It’s a hard balance being in the Software/SaaS (Software as a Service) industry. We can put lots of time and focus into systems and development, but sales may suffer… or we focus on sales and then development suffers… ProActive Software (www.proworkflow.com) has bootstrapped (growth through no funding, and only sweat equity) to profitability thus far and this is fun to a point however if the intention is to bootstrap through to profitability as we’ve done, the issue is 100% correct allocation of resources between development, sales, systems and marketing.

We don’t have a truckload of resource, rather a smaller dedicated team and no massive flash offices (ProActive is largely a virtual team). There are a few contractors globally but we do A LOT with what we have.

We’re up to a good number of dedicated servers in California and one in NZ, and are in profit. So the years of hard work have paid off. Revenue is looking healthy and we all earn good salaries (founders work 16hr days).

The biggest problem I see in both the local and global market is the high number of software/SaaS companies trying to scale, but using (old school) high inertia sales and marketing ie: people having to hard sell, or visit companies premises to sell. Also, trade shows and exhibitions, travelling etc…

All this is fine (if you can afford it), but the underlying business model HAS to be low inertia, otherwise, it’ll scale, but so will the costs and expense… and profit will never come.

To be in New Zealand and compete in the SaaS market globally, there needs to be minimum expense per sale, and as the revenue grows, the margins need to expand as well.
If your business’ margins shrink with scale, you’ll hit a lid and have no profitability long term… Expanding margin mean you can scale faster as you grow.

Some companies I know of think that ‘Speed to market’ is the key. You must grow fast! – wrong – it’s a myth! Long term sustainability is the key. Be smaller and healthy rather than rush things with the wrong model only to find out that you’ve scaled up too fast on a bad model and the only path to profitability is to take round two funding (and lose more control).

We track our competitors (as it’s a competitive market) and probably 20-30% of the competitors I track have disappeared in the past 12 months. Gone! We won’t allow that to happen to ProActive Software 😉

In my personal opinion, Founders should also take a company to revenue BEFORE taking investment to scale – otherwise you simply give away too much of the company and the investment goes into R&D (Investment should go to Sales/marketing). Not only that, but it’s those bootstrap years that help you truely discover the ‘profit recipe’ of your business. You can’t spend needlessly – every dollar out must return. This thinking can be lost or clouded if too much investment comes in too early.

Ultimately there is one formula we ALL must adhere to to succeed long term.

COST TO AQUIRE a Sale < (Must be Less than ) AVERAGE REVENUE from a Sale

Where most companies get it wrong is on the ‘Cost to Acquire a Sale’ part. They make plenty of sales, but when you look at their model and costs, with trade shows, print ads, high sales costs etc they can blow 30x or more the monthly revenue they’ll gain…

Ie: A software co may spend (if analysed) $1000-2000 in time and company resource to land an average $50 per month sale. This means they’re not in profit until that customer has been with them 30 months. On this note, every company has a different ‘Average Customer Retention’ time.
This may be 3 months or 2 years, but simple maths will tell you that if it takes 30 months to get to profit and the ‘Average Customer Retention’ time is 12 months… Guess what… you have a problem… and you’ll be chasing 2nd round funding sooner or later to stay afloat.

Understanding the key metrics around ‘Cost to Acquire a Sale & Average Revenue from a Sale’ is a key issue we all need to focus on – every day…

That’s my 2 cents for the morning… Time for a coffee!

Author: Julian Stone – http://www.julian101.com/

Julian Stone

Julian Stone here, CEO of www.proactivesoftware.com, developers of www.proworkflow.com (Project management software). I’m a chronic serial creative thinker and have a passion for creativity, business and entrepreneurship.

Since the early days at school til the current adult days I’ve been involved with many businesses, in many forms, but the real passion I have is designing ideas from scratch and seeing them through to completion. I love startup businesses and their associated challenges; the fact that the more you learn, the more you realize you don’t know! Every day is an opportunity to meet a new person, learn a new skill, tackle a new challenge!

My personal background is 15yrs in graphic design, ad agencies, 3d animation, video editing, multimedia, print, prepress and other creative persuits.

About 1999 I was made redundant, mostly due to a failing internet company I was working for at the time. It was also about the time of many ‘.com boms’ where many startups failed due to a distinct lack of any real business plans, paths to revenue or just crazy and unrealistic business ideas.

I saw from the inside out, what happens when a company collapses. It was messy, complicated and a lot of people were hurt, both emotionally and financially. However, amidst all this came a blessing! I met my wife, Sarah, who was was also working for the company. Out on the street at age 25 and not many jobs available, it was ’sink or swim’. I chose to ’swim’, and started contracting initially, then business, and haven’t looked back.

There have been hard years, and I’ve learned a lot, but heading down the business path rather than employee path was the best decision I’ve made career-wise.
I’ve surrounded myself with many like-minded friends and look forward to an exciting ride ahead!

This blog is designed to discuss my thoughts on matters (yes, I’m very opinionated) and to share lessons I’ve learned from people, books, experience or the school of life. ;-)

1 Comment
  • Great post Julian! Sustainability is indeed the key. A clever idea poorly executed is no good to anyone.

    I’m going to print this article off and stick it above my desk.

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