Securing The Bag As A Black Founder PT 2: From $0 to $4 Million ARR in 32 Months
What You Will Learn in This Post
I will share hard numbers, actual decisions, and strategic reasoning with you so you can learn from what my cofounders and I did and see that it is OK to take risks where you don’t know for sure if something is going to work out. I will not discuss the unique operating decisions or industry dynamics because they are not important to embrace the spirit of our experience so that you may be encouraged to go boldly to build your vision. You will learn that there is no clear path to $4 MM in ARR but that it is possible in a short period of time with some luck mixed with good execution and risk-taking. I will dispel the fairy tale narrative that abounds where starting and growing a company looks so glamorous. I will also once again show that debt is not always a bad thing.
As I described in detail here, our company Nice Healthcare reached $1 M in ARR in the 15 months leading up to January 2019 and we had only raised $350,000 from Indie.vc in May 2018. Our next goal was to get to $4 M in ARR as soon as possible. The strategic reasons for getting to this milestone were manifold. Here were the top 3 reasons:
- Pay for planned investments into the company for technology and product enhancement
- Hire more people to take tasks away from the founders which would result in better customer experience and employee experience
- Paying the founders a good salary and giving other team members raises
I will now go through these 3 points one by one and describe the why, the what and the how.
First a Little Context
These details will help keep things in perspective without me sounding like I am trying to sell you on my company. Nice Healthcare is a tech-enabled service in the health care industry. Highly scalable, but unlike pure tech, margins are in the 40% — 60% range vs the 70% + range. Our revenue is recurring on annual contracts that are paid quarterly. Our typical client is an employer with 500 or fewer employees. Most of our staff are clinicians (not contractors), so the salaries are very high, and they do not work in the “back office”, they are strictly patient-facing. By back office, I mean sales, operations, customer support, finance, HR, etc. Also, we wanted to do all of this while remaining cashflow break-even because we had no plans to raise additional capital ever again. This was an ideological stance — not a data-driven or strategic stance — we had taken due to the negative experience we had with VCs in my previous company; I detail that here. I cannot emphasize enough how much we wanted to avoid raising additional capital.
Taking a Risk and Investing in the Company Before We Had the Money
Sometimes one must step out in faith to achieve their goals. My cofounders and I did this with the tech component of our business. From launch in October 2017 to January 2019 we had relied on third-party applications combined with scripts I had written in Google Sheets and Zapier to run our tech-enabled service startup. We always knew we would need to build our own technology to fully realize the value of what we were building. The problem was we did not have money to hire developers, we did not have money to hire anyone for that matter except for clinicians. Still yet, with what was left of our $350,000 investment from Indie.vc we hired a local firm called Cloudburst to start building our technology platform in November 2018. If you are tracking the way too many dates I am throwing around, you may have noticed this is actually before we hit our first goal of $1 M in ARR! We had to take the risk because we knew we could not continue running the business on our homegrown tech system. Cloudburst was very flexible in working within our budget and also hitting our go-live date of January 21, 2019, for the base version of our platform. We believed strategically we needed to do this to ensure future growth for 2020 which was over a year away, but we could see the trajectory we were on and needed to plan ahead. But the pain was real, and we had to do some risky stuff to make it work. Every day looking at our checking account was like staring down the barrel of a loaded gun.
Cash was incredibly tight; the founders were still not making good salaries and we had not given any staff a raise in over a year. I had to check the bank account multiple times each day. To top it off, the founders were still working crazy hours because we had to do everything without a full team to work the “back office”. The initial budget for the first few months of development with Cloudburst was $78,000 (this was a huge amount to us), money that we had to scrape to get. Genevieve one of my cofounders took out a personal loan in the amount of $35,000. I also got our Blue Vine line of credit increased from $20,000 to $75,000. Blue Vine money is very expensive and very risky. We had not used it but once before, but now we needed it and used it regularly. I would sweat bullets each time I drew on it and would have to fight and be very creative to pay it back since the payments were weekly. One really big and unplanned boost is that we signed our largest client to date in November 2018 and they paid the whole year in advance in exchange for a small discount, this provided $100,000 overnight! It did not stop there, at the last minute in December 2019 we were able to convince our distributor to pay us $200,000 upfront for exclusive rights to distribute our service in our home state of Minnesota. We were so happy! But it was tempered by the fact that we were quickly reaching the point where we absolutely needed to hire more back office team members. All this up-front cash was barely putting us at cash flow break-even and we would burn through it well before the end of 2019. But before 2019 ended we needed to invest at least $200,000 more in technology in addition to another $100,000 in service enhancements.
