How much money do you need to start a successful company? It might be less than you think. Some smart entrepreneurs are bypassing the whole venture capital world with its alphabet rounds of funding, opting instead to get their companies going on a relatively small investment and remain masters of their own fate.
That approach worked perfectly for EverQuote, an online marketplace for auto insurance. The company was started in 2011 by co-founders Seth Birnbaum and Tomas Revesz. Both had participated in successful start-ups in the past, and their idea for an online marketplace is the sort of thing many VCs are eager to fund. But EverQuote's founders opted instead for a mere $140,000 seed funding and a spot in an incubator. They're glad they did. The company was profitable within its first year, and now gets about 3 million unique visitors per month.
Creating a successful company with such a small stake isn't easy, especially in the high-tech arena. Here's how EverQuote's founders say they did it:
1. Hire people you already know.
"If you want to be massively capital-efficient, you literally can't afford to hire anyone you don't already know does good work," Birnbaum warns. "The first 12 people we hired had either worked with us directly or someone we were working with had worked with them directly. That's the only way to save time and money early on." Otherwise, he says, "No matter how careful you are about hiring, the risk of a mis-hire is great."
2. Get ready to wear lots of hats.
EverQuote was a four-person company for its first six months and during that time, Birnbaum dealt with advertisers, insurance carriers, consumers, agents, and companies Web traffic sources, made presentations to the company's single investor, and did much of the data analysis. Revesz did web development, IT, some HR, and some finance. It was a cost-saving approach that came with some benefits, Birnbaum says.
"In a VC-backed company you would hire out of the box," he explains. "By not having three people in finance and another three in engineering I got to know all our advertisers because I'd sold to them. I also know the traffic suppliers. If you can do all those jobs, you can do the work of several people. And when you do scale, you know all the jobs intimately."
3. Get cash-flow positive as quickly as you can.
To accomplish this, Revesz says, "You have to be utterly brutal about where you spend your time and thus your money. In our early days, we looked a lot at what others were doing with advertising and trying to discern who was doing it effectively. There was no going into places that were wholly unknown." Once they'd seen a successful strategy they wanted to try, "You try it very quickly at a small enough scale not to waste money, but big enough to get a meaningful result," he says.
"Our test was, we can afford to lose $500," Birnbaum adds. "Now we can afford to lose $50,000 or $100,000.
4. Resist the temptation to offer big salaries.
"We've had lots of times when we had an absolutely wonderful job candidate ask for what, in a heavily funded company would be a small difference," Birnbaum says. But EverQuote's founders stood firm, sometimes losing potential hires over a difference of $5,000 or $10,000.
"For me, this is an equity play," he explains. "We look for people who feel the same way, rather than people just looking to get $5,000 or $10,000 more than they would up the street at Facebook or Google." Besides, he notes, EverQuote will have 150 employees by the end of this year. "If we paid each of them $20,000 more than we do now, that would be $3 million and we would not be profitable."
5. Share as much info as you can with employees.
In a company with no investors to answer to, you're free to share detailed financial information with the people who work for you, and you should, Birnbaum and Revesz say. "Everybody can see where every penny was spent by whom, where every dollar was sourced and from whom," Birnbaum says. "It is completely transparent in terms of how the business operates. It's helped to create a culture where if a traffic team is missing a target-or the opposite, killing it for some reason, everybody downstream can see it and react."
Birnbaum and Revesz started this transparency policy because they wanted employees to thoroughly understand why the company couldn't spend more on, say, new hires. But it's had other benefits too. "Recently, the business was churning out more profit than we had planned," Birnbaum says. "Rather than have a whole discussion with managers at a quarterly planning meeting the sales folks looked at the figures and said, 'we can build up our sales force here, here, and here, and that will accelerate growth."
It seems to be working, he adds. "They're moving the needle now."