Congratulations! You bootstrapped your e-commerce company and are feeling good about your progress. But now you’re in the position that you need to take that next big step. Many other e-commerce companies have reached the same juncture as you and have gone on to become juggernauts.
Shutterstock’s founder Jon Oringer, coded the first website himself and took 30,000 pictures in the first year. Chad and Eleanor Laurans co-founders’ of DIY home security seller Simplisafe, started the company with money from friends and family.
In this article we look at why e-commerce companies plateau when bootstrapping and how to take your next step, whether it be scaling your business to $100m, selling it, or optimising it so you can scale down your hours.
Why You Bootstrapped?
It is important to remember why you bootstrapped in the first place because some of those reasons will colour your choices as you move to the next stage.
For those looking to start their own e-commerce business, this will be a good summary of why they should bootstrap in the first place.
“Unless you absolutely need to raise a round of funding, the best way to start a company is to bootstrap it yourself”. Jon Oringer, CEO of Shutterstock.
Not every e-commerce startup has access to a world-class accelerator like Y Combinator, Founders Factory, or Rocket Internet with their long-list of potential investors and interested VCs. Most e-commerce businesses need to bootstrap.
Nobody wanted to invest in Simplisafe in the early years. It was going against big successful home alarm companies like ADT and was asking customers to install their security systems themselves – a market first. No wonder, the Laurans had to turn to family and friends for capital and soldered the early prototypes themselves.
2. Control and Retaining Ownership
Bootstrapping also ensures you keep creative, strategic and financial control over your business and maximises your ownership level as well as simplifying your strategic decisions.
Oringer loved being an entrepreneur and operating a lean ship. He liked to try all different roles within Shutterstock and loved learning by doing. He also liked retaining a big piece of the ownership pie which allowed him to become New York’s first Silicon Alley billionaire.
3. Quick Pivots
Nine out of ten businesses fail while those that survive often pivot into a different business model. Oringer failed with his first ten startups. Bootstrapping allows you to pivot faster. When you have taken money from investors or have borrowed debt, your investors or creditors will encourage you to persevere with your original idea longer than is necessary and will be sceptical if not hostile to any pivot idea. Investors however tend to be more flexible than your bank manager!
Bootstrapping got you to where you are. You probably have a strong position in your specific niche and one or two sales channels that work.
But to reach that next level, you need to invest heavily to launch new products, make strategic acquisitions, or open up new sales channels.
The bigger you get, the more capital intensive your next steps become.
What Is Next?? The 3 Strategies to Achieve Your Goal
What comes next depends on where you want to take your business. There are three main strategies you can take.
Do you want to be the next Shutterstock, start your next business, or maybe travel the world?
1. Scaling Up Your E-commerce Business
Next stop: $100m. You built your e-commerce business from the ground up and proved all the naysayers wrong and now you want to prove them wrong again by making your business a juggernaut.
To do this, you are going to need to bring some external capital in. This will help you grow faster by allowing you to scale up your capacity and to invest in market and product development.
You may also want to go on the hunt for acquisitions to move into adjacent products or markets, or to quickly increase market share.
Preparing for External Capital
Your focus needs to be on your revenue growth ratio. Show potential investors and your bank, the burgeoning potential of your business. Growth rates greater than 10 percent are eye-catching but it is also important to show a record of consistent and preferably profitable growth.
Total cash flow should be positive to demonstrate that you have created a sustainable business model. In the next stage as you use external funds to aggressively build up your company, cash flow may go negative but at the bootstrapping stage negative cash flow is a big warning sign with sirens wailing and lights flashing. 29 percent of businesses fail because of bad cash flow.
It is also important to focus on your LTV to CAC ratio. That is your customers’ average Life Time Value over their average Cost of Acquisition. The higher the ratio, the more attractive your business will be to potential lenders or investors.
Debt vs Equity
Debt and equity have their advantages and disadvantages. The best choice for your e-commerce business will depend on whether you can bear the risk of regular payments on debt versus the wisdom provided by equity partners and the greater flexibility for future funding.
Debt has five main advantages over equity funding:
1. It is temporary. Once you have paid back that debt, you never have to give money to the lender again. In contrast, equity is forever (or until bought back). Each year you will have to distribute profits to the shareholders in your business.
2. It is cheaper. Being temporary also makes debt cheaper relative to equity. And as your e-commerce business grows in value, equity will become more and more expensive as you pay out higher and higher amounts of dividends.
3. It is tax deductible.
4. Less interference. Lenders typically will not tell you how to run your business, although they may put some restrictions on some activities. In contrast, equity partners will believe it is their right to interfere.
5. You maintain your level of ownership. As the rounds of equity raising increase, you can watch your ownership dilute down and down.
But Equity has the following advantages over debt:
1. Default risk: You are obliged to make regular payments on your debt no matter how your business or the general economy is faring. With equity you only have to pay dividends if you have made a profit and you are not retaining the funds in your business.
2. Greater flexibility for future borrowing: Debt sits in your liabilities and makes it hard to borrow more money in the future. In contrast, raising equity will lower your debt to equity ratio, which will look more attractive to potential lenders. If you want greater financial flexibility then choose equity as your first option.
3. Wisdom: Equity partners, particularly angel investors and VCs, will be able to tap into deep wells of experience to help your business grow and overcome difficulties. They will bank on their experience and ability to unlock value in your company that you could not do alone.
4. Networking: Equity partners are incentivised to introduce you to good employees, mentors, and other investors. Lenders have no such interest. Lenders help once (or each time they provide funds); equity partners will keep on helping.
What type of Debt Financing?
Banks remain the main option but they are no longer the sole reputable option. Many of the larger e-commerce and payment platforms provide a limited debt financing option. This includes funding through payment channels or payment processors like Shopify Capital, Stripe Capital, and Amazon, but also dedicated revenue based funding providers like our partners at Velotrade.
What Type of Equity Financing?
As a growing e-commerce business your choices for raising equity used to be limited to searching for potential partners and angel investors using your own or a broker’s networks. VCs, IPOs and SPACs are further down the road.
More recent options include equity crowdfunding (up to $5 million annually in the US) and Security Token Offerings (STOs) (up to $75m in the US).
Equity crowdfunding is the raising of capital on platforms like WeFunder, StartEngine, and SeedInvest. They are like Kickstarter for small businesses.
STOs are a new form of financing that uses Distributed Ledger Technology to issue tokens rather than certificates to shareholders. They can be issued on crypto exchanges but many of the world’s largest stock exchanges are also developing security token exchanges. They are much cheaper than IPOs and can be used to raise smaller amounts. The downside is that the secondary market is small at this stage.
Finally, there are new funds that specialise in providing equity financing to bootstrapped, cash flow focused businesses such as Calm Fund and Smash.vc.
Regardless of where you find your funding, good books will get good looks! Make sure you have your financial accounts in order: clear and well presented. After an initial meeting (or sometimes even before) this is where potential investors will base their lending decision from.
2. Selling Your E-Commerce Business
Maybe you have enjoyed the ride of bootstrapping your e-commerce business but are ready to sell and start your next business or try something new.
To maximise your sales price you should focus on optimising your EBITDA. This is commonly used for valuing companies because it provides a snapshot of your business’ operational profitability. It is also important to keep cash flow healthy.
When selling your business it pays to have your books in order. Questions on the financials are one of the most common reasons why deals fail or valuations being lowered..
If you are looking to sell, the good news is that it has become a seller’s market in the last few years. There are now many funds and aggregator companies looking to buy thriving e-commerce businesses just like yours.In 2018, Simplisafe sold a controlling interest to Private Equity firm Hellman and Friedman.
3. Optimising and Scaling Down Your Hours
Maybe you want to keep your business at its current trajectory and don’t want to sell or scale to $100 million revenue. You’ve grown it into a profitable business and now you want to use that stream of profits to bootstrap your next startup (the perennial entrepreneur) or to simply travel around the world (lifestyle cash cow)!
In this scenario, the goal is to optimise operations while you lessen your daily involvement with the business.
In terms of optimising operations, you will focus on maximizing operational cash flow, while managing your gross and net margins.
When it comes to the LTV and CAC ratio, the higher the better. Do not spend on customer acquisition unless you are sure that their lifetime value is sufficiently high.
In order to downscale your hours, identify the minimal personal involvement your business needs and the maximum you are willing to give. For everything else, hire someone or outsource it to a freelancer, SaaS, or outsourcing firm.
Maybe no one will ever do the job just as good as you, but they may actually do it better! But as you’re stepping away from daily operations, it becomes even more important to manage your team based on the right KPIs and management reporting. You need a dashboard to provide relevant and up to date insights that will allow you to quickly identify and breakdown problems and opportunities.
Bootstrapping is a personally and financially rewarding experience, just ask Shutterstock and Simplisafe. And once you have established your business, your future options open up. But whether you choose to become the next e-commerce juggernaut, or you want to sell, or downscale your involvement, having your books in order and managing the right metrics is critical. If you need some help with your books then we can help there too or checkout these cloud-based bookkeeping services. The best way to monitor key metrics is to have Insight Matters develop a Game Plan for you business with a custom dashboard that makes it easy for you and helps you zero in on your goals.SCHEDULE A FREE CONSULTATION