There is a widespread belief that a successful business cannot be started with little or no money, especially in a new market. Anna Radzievskaya, the founder of Code Breakers, shared her experience as a solo founder who created the No-code development market without investment or start-up capital, became a market leader and grew from zero to RUR90 mio ($1.2 mio) a year in two years.
– Why do startups need investment?
– When founders say they need money for their startups, they mostly mean investment at the early stages. Indeed, during this period, funding is essential and sometimes even crucial for the future of the project. I will try to explain which startups need investment and why; it depends on the threshold of entry into business.
A high threshold of entry into business refers to projects that involve relatively high start-up costs (CAPEX). There are areas of business where a new company has little or no chance of starting operations without funding. For example, manufacturing companies cannot open without raw materials or equipment. Another example is the real estate industry, which is a highly capital-intensive market, with a high barrier to entry.
In the tech industry, such projects include platforms where the technology itself is a product and cannot be used without a basic working functionality. No-code platforms are in this category – they are high-tech projects, where you need to invest time and money in development before an operational solution can be offered to users. That stage can take years. Usually, such projects require the founder to have a large start-up capital, or secure backing by an investor.
A low threshold of entry into business refers to projects that can begin operations without high start-up costs. Such projects mostly include service products, such as a cleaning company website, a private tutor, educational projects, etc.
These start-ups, too, require initial capital, but the founder’s savings are usually enough. They do not incur major financial costs (CAPEX) that would be vital for the start of sales or early-stage business development. Usually, founders develop such projects to a point where they can test the market demand and the business model and later raise funding for further scaling, hiring a team and marketing.
This is the type of niche where you can start a business with or without investment. I chose just such a business model for Code Breakers; this helped me avoid investing at the early stage, grow independently and have full control of the company.
– So how can a startup grow without investment? What kind of business model does it need?
– You need a business model where you recoup the cost of attracting a client and start making money from the first purchase. In simpler terms, the formula is this: first purchase check = CAC (Customer Acquisition Cost) + profit. Another good model is where your average check is low, but your customers consume the product so often in a short period of time that CAC pays off quickly enough (in a week/month).
With this model, the business quickly makes money that can be directed towards development: the purchase of traffic, scaling, expanding the team, and operational processes.
If the client uses the product rarely, such as once per month, and CAC does not pay off with the first purchase, one cannot do without investment because the money spent to attract client will be recouped after several months or even years, and to be able to wait that long it will be necessary to have funding for business operations, marketing, expanding the team, etc. To better explain how this works, I will give you several examples from our experience.
Qlean
Qlean is a major Russian cleaning service. The company’s monetization is based on payment for each cleaning with an average check of RUR 3.5K. The cleaning is provided once per 1.5-2 months, and costs for attracting a client paid off after 7-9 months, or approximately 6 cleanings.
It means that if a company spends most of its budget on attracting clients in the first month, it will not have enough in the second month for marketing and scaling, because the invested money is not recouped yet. Without an initial capital or investment, such company might go broke after 3-4 months of work, especially if it requires large funding for marketing and personnel.
Qlean attracted investment to scale marketing and sales. But, in addition to investment, for such business models it is crucially important to work with customer retention rate. That is why my task in the company was to work with repeated orders, especially after the first order, which is critically important because it determines whether the client will continue to use the service. Thus, I was in charge of training cleaners to improve the defect rate which increased the client retention rate by 10% after the first cleaning and reduced the general churn by 4% due to the improvement of client experience.
Blizkie.ru
Blizkie.ru is a marketplace that offers elderly care services. The business model was similar to Qlean, but the difference was that if the cleaning is ordered once per 1.5-2 months, care experts work every day. The median cost of aged care is RUR 1K per day, so the average income from one client will be RUR 30K in the first month, which covers the expenses on attracting a client (RUR 18-25K). The frequency of use of the service is very high: having spent the money in the first month to attract the client, we will cover these expenses in the same month. This business model is much easier to develop without investment.
In this company, I was in charge of retaining customers by offering them additional services. For instance, we adopted a system where a medical worker assessed the condition of the patient and created a care program for the next several months at the first meeting. Clients appreciated it and were intent to follow the plan because it helped to provide their relatives a quality care. Thus, the churn rate decreased by 8% in the first week. But it is important to understand that despite the advantages of this business model, there will still be expenses. To do without investment, the company owners need to have a solid initial capital.
Code Breakers
Code Breakers is an EdTech project that teaches no-code development. When I was launching the project, I had numerous ideas on how to build monetization: to offer monthly subscription, create affordable mini courses for a wide audience, or pricey courses for a selected segment of the market. I conducted several tests and found the average CAC in my segment, which helped me outline an optimal price range with an average check of RUR 75K. Unit economics also was successful: the attraction of a client paid off immediately, operational costs were covered and there was revenue.
Yet, when it comes to the business with such check amount, the question always arises as to how mass segment clients could be attracted. We made use of a bank installment plan which can be instantly arranged by a client, with payments for the training course made throughout the year. As a business, we receive the full amount from the bank right away, which allows us to use this money for marketing, team growth, and scale-up. These efforts allowed the startup to develop without our own and others’ investments, although we had to borrow to close the cash flow gap. This helped us grow faster and build a team that I could not afford initially.
It should be remembered that a proper model is not the sole thing required for a business to develop without investment. At initial stages, it is important to engage in marketing and sales while avoiding spending all available money to this end as there is a risk of wasting it in case channels you find prove ineffective.
– Are there any golden rules of building a business without investments? What helped your startup grow from scratch into the annual $1.5 mio within two years?
– Before launching a startup, you should understand whether you are entering a new market niche (blue ocean) or an established one with a large number of competitors. A well-established market has a constant demand, with customers knowing the product and buying it; the main aim is to win market share from existing players through offering a more advantageous solution to clients.
As regards a new market, things are a bit more complicated. Startups essentially need to create a market and demand for their product. This may take several years: before promoting a new product, you have to tell the target audience about it, handle their objections, create a demand, and then sell it. Such a transaction cycle may take several months after the moment the client finds out about your company. You have to be prepared for it and view it as a sort of marathon rather than a sprint, and distribute resources accordingly – especially when you choose to operate without investments.
Code Breakers was launched in an empty market space, with potential clients having no idea of the no-code approach and not being ready to buy the product. We had to create this market through our own efforts, which included:
1. Making use of experience with no-code tools. At the time, I had already engaged in developing no-code IT products for several years and could tell Telegram users a lot about it; this resulted in my Telegram channel getting its first subscribers. I imparted the knowledge by creating a method for building no-code IT products – a training course named Creating No-Code IT Products: From Idea to Launch, and hosted a Telegram webinar. Sales from the first group amounted to about RUR 1.2 mio; this money went to scaling and hiring personnel. Also, the knowledge of no-code platforms allowed us to go without developers in building our own IT infrastructure and save money. All our digital products are created with no-code tools.
2. Marketing with no budget. I hosted numerous events, free webinars and presentations, and spoke about no-code capabilities and benefits. The conference on no-code, which was attended by speakers from all across the globe, showcased cases that inspired people to learn no-code development.
3. Collaboration and partnerships