We built a capital efficient business at Yellowfin because we didn’t have a choice. But there many reasons why building a business that isn’t hugely VC dependent is a good idea.
The business intelligence sector has seen a number of recent acquisitions. This has been driven in part by the amount of venture capital that has been pumped into the space.
Crazy valuations have led to vast sums of capital being poured into businesses that simply can’t grow fast enough to drive a return on the investment. Rather than being driven by organic growth, many have found themselves dictated to by a 12 to 18 month investment cycle.
It’s a very different path than the one we’ve taken at Yellowfin. When we began 14 years ago we bootstrapped, grew organically, and became self-sufficient under our steam. We’re a “capital efficient business”.
You’re the master of your own destiny
Running a capital efficient business has given us control of our own destiny and strategy.
Whilst VC funded companies lose board seats to investors and public companies are beholden to their shareholders, we’ve been able to focus exclusively on our customers. This gave us a lot of flexibility – in designing our price models, thinking about our product roadmap, developing our sales strategy, and executing in all these areas.
We have the freedom to take a longer-term perspective because we’re not driven by fundraising cycles. We’ve can look much further into the future and build our product for that vision. By focusing on the long-term, we’ve been able to put in place strategies that ensure we attract and keep the best people who are in it for the long-haul.
So many businesses are driven by what they have to achieve in the next 12 months. These tight deadlines create boiler room pressure to deliver things quickly and that pressure can often force you to make mistakes – substantial strategic mistakes. While you may have achieved this year’s goal, perhaps you’ve now made it twice as hard to achieve your five-year goal.
Our business model allows us to continually give our organization little taps in the right direction rather than big jolts that can have catastrophic effects.
Investment can accelerate growth, but not product
In the business intelligence space it’s not uncommon for organizations to raise $150 million, $500 million, or even $700 million. But I question where the money goes because Yellowfin has achieved comparable revenue growth to those organizations with essentially no external capital.
My opinion is that during the startup phase there’s a lot of learning around the product that you’re building – how to take your product to market, what features it needs, and who your customers are. Money doesn’t really help at this stage when you’re iterating on the product. What really helps is live customers. No matter how much money you raise, you can’t buy customers who care about seeing you succeed. It takes time and hard work to build relationships with customers who will provide this early product shaping feedback.
Being a capital efficient business has its advantages
Being a capital efficient business is a less traumatic journey in many ways. That’s because taking external capital creates a cycle. When the money comes in there’s a surge in hiring and marketing activity. This is based on the other belief that this activity will somehow translate into revenues that will support the growing cost structure. When this doesn’t eventuate, the layoffs start and there is a real contraction in activities.
This cycle is very difficult to manage. It’s not great for employees, it’s not great for customers, and it’s typically not great for investors.
When you’re a capital efficient business you can grow at a rate that is manageable and doesn’t continuously disrupt the business. Our management team is focused on running our business rather than hunting for the next round of cash. We determine what we can afford to reinvest and grow from there.
Every single dollar we spend in our business is important and geared towards growth. We make choices based on how it will help Yellowfin grow, not because an external party has earmarked it for marketing. It’s a very different approach to creating, marketing, and growing a product.
This approach has made us adaptable and resilient. It differentiates Yellowfin from our competitors and others in our industry.
But there are opportunity costs
As an owner/founder of a capital efficient business, you’ve got to be prepared to sacrifice. You’re putting your money where your mouth is. You have to back yourself and wear the risk just to make the business fly. Many people aren’t prepared to do this, and that’s fair enough.
The choice to take this path to growth can’t be made in isolation, you have to bring your team and family on the journey with you. That means you need to have an open and honest conversation about the realities of starting your own business.
Bootstrapping was our only choice when we began Yellowfin, but that doesn’t mean it was ever a bad choice. Building a capital efficient business that isn’t reliant on VC funding has given us the freedom to grow our business the way we want.