With so much VC money going around in recent years, profitable startups may seem like a dying breed — but that’s far from the truth. Many self-made startups have gone on to be wildly successful. Look at companies like Atlassian, Zoom and Squarespace, which went public just this May.
This path may be longer, and it’s one that comes with its own challenges and advantages, but it’s an equally viable method for building a thriving business. In my own experience, after raising an initial round of only $2 million back in 2012, Plivo spent the next nine years bootstrapping the company with the goal of early profitability.
For us, this has been the right path to growth. Rather than relying on funding, we focused on building strong fundamentals before looking to scale. For other entrepreneurs that want to take a similar approach, here are four strategies to follow to build a profitable business from the start.
4 Strategies for Growing a Company Without VC Funding
- Talk to your customers to find product-market fit.
- Keep non-VC fundraising professional.
- Use the Rule of 40 to guide your spending.
- Plan to increase your net expansion rate.
1. Talk to Your Customers to Find Product-Market Fit
As SaaS, B2B and even B2C markets become increasingly crowded, you need to carve out a unique niche for your business. Find a problem that’s facing your market and solve it in an innovative way.
To get a full understanding of our customers’ problems, we employed one essential tactic: talking to them. As we built a business communications company — the industry we’d worked in for years — we already had a strong network of potential customers we could have conversations with to understand their pain points and learn about opportunities for optimization. You may find other ways of getting this kind of customer feedback, such as gathering insights from analysts or working with a consultancy to arrange competitor interviews.
In Plivo’s case, by speaking with our customers, we found that embedding communications like voice calls and SMS into web and mobile applications was a real pain point. So, we set out to make building a telecom tech stack easier. In 2011, before the company even incorporated, we released an open-source framework that abstracted and exposed the underlying telecom layer via APIs.
As we talked to our customers, however, we learned that they also struggled with carrier relationships and wanted to host all their communications in the cloud. They told us that if we could do this, they would pay for it. So we iterated, built out those capabilities, and by the time we incorporated the company in 2012, we had our first paying customer on day one.
When it comes to taking in customer feedback and building product roadmaps, the key is to notice patterns and trends in your conversations with customers, conduct analysis and forecasting, and do a gut check to determine the right trajectory for your business. With this thoughtful approach, your customers’ insights become one of the most valuable tools you have to find a true product-market fit.
2. Keep Non-VC Fundraising Professional
If you need funding early on, try to raise from friends and family or angel investors so you can maintain flexibility and continue to experiment. This approach will allow you the freedom to refine your product-market fit without being beholden to your board.
If you’re raising money from personal relationships, though, keep in mind the importance of treating the process professionally. Set a consistent communication cadence for investor updates, including any pivots you make early on in the business. This ensures your investors feel engaged and in the loop on what’s happening with their investment. That way, you can maintain long-lasting relationships built on trust, transparency and mutual respect.
And don’t get lax about complying with fundraising and reporting requirements. For one thing, if you hope to scale and grow your company one day, compliance and clarity of documentation is vital from day one. Be sure to set a defined price for your fundraising round, establish how much equity and stock investors get, and keep good records of who gave money and how much. Without this solid foundation, you can run into issues later like future VC funding falling through or being unable to sell the company because your paperwork is a mess. In addition, keeping your fundraising structured and well-documented can prevent legal issues in the event that personal relationships sour or someone chooses to sue your company.
Also be sure to follow these best practices to streamline the fundraising process. Structure your company as a Delaware C-Corp, which is the most convenient type for this endeavor. Split equity among co-founders as equally as possible to prevent disputes. And use an affordable firm to help you manage your startup legal paperwork. We used Clerky at Plivo, and it was tremendously helpful.
With these tips, you can raise without relying on VC funding and hold onto your freedom to experiment without needing board approval so you can focus on building your business without restriction.
3. Use the Rule of 40 to Guide Your Spending
We all know how important reducing your burn early on to get to profitability is. To get and stay profitable at Plivo, we employ the Rule of 40 as our guiding metric. This rule says a company’s growth rate percentage and EBITDA percentage should add up to about 40 percent. It’s all about finding the right balance. And at Plivo, we didn’t want to grow at all costs if that means burning through a lot of cash and jeopardizing our profitability.
Our formula then and now is simple: We make more than we spend. Early on, we were frugal in our paid marketing framework, taking a page from Jeff Bezos and his principle of frugality at Amazon. Our cost of customer acquisition was no more than what we expected to make from that customer within nine months. We didn’t invest in anything for the company until it was necessary. In practice, this meant we acted only when something was at the point of breaking or it was painfully hard to manage without a new solution. We worked out of our own homes for a number of years. Office space came later, as did paid marketing, a dedicated sales team, and an official customer service function.
After all, just because there’s money in the bank doesn’t mean you should spend it. Frugality is key for new founders looking to build a strong, profitable foundation before starting to scale.
4. Plan to Increase Your Net Expansion Rate
The strength and growth rate of your customer base is the truest measure of your business’s performance.
As you know, one of the most critical metrics, once you hit $1M-plus annual recurring revenue, is net expansion. Depending on your market, 100 percent-plus net expansion at this stage is considered great. Achieving this metric not only proves that your customers love your product, it also enables you to spend more to acquire new customers.
Without a solid net expansion rate, building a business is like bailing with a leaky bucket. So, it’s crucial to understand which segments are likely to churn, minimize that churn and, at the same time, find new possibilities to expand by cross-selling or upselling your customers.
The key here? Get feedback from your customers throughout their journey with your product and your company. Have those one-on-one conversations, conduct surveys, pay attention to your Net Promoter Score and other satisfaction metrics. The point is to get a hold of the qualitative and quantitative data that can tell you what’s going on with your customers and why. Do you have a churn problem? Is it revenue churn or logo churn? Are customers having problems with the product or with adoption or usage? Talk to them and find out, and then use that feedback to optimize your offerings so you can reduce gross churn and boost new revenue.
Using these tactics at Plivo, our net expansion has been over 100 percent since the early days. As a platform business, this has been very helpful in our growth. We get to grow as the customer grows, which has helped us achieve long-term profitability.
Once you’ve established these fundamentals and have a good product market fit, VC money can add fuel to the fire of your growth. But until then, keep bootstrapping and focus on building a viable, profitable business.