Categories: M&A and Financing
How to Start Your Own Software Company: 8 Bootstrap Tips from ShareFile's CEO
by Bruce Hadley, Founder, SoftwareCEO
Raleigh, NC-based ShareFile has racked up some astounding gains in the past four years: 2,403% revenue growth, good enough to earn the company the #104 slot on the current Inc. 500 list of fastest-growing private companies.
ShareFile founder and CEO Jesse Lipson says that in 2006, when the company logged $169, 530 in sales, the employee count was two: himself and one other person. ShareFile now has 35 employees (plus seven part-timers), and expects to add another 10 this year. 2010 revenues are on track, Lipson says, "for another really big growth year."
ShareFile's namesake product, launched in late 2005, offers subscription-based file transfer and sharing and is targeted to business users, with 12,000 corporate customers and 1.5 million users worldwide. While ShareFile runs horizontally across all types of businesses, last year the company introduced Virtual Data Room, specifically targeted to the needs of the financial, legal, and bio-tech industries.
Amazingly enough, ShareFile has accomplished all of this without a penny in outside funding -- not even the entrepreneur's usual standbys, credit cards and home equity loans.
How, you ask? Read on.
Tip #1: Fund yourself through services
"Before starting ShareFile, I had a web development company that did service work," Lipson says. "That was a way to bootstrap this one. I got to learn a lot and get paid for it, plus get some cash flow.
"By being in the services world, we could see what problems customers ran into in the real world, and get paid for it. At the same time, I knew I was interested in products, and in running a product-based business.
"So, we split the company into three parts – one focused on services, one on online ads, and one that I spun off to focus on products, which became ShareFile. For two years, I ran that company and didn't take a salary from it, but I was doing a little work in the online ad company, so was able to get a small salary there."
Still, Lipson admits, it can be tough to scale a services company. "You might have 100 customers, but $3,000 or $5,000 a month in revenue doesn't go a long way against server costs, development costs, and everything else."
Tip #2: Turn a service into a "bridge" product
"At the time of the spinoff, we had one product that was generating some monthly revenue," Lipson says. "We used that revenue to fund ShareFile development and marketing and development."
That other "little" product was targeted to online ads, and had only one customer, albeit a big one: AOL.
It was essentially a custom product for AOL, Lipson says, and, surprisingly, AOL did not ask for an exclusivity clause. "But we decided to not market it," Lipson says, "because we felt that we didn't have experience to sell into the enterprise space."
Tip #3: Choose your market based on what you know
With the sale to -- and ongoing revenue from -- AOL, one might think ShareFile was perfectly positioned for enterprise sales. But it isn't that simple, Lipson says.
"The difference is that since we started in small business space, I had much better intuition as to what customers needed in security, support, and product; enterprise is just a very different game.
"Plus, my own personal philosophy is that the closer you get to enterprise, the more it becomes a service. As I said, I really did want to move away from the services business.
"Finally, sales costs are much higher on the enterprise side. The AOL product still exists, but we don't have any customers using it. At the end of 2006, AOL changed their business model and decided to become more of a portal, so their need went away. But we had a good year from it."
Tip #4: Beware the attached strings of VC funding
Much of Lipson's insistence on bootstrapping came from his first-hand view of the other side: "The first company I worked for was a venture-funded startup, so I saw how that worked," he says.
"I wanted to start a company, but didn't want to go the VC route. Those startups that took venture money just didn't seem to be running their companies according to the principles of gaining and listening to customers; instead, they did what the VCs wanted.
"I've watched a lot of venture-funded companies, and it seems like VCs are often chasing the latest trends. If mobile is hot, they want you to integrate mobile into your product line. If social networking is hot, they want you to integrate social networking.
"But while they're pushing you into these new hot trends, your actual SMB customer is a five-person graphics firm in Illinois. We want to be really focused on what our customers want, rather than what our investors want."
Tip #5: Know the difference between growth and responsible growth
As expected, ShareFile's track record of late has attracted a lot of investor interest. Lipson still isn't interested. "A reason for this is one of our three core values: responsible growth. We've tried to stay focused on business fundamentals.
"I would like to think -- and it's an example I use when talking to people -- that if we were a bank or mortgage company in 2006 or 2007 we wouldn't have fallen prey to taking on sub-prime mortgages. Our refusal to take outside funding helps us stay out of a bubble mentality.
"When you take on external funding, by definition, you're expected to spend it, so by definition you're going into the red. I just didn't want to do that.
"Another reason is that, from my experience in 1999-2000 watching the free fall of the dot-com bubble, I knew what could happen with irresponsible growth. We have stayed out of trouble, and we have full control over our company."
Tip #6: Practice (don't preach) being a customer-centric company
ShareFile's second core value, Lipson says, is to be a customer-centric company -- and he fully intends that to be a daily practice rather than a platitude.
"I read every single support ticket that comes in," he says. "Not only do we listen to our customers, it's not uncommon to get a suggestion from a customer and a few days later roll that suggestion into the product.
"This doesn't always happen, of course -- we don't incorporate everything -- but we have several customer testimonials where they say, 'Wow, a few days after I made this suggestion, the feature showed up in the product.'"
Tip #7: Measure, test, optimize, publish, repeat
"Our third core value is to be data driven," Lipson says. "We're extremely data focused. We test and optimize everything. We have a bunch of big LCD televisions in our offices with sales numbers, number of customers signing up, the health of our servers -- all the key metrics for our business."
In addition, ShareFile follows the Net Promoter philosophy, as originally created by Fred Reichheld of Bain & Company. Net Promoter is a metric for tracking customer loyalty, and Lipson says he's adopted it as an important discipline.
"We send out a very simple email to a random sample of our customers every month," says Lipson. "There's just one question: 'How likely are you to recommend this product to your colleagues?' It's a scale of 1 to 10. Plus, there's an optional text entry box where they can tell us why they gave us the rating they did."
In the Net Promoter system, a customer who gives a rating of 9 or 10 is considered a "promoter," a rating of 7 or 8 is considered "neutral," and any rating 6 or below is considered a "detractor." To come up with your score, take the number of promoters, subtract the detractors, then divide the result by your number of responses. Thus, the final score can go from negative 100 to 100.
So, for example, if you get 100 survey responses, and 40 people give you a 10, and 60 give you a 7, and 10 give you a 5, you'd subtract the 10 detractors from the 40 promoters, for a net 30. Divide that by 100, and you've got a percentage score of 30.
ShareFile sends out about 1,000 surveys per month, and their response rate is running around 10%. "We can slice the data a number of ways," Lipson says. "For example, how we're doing in particular industries, how company size or number of users might affect our score, and so on.
"We've never released our score publicly, but I will tell you this, by way of comparison: Rackspace is a company that uses Net Promoter scoring, and they pride themselves on being highly, fanatically customer-centric. The highest Net Promoter score RackSpace ever got was 40, and we're well above that."
Tip #8: Don't let bootstrap mode make you nearsighted
Self-funding, especially from real revenues, has its obvious attractions. But there's a real risk, Lipson says: "There's one big danger of the bootstrap mode, and it happened to us: You invest everything you have into things that are directly related to sales.
"In the past, we'd only spend money if we could directly track the ROI, and that comes out of the mentality of scarcity. You don't spend what you don't have.
"Because of this, we under-invested in marketing and other roles that are not necessarily directly related to immediate ROI. So, over the past six months, we've changed that; we've now got a lot more focus on marketing, PR, and other activities that will increase our profile."