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Why This Startup Turned away From Investor Funding

Why This Startup Turned away From Investor Funding

Wednesday, June 1, 2016/Categories: business-development-and-sales

Investor funding isn’t right for every business, even for those lucky enough to get an investor’s attention.

Regpack (@Regpack), a startup that creates automated registration software, is one such company. In 2010, the company was founded with external funding behind it, but CEO and founder Asaf Darash soon found investors to be to more trouble than they were worth.

We talked to Darash about his decision to give up that funding in favor of bootstrapping and why he believes it helped make Regpack a more successful business.

The following transcript has been lightly edited for clarity and length.

What aspect of external funding did you want to get away from?

I think there are two different elements that I thought were harmful in the funding process:

  1. The funding itself.
  2. How the company functions under funding.

Funding creates an external element that is looking to gain rewards in the short term. The objectives and goals of funders are often times different than the company itself.

In order to raise the value of the company, the company needs to reach hyper growth values. This is achieved by pushing a lot of funds into marketing and raising the cost of client acquisition above the lifetime value of the client. The company then constantly loses money regardless of growth. In turn, this creates a company culture where the clients of the company are viewed more as a money machine than a long term method to create relationships.

All this might not sound bad, but when the client acquisition is very high and the company is losing more and more money as it grows, it creates a situation where the higher management of the company is constantly dealing with funding rather than sustainable growth. Companies need to reach a unicorn status in order to be of value – a status that only one to two percent of companies reach. Additionally, the people who build the company from the outset slowly lose power over the company.

How did funding affect your culture?

The company starts to center on the company value rather than the product and the value proposition that it brings to the market.

I personally felt that, with funding Regpack, we had what I call “Silicon Valley fever.” Growth is the only thing that is important; the company seeks out venues that are the easiest to grow in and that are not necessarily the most profitable.

Employees do not have a high attachment to the product, the client, or the success of the clients since they understand that there is no direct connection between that and the success of the company. Most of the burden of success is left on the CEO and CFO. They need to show the “right stats” in order to get the next funding round. Funding is wrongly perceived as success.

What happened when you started bootstrapping?

The move from being funded to bootstrapped was anything but easy. We converted the funding to a loan (that we are paying off) and started to think only about long-term profitability. The main indicator for success was not the number of new clients, but the number of new clients that create real income.

We moved from “how much did we grow” in terms of employee count, new clients, and media exposure to how main metrics grew: revenue and profitability.

All employees know these metrics at a weekly, monthly, and annual level. The company becomes client-centric, and everyone understands that every action they do affects the bottom line in terms of their team members and income (income at Regpack is directly connected to these metrics).

In terms of our product, this also changed the way we worked. Instead of only asking, "Will this help us grow?" the questions for new features are (in this order):

  • Will this bring in more profitable clients?
  • Will this lower support cases so clients will be happier?
  • Will this help us bring client success faster?
  • Will this raise profitability?

I think that is a major change, and I am very happy with the decision to be bootstrapped.

How hard was it to start bootstrapping?

When we moved to bootstrapping, we had a little income already ($10,000 to $15,000 monthly) so we wanted to use that to build up. I doubt that without this minimal income it would have been possible.

We moved from our expensive offices in San Francisco to Oakland and worked from one small room. All employees were let go and the three partners worked without pay for six months. We worked 15 hours a day for the first year. It was a hard transition, but we understood that continuing as we’d been going would not bring us to the place we wanted to be five to seven years down the road.

We would talk to the clients once a week or biweekly in order to understand what they needed to stay with us for the long run. Our clients became the number-one source of new clients through word of mouth since they wanted Regpack to succeed.

Has lack of funding made your business more efficient with resources?

Absolutely, without a doubt. Every expense is examined; every new feature is tested for the questions listed above.

Asaf DarashAbout Asaf Darash: Asaf Darash is founder of Regpack, an online registration system used by more than 4,000 organizations worldwide including the NFL, Goodwill, and Stanford. Regpack’s technology is based on Asaf’s PhD work that dealt with computer data connections and networks. It serves as the foundation for the flexibility of the Regpack system.

For more on this topic, read “Is VC Funding Right for Your Business?” and “3 Things IT Businesses Should Do before Raising Capital.”

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