Taking a Risk and Hiring Before We Had the Money
My cofounders and I would have meetings every other month or so where we would go through the strategy and projections in detail, each session was 3–4 hours. (We are a fully remote company and the three founders live in three different cities hours apart) These sessions were painful. We shared everything with each other to make sure no one was about to go A-Wall due to stress and pressure. While launching the base of our technology in January 2019 it was becoming obvious that we could not get much further without hiring about 5 key back office team members. The bi-weekly cash flow model was and is to this day the law of the land in our business. The model was projecting that if we were lucky, we could make only one of the 5 needed hires. One was better than none, so we did it and hired our first non-clinical team member in May 2019. Strategically we had to do it to maintain a high level of service to our end-users and our employees. Not being able to hire the remaining 4 that we knew we needed was a difficult pill to swallow while the three of us co-founders were not making good salaries and working insane hours, we knew our current path was not sustainable. It caused us at each meeting we had to talk about whether raising more money may be good for us despite our reservations. These were delicate conversations but raising kept on coming up and we started seeing how it could really help the company maintain its growth rate. Still yet, we never really openly agreed that we should.
We had raised $350,000 from Indie.vc in May 2018. The plan was that it would be the last money we would ever need. In our monthly calls, Bryce Roberts the managing partner at Indie.vc was sensing the stress I was under and also sensing the success the company was on the verge of. Starting in May 2019 around the time we made that first non-clinical hire, Bryce would lightly mention that if we ever needed more cash, he would make it happen with no hassles as it was clear we were good stewards of the company’s resources. I would always brush him off and say we don’t need it, that we are sticking to the plan. But as I detailed above, the plan was beginning to look less attractive and perhaps even harmful to the company. In July 2019 I finally was honest with myself and recommended to my cofounders that we take more money from Indie.vc and that it will for sure, this time, be the last money we need. Genevieve and Allison agreed, so I Slacked Bryce and said, “let’s do it”. And we did! It was super easy. While I was in the wilderness of Northern California with my wife on August 7, 2019, celebrating our 15-year wedding anniversary, Indie.vc wired the money. I can’t stress enough how lucky we were and are to have a partner like Indie.vc. I wish every company could take money from them; I really mean that. The fact that many founders do not have access to an Indie.VC like we did is not lost on me, I know the privilege we have. I am not a better founder than anyone else, but I did have connections to people like Indie.vc and a good relationship with Bryce that allowed Nice Healthcare to flourish. With an additional $750,000 in the bank we were able to make those 4 hires (VP Growth, 2 Customer Support, and 1 HR) we knew we needed in September and October of 2019. On top of that, we now had the courage to pay the founders good salaries and give the original team members raises which of course boosts morale.
Taking on More Risk, We Can’t Help Ourselves
My cofounders and I are willing to take on risk. One of the key things we were able to do with the extra cash was expand out of our home state of Minnesota into two more states, Utah and Nebraska in Q1 2020. Without the additional funding, we could not have done that while also staffing up the company and investing in technology. And in a true circular fashion, if we had not staffed up the company in the Fall of 2019 and started investing in technology in Winter 2018 using our own money, we could not have operationalized two market expansions in Q1 2020. It just would not have been possible. The market expansions are very expensive because it takes about 12 months to get each new market to break-even on a cash flow basis. When the two new markets launched in March 2020, we also hit our forward-looking revenue goal of $4 M ARR while still operating at cash flow break-even. We were so busy with the market launch, onboarding new staff, and deploying new tech features every two weeks that we did not celebrate. I know we will get around to it, but in March 2020 all we could talk about was our new goal of $10 M in ARR. I am hoping one of my next posts will be $0 — $10 M in ARR in XX months. And perhaps by then, you will have your own story to tell.
Founders of companies have to be good at many things in order for their companies to survive in the early days. Having many skills is the only way to survive until you reach a milestone such as product-market fit, profitability, or getting funding. After certain milestones, you probably should find people better than you at the myriad of things you have been doing. However, there is one thing that I believe founders should retain and continuously improve on. That thing is the ability to always be reevaluating your plans, assumptions, and hypotheses. The plan you set in the beginning whether founded in data, or in ideology, is unlikely to survive contact with the real world. I firmly believe if you are working on a company right now or planning to work on one, that you will succeed as long as you stay committed to solving a valuable problem and keep in mind that the correct plan will reveal itself out of the plan you think is the plan.
This post was originally published by Thompson Aderinkomi on Medium