Pragmatic Advice For Financing The Growth Of A Software Business
A conversation with Erik Matlick, Founder & CEO of Bombora
Erik Matlick, CEO of NYC-based marketing data software company Bombora, shares his insights and experiences on financing growth from his experience helping multiple software ventures get off the ground. Matlick, who is also an investor himself, has a much more pragmatic, calculated perspective on raising money – one that is a far cry from the cash grab strategy often hailed in Silicon Valley. Matlick will be speaking on a panel titled “Financing Software Growth The Smart Way” at the Software Executive Forum event in Brooklyn on August 28, 2018. To register for the event free of charge, please email abby.sorensen@softwareexecutivemag.com for a promo code.
What was the main reason(s) you decided to grow Bombora organically, without outside funding?
Bombora did have an initial angel round, and while it was small compared to the venture funded rounds you often read about, it was relatively large by angel round standards. After that, we made the conscious decision to grow through organic revenue and be disciplined in how we spent the money.
I am a big believer in discipline. Having a finite amount of money instills discipline across management, forcing them to think about expenditures and core areas of focus. This way, every idea gets battle-tested, and the focus is on what will have the greatest short- and long-term impact for the company and your customers.
Every time you raise money, you make a decision that impacts your future options for additional financing or an exit.
Every time you raise money at a higher valuation, you close your options. Entrepreneurs often don’t think about it this way, but big raises often mean you’ve sold your company without realizing it. Institutional investors often introduce short-term priorities because they themselves are driven by a charter that stipulates when to make an investment and when that investment should pay off. This can conflict with what’s best for you employees and your customers.
Were there ever times in the early days of getting Bombora off the ground that you wished you had raised money? What made you stick to your guns?
I’ve funded several companies this way in the past, so I never really questioned it. Still, there have been times where I’ve seen that a little more money would allow us to grow faster.
Bombora is unique in the sense that we’re creating a new market. Other startups exist in markets where other companies paved the way and educated the potential customers. Having more money would help us educate the market, but I understand that this just takes time. If the market’s not ready, you can only do so much to create demand. We’re not making money off a customer for the first year or two, but we’re investing in the relationship and are creating value.
What were some of the early resource decisions you had to make concerning hiring, product development, etc.?
Our constant debate is whether to invest in engineering or sales. When customers want your product to perform certain functions, you need to hire engineers to create revenue. When you have an existing product that creates revenue, then adding salespeople is a clear path to more revenue. Both take investment. At Bombora, it takes roughly the same amount of time to complete an engineering initiative as it does a sales cycle, about six to nine months.
Another factor is that very early on in my entrepreneurial efforts, I forged a close relationship with our bank, and Bombora benefits from that relationship today. It’s really important for entrepreneurs to understand how to build credit, because one day they’ll need it. The first time I took a line of debt with our bank, I didn’t need it. But things didn’t go as planned with that startup, I borrowed more, and paid it back. Because of that, the bank believed in future endeavors and lent Bombora a good amount of money before we closed our angel round. Debt allows a startup to get more out of its financing, and it’s less expensive in the long run as well.
What parts of the business to do try to run lean? What areas have you found it most worthwhile to pour resources in to?
It depends on the stage of the company. In the early stages, I often focused on R&D and product, spending very little on sales and almost nothing on marketing. Many companies do marketing before they have a product to market, when there’s nothing there.
Bombora focused on a real product, engineering, and even some IP, in the form of patents that we’ve filed. Of our first 20 employees, almost all held engineering and product roles. We made these investments and long-term bets while sacrificing departments like marketing and finance, and I think that has paid off for us. Once the product is in place, the focus turns to sales. To this day, we probably underspend on marketing.
You’ve held leadership positions at numerous companies before co-founding Bombora. What financing and/or growth strategies did you learn along the way that you have applied to your role as CEO of Bombora?
At my first business I raised an angel round, and eventually topped that with a $16 million venture round. I learned that venture funding did not help the company grow. There were certainly outside factors, such as the size of the market at the time, and the Dot-com bubble. But I had sold the company to the VCs without realizing it. The executive team spent half the month preparing for monthly board meetings, and the board itself was not experienced in the industry.
The first thing I did in my next venture, Industry Brains, was build a plan where all my options were kept open. We did a small angel round, with six individuals who had some connection to the industry and would help build the business. If things didn’t go well, they could help.
As an investor yourself, what mistakes do you see companies make when they are trying to raise money? What gets you really excited to work with a founder?
There’s a time and a place to take funding, and I believe that more often than not, entrepreneurs take money at the wrong time and get stuck. The biggest advice I give startups is to raise as little as possible and focus on proof of concept. Almost everyone disagrees and thinks that companies should raise as much as they can in the first round. But those rounds will dilute the founders the most.
When it comes to working with other founders, I get excited by those who are open minded and willing to ask for advice. One company I’m invested in right now is actually the second time I’ve worked with the same founder. We have a call once a month for him to ask questions, and then he makes decisions based on that advice. The company is now in his second pivot, but it has a good path to profitability.
That’s preferable to the opposite, which is a founder who calls under the guise of asking questions but has already made the decision. Why have advisors and investors if you don’t want to leverage their experience? Inexperienced CEOs can run into issues if they make decisions without advice, so it’s good to have experienced advisors to call on.
Do you have any other advice for software companies debating between raising money and continuing to bootstrap their way to success?
It’s very rare for a company to not raise any money. The key is figuring out how you’re going to raise the money beforehand. From there, it’s about how much, and from whom.
The more traditional approach is to raise a whole bunch of money and then figure out how to spend it, which is risky. Silicon Valley often celebrates companies that raise tens of millions of dollars. These founders are congratulated, as if raising money was the desired outcome of their business. I don’t understand how that’s something to celebrate.
The alternative is to take calculated risks and raise money when you know you can use it. As an entrepreneur, you should be celebrating the creation of value and a positive outcome for a customer, not an artificial event like raising money from an investor. By only taking on the funding that you need, you can provide more value to your customers without the outside pressure that comes from aggressive revenue targets driven by evaluation and investment.