January 15, 2021
January 15, 2021
This blog is part our recurring series Friday's on Recur featuring Co-Founder of ASG Jake Brodsky, covering what’s happening in the market and common Founder questions about growing, selling and leading a SaaS business.
Among Founders’ 20 titles includes being a Chief Problem Solver.
Most of the solutions for these problems include spending MONEY. We all hear about the success stories of Founders going to Venture Capitalists (VCs) to raise and throw money at their problems, but rarely hear about the failures of which represent >95% of companies that seek VC depending on what study you look at. Overall, the VC market has done a tremendous job marketing as they keep people intrigued by the idea of entering a gauntlet.
For Founders who choose to bootstrap within the software landscape, they tend to focus on product. A good product will attract customers, right? Maybe. Technology has progressed at a pace in the last 5-10 years that majority of tech out there is sufficient enough to service its customer base. The vertical race is well underway where companies large and small are creating specific products for a specific customer base. Don’t believe me? Check out the growth in Categories tracked by Capterra that you can now advertise your product on (it’s grown from 200-750+ over the last decade with the number of total companies advertising on Capterra jumping over 20k).
Spending in a bootstrapped business is a zero sum game. If we spend $1 on product, we’re generally taking it from one of two areas: another expense category, or the incremental revenue added in the business, aka Growth. That second category is where I think most people don’t focus enough.
So how do we grow the business without investing in product? Invest in sales, or customer acquisition instead.
The beauty of sales is it can be formulaic where you can flex up or down the amount you’d like to “risk”. I put risk in quotes because I’ve had hundreds of Founders tell me that they view investing in sales as riskier than in product. They think investing in sales might not work.
But let me ask you, if you invest in sales and it doesn’t work, doesn’t that tell you something about the product? Wouldn’t further development on that product potentially just dig you further down a hole that you won’t come out of anyway? Some of the best companies in the world started with sales before they even had a product. If anything, sales can help direct where product needs to go.
Every bootstrapped Founder should also be its chief salesperson (new title of Chief Revenue Officer has popped up over the last few years). This CRO should be out hunting new logos. That will result, in an expected case scenario, new customers. New customers bring new revenue, which brings new profit, which brings an increased base of capital to reinvest.
For example, if a company with $1 million of revenue that operates at a 20% profit margin adds an additional $200,000 of revenue in the next year (20% growth to get the business to Rule of 40). There is an additional $180,000 (assumed 90% gross margin) to invest in the company. By one year of sales focused efforts, you end up with nearly the same amount of money you had available to re-invest the year prior, except this time you still have the original $200,000 of profit.
That investment can now be focused on product or customer success (non-immediate revenue generating, yet essential areas of the business) without having to drop profit down by $1. It’s hard work, but it’s “found” money that can be used to build a sustainable business.
So what does the other picture look like, where you invest in product?
Again, you have a $1 million revenue business and choose to invest all of it in product. You have $0 in profit. Without a sales effort, you probably grow at the rate of the market growth, which on average is ~3%. So the next year you have $1.03 million of revenue and still no profit. You have a better product though. So maybe the next year you can sell more? Wrong again. Product needs to be invested in again and you get stuck in a vicious cycle of reinvestment without ever seeing the ROI.
ROI in sales can be formulaic as I mentioned. Start small and track the return on that investment. How much did it cost you to acquire that last customer? How long do you expect them to be a customer and what is the amount of revenue that customer will generate over their lifetime? Does that equation produce a net positive ROI? Will it scale if you did more?
Those are the questions I’ve found myself offering to Founders who are thinking about how to tackle the next phase of their business. There will always be a need to invest in product. Keep product at a Minimum Viable level and focus the rest of your time on scaling up sales. It’s the hand the keeps feeding itself!