Serial Entrepreneur & Enterprise RIA Pioneer

Jeff Haynie

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How to fund your startup from customers

Russell Jurney’s blog post has spurred me out of my blog-laziness to talk about something I’m passionate about - starting companies and helping entrepreneurs. If you haven’t read his most excellent post, titled “The California State of Mind” - stop now and read it.

As a follow-up from his post, I wanted to share something not widely known in Atlanta circles about how Nolan and I funded Appcelerator. Sure, everyone by now around town has heard that Appcelerator was funded by Storm Ventures, a well-known Silicon Valley VC. They’ve probably also heard that we moved Appcelerator from Atlanta to Mountain View, California last summer - almost a year ago now.

But that’s not the full story and I’d short change you if I don’t tell you the rest of the story. How did we get there? So, you know that we moved and that we raised money to follow our dream. But, how did we get there and how did we survive before that?

We had been in business almost a year and half before we raised money and had almost 15 employees when we raised money. The other little known fact - and for good reason - is we also generated just shy of about $1.5M in revenue in ~12 months *before we raised money*. Yes, our little ‘ole poor startup in Atlanta had real revenue from some real customers. Mind you, our revenue was largely services based and was revenue we generated by helping a few select customers implement our technology.

That’s the rest of the story - the back story to the funding. And there’s a lot to learn from that. Of course, as a small private company, I’m not really a big fan of talking about revenue. It’s just not usually fruitful to do that for a lot of reasons. However, it’s easy to misread the situation when you talk about our situation and your situation and the greater situation of the Atlanta startup scene. That’s because, most entrepreneurs get fixated on raising money to build their business - that they forget about what matters: solving real problems for real customers and translating that into cash. Remember the goal of that wonderful startup? Yeah, create revenue. Your cool product idea sucks if it doesn’t somehow, someway, create a path to value - which most of the modern world ultimately weighs as cold hard cash. Facebook’s doing it. Google’s printing it. Even Yahoo, that company we all thought was “dead” is generating billions of it.

The new VC is the old VC and it’s got the best terms on earth: cash.

No equity and no board meetings required. Just build something that they need and they’ll pay you for it.

Do that and you’ll transform your startup. You’ll have lots of options. Worse case, you’ll have a lifestyle business. (I’ve heard that 2 cadillacs and a boat is better than an office at the ATDC these days.)

So, I’m sure I’ve made it sound easy. Well, solving a real problem for a customer that will pay you isn’t always easy. But, guess what, if you can’t do that, you can’t raise money outside of the Bay Area anyway - give it up. And, guess what, the myth is that Valley companies don’t make money. Well, some don’t, sure. But, the pressure here to perform, to measure, to execute … much much much more than Atlanta. Steel sharpens steel.

Here’s what I did to make it happen

I was very, very fortunate to have a few trusted customers that believed in me. That’s right, not too much different than investors. They bought my vision and believed I could help them - and that by doing that, they would also help me (key point). They were willing to take a risk on me and what we were trying to accomplish and that there would be a mutually beneficial outcome.

The mutually beneficial outcome was that if we could help them solve some problems at a certain price and within a smaller than usual timeframe, it would be worth it to them (read: they would pay money). In trade, it would help us improve the product, work to refine our value proposition and give us cash. I love working hands-on with customers because there’s where it matters the most. It’s not as fun as just getting a pile of money to spend and getting in a nice little bubble… but trust me, if you’re not working with customers, you might as well assume you’re doing it all wrong - because you are.

We also tried on purpose to limit how many customers we worked with and what types of deals we did. We were small and wanted to keep it that way. In our case, we didn’t want to build a big services business. We wanted to continue to generate enough incremental revenue to hire 2 more engineers and still have 4-5 months of cash in the bank in case things slowed down. We funded almost 15 souls through around 5-6 full-time billable employees (granted, a number of us were working well over 70-80 hours per week on multiple customers).

But, we couldn’t have done this if we didn’t have great customers that helped. And they were willing to take risks. And we’re forever grateful for that. (One note, our customers weren’t all in Atlanta and in fact, we covered Boston and another area too).

So, why did we raise money?

Nolan and I both have experience in services companies and both have started services companies before Appcelerator. Most service companies are awesome lifestyle business. They’re also feast or famine and very difficult to scale. We’re software guys. I like software - a lot. So, we viewed our strategy as a way to work with customers to help us develop the product and to give us enough runway to figure out how we could scale the product (and really, what the product we wanted to build would be). It always takes a lot longer from the beginning to create “the product”.

We got to a certain point (read: revenue) that we had a choice. We needed to either ramp up considerably given the size of revenue and potential pipeline of new services revenue, or, we needed to raise enough capital to allow us to transition out of the services business to focus on the product full-time. It’s almost impossible, in my opinion, to build out a real product and do services at the same time. We knew that.

So, we had options. I had experience raising VC money and I had contacts. Once we got to a certain level, our advisors and Nolan and I started thinking that it would be time to think about bringing in outside capital. We also were lucky on the timing. We timed things just right, and that’s pretty hard to do given where the economy ended up just 6 months later.

My advice to you is simple. And, it’s a slight twist on Russell’s.

Either:

1/ Move to the Valley and shut up.

2/ Stay in Atlanta and stop complaining.

In either case, you’ll need customers. Fund your startup with customers. Build something that customer’s need and will pay for. If you do that, #1 or #2 really makes little difference in the scheme of things.

(P.S. This advice applies to everywhere else outside of the Bay Area too).

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Jeff Haynie is co-founder and CEO of Appcelerator. He started Appcelerator to provide a true open-source solution to enterprise RIA and SOA-based services development, after growing frustrated by the limited options and complexity in other solutions through his own development work. Prior to starting Appcelerator, Haynie served as co-founder and CTO of Vocalocity and CTO of eHatchery, an extension of Bill Gross? ideaLab. Haynie is an expert software developer and entrepreneur. Haynie has been active in standards development, as well as a contributor to open-source projects, including early work on JBoss. For more on Jeff Haynie, visit his blog at http://blog.jeffhaynie.us.