel round, Feb 2015 (plus $100K from 500 Startups and DreamIt Ventures from their respective accelerators)
- Full-time team members: 12
- Paid customer accounts: ~1,200, with about 3,000-4,000 individual seats.
- Month over Month revenue growth: ~20%.
Growth vs Profitability
This is a team and Board decision, but the truth of the matter is that the CEO is usually the only one directly on top of the budgets and financial projections, and his or her recommendation will carry a lot of weight.
Quoting @evanish. as a CEO, your only job is:
When dealing with a startup vision and strategy there are two extreme roads you can take:
Access to venture capital has allowed companies to go for Plan A and continue raising funds without a clear path to a profitable business. The best examples of this are probably Pinterest (recently raised series G) and Twitter, a public company that still hasn’t figured this stuff out and it’s (finally) reflecting in their stock.
On the other hand, aiming for Plan B may completely stall your company. Don't get me wrong, having a profitable business that can make a good living for the founders and the team is a fantastic milestone, but it’s not the reason many of us are here, and definitely not the reason why your investors gave you money.
Leaning the balance all the way to A puts your business in danger in case you aren’t able to reach the milestones for a new round, or if the fundraising landscape changes. On the other hand, leaning it to B leaves the path open for a competitor that does have access to capital, and could cripple your ability to raise funding in the future: investors want companies that can scale, and you can’t prove that without strong MoM growth.
About 6 months ago and given the unstable fundraising landscape that we expected for 2016, the team and the Board decided to lean the bar to plan B.
This meant potentially sacrificing some of our MoM growth, but it forced us to be lean about the money we spend and the people we hire. The idea here was to ensure that we could continue working on the product regardless of our ability to secure any more funding.
Now, 6 months after we made this call we believe we have positioned ourselves ideally to raise a larger Seed Round at a much better valuation (we are raising a $550K Convertible Note at the moment).
Don’t run out of money
Working on point 1, I’ve come to live and breath our financial spreadsheet during the past few months. Some tips about this:
- Use a template and customize it: you can find a bunch of them online.
- Tailor it to your business: if you don’t know Excel, learn it. You need to be on top of this at all times.
- Create an easy way to input your monthly KPIs: this shouldn’t take more than a few minutes, and you should be able to experiment with different changes on MoM budgets and see how that reflects in the future.
- Create a Summary chart: this is where you can look at revenue vs expenses and cash in the bank. This is how ours looks like at the moment.
Speed up your ROI
I love SaaS. The concept of recurring, predictable revenue is great and it lets you forecast accurately the performance for the upcoming months, with little sensibility to seasonality. Also, it’s a lot easier to focus on your existing customers and making them happy, than going out to find a bunch of new people every month.
However, there’s a potential cash flow problem depending on the time it takes you to recover your CAC. There are two mantras in Saas:
- LTV > 3x CAC: lifetime value should be higher than 3x your acquisition.
- CAC < 12/mo LTV: recover what you spend to acquire a user in less than 1 year.
Even sticking to these rules, you might have a cash flow problem if it takes you, say, 9 months to recover the full cost of one acquisition. And that sucks for profitability.
While we always focus on lowering our CAC and our churn, we recently made an important breakthrough by offering a HUGE discount on our yearly plans. While the standard yearly discount is 10-20% or 1-2 months, we decided to offer a 50% discount on our yearly plans.
This had small impact in our ARPA and our LTV, but it had a significant impact in our cash flow. It’s simple math when you spend $50 to get $250 right away, or over the course of a year. If you have the money, you can re-invest it again quickly.
Switching to these large discounts changed our MRR to Revenue multiplier from 1.1 to 1.4. This means that for every $1,000 of MRR in a given month, we now make $1,400 worth of revenue because of those prepaid yearly subscriptions.
More importantly, we recover our growth spend within 30 days, allowing us to reinvest it much quicker:
One of our biggest concerns when we moved into this conservative approach was losing momentum. Last year, we grew around 20% MoM every month and getting to that 20% each new month gets exponentially harder (literally).
All our financial models and protections assumed that our MoM % growth would have dropped to around 8% by now, but we’ve been able to successfully keep growing at 15-20% MoM. We’ve accomplished this by significantly lowering our CAC.
Around 1 year ago we paid an average of $100 for a new paid customer and we’ve dropped that to around $55 by now, while increasing how much we spend in a give month to attract customers. In combination with reducing churn, this has increased our LTV/CAC from 2.5x to almost 5x.
This of course doesn’t make sense if you are using direct acquisition channels like SEM or Facebook Ads, because the more reach you want the more expensive your CPC gets. However, we’ve turned this around thanks to a very successful content marketing strategy. A year ago, the majority of our customers came from our paid advertising campaigns, mainly Google Adwords; today, about 65% of our paid customers come from organic search.
Starting to rank for organic search has been a (still ongoing) tough process, but every dollar we put into SEO has been paid more than 5 times over with our results so far.
This is a tale for another time.
Recruit and retain the best talent
This is another challenge you’ll face if you want to bootstrap for profitability.
I must mention that all three Slidebean co-founders are Costa Rican. The largest portion of our team is based in San José CR, which allows us to attract talent at a lower cost than in the US (but still much higher than other countries in the region).
By having a larger team than our equivalent startup abroad, we can move A LOT faster. This has allowed us to effectively position our brand more strongly that companies that have raised more funds than us.
When we decide to hire a new team member, we go through a decision process like this:
- Can we find that talent in Costa Rica?
For most of our hires, we can. We’ve built our marketing & customer success teams from Costa Ricans with experience with US customers.
- If not, can we train them?
The truth of the matter is that there aren’t a lot of people in Costa Rica with experience in B2B SaaS. This has made our selection process tougher- for many roles we’ve ensured that we hire smart people that can learn fast but for other roles we don’t have a choice but to look for experience in the US.
Still, we’ve surrounded ourselves with extremely smart, fast-learning and proactive people. With the guidance of our mentors and our US team, the Costa Rican team has caught up fantastically and I’m pretty sure they’d have no trouble in getting a job on a US company in the future.
Which comes to my other point, retention.
As of today, we’ve only had one employee quit the company (personal reasons). We value team culture above everything else and we’ve made Cultural Fit our very first benchmark when evaluating applicants. I think of most of my co-workers as friends and more importantly, they are friends with each other rather than just collaborators.
Working for a startup is SO different from a traditional job and our team has come to appreciate that.
Even on a bootstrapped budget, there are a lot of ‘little things’ that you can offer and that have a huge impact in your team’s perception of the company; furthermore, many bosses underestimate the cost of hiring and onboarding a new team member which is usually higher than giving your existing team a raise.
These are just some of the policies that we’ve implemented;
- No hours and work from home:
Hours and schedules are forbidden. You come in and leave the office when you please. Our only mandatory day is Tuesdays when we have a weekly team meeting. Also, most of the team work from home 1-2 days per week.
- No assigned desks or cubicles:
There's no 'Founder's Table' or 'CEO chair'. We are all equals here and our seating arrangements reflect that.
- Paid sick leave and vacations:
This is actually law in Costa Rica, but we don’t “have-to” do it being a US Company. Still, everybody gets 1 free day per month which they can of course accumulate. When somebody is sick, they just let someone know and often choose to work from home.
- Complete openness about company performance:
Everybody in the team has access to our revenue data. Everybody knows how much money we’re making each month and how much we are growing. I believe it’s fundamentally important for the team to know how the company is doing and more importantly, the impact that they are making in that growth.
- New laptops for everyone:
For security reasons we have an all-Apple environment. We provide all team members with a new company Macbook (which they often get to unbox themselves, if you’re into that sort of thing). We also give them the option to finance new personal iPhones and MacBooks with small monthly, no-interest deductions.
For a company budget, $1K-$1.5K for a new computer is often irrelevant in the grand scope of things, but it has a very big impact for most individuals.
- Free coffee, Coke and beer:
Because of reasons.
- Uber rides if they need to work late:
Anyone in the office after 7:30pm gets a free Uber ride home.
Again, the cost of all of these benefits is relatively small for our monthly operation, but I believe the combination of these small details does have an impact in our retention and in the team’s performance.
Set & spread the vision
I’ve never managed a team larger than the one we have today, so all this advice comes from this (very recent) experience. As you grow your company as CEO, you’ll find that you’ll be more and more disconnected from things that used to be your daily cup of tea.
All throughout Slidebean’s evolution my job as a CEO has changed a lot. These are just some of the tasks I was in charge of through the last few months;
- Feb-2014 to Jun-2014: Press and Business Development
- Pre-launch preparation and hustling press.
- Jul-2014 to Oct-2014: Fundraising (during DreamIt Ventures)
- A terrible use of my time. More on that failed process here:
Related Read: How we spent our first $250,000, lessons and mistakes
- Nov-2014 to Feb-2015: Customer Success & Marketing (500 Startups)
- We pivoted our company during this time. More on that here.
- Mar-2015 to Aug-2015: Growth Hacking I > SEM & Facebook Ads
- During this time we hired our first team member, who took over Customer Success to allow me to focus exclusively on Marketing and Growth.
- Sep-2015 to Dec-2015: Growth Hacking II > SEO
- During this time we hired our new Head of Marketing, allowing me to delegate SEM and self-teach myself SEO.
- Jan-2016 to May-2016: Team Managing
As the team grows, I no longer have time to get hands on in almost any task. My job now consists of work session with the different teams, to figure out stuff where they need my input and come up with new strategies.
Having had the chance to actually do many of the tasks and then delegate them, allows me to better understand and manage the struggles that they might come across, while being very aware of how much time things usually take to do. I also like to think that as a CEO you get respect points from the team if you are delegating tasks that you know how to do, and actually handled yourself at some point.
Hoping this is useful for for your own budget planning. Feel free to ask any questions in the comments.
If you want to take Slidebean for a spin, you can use this button to get a free trial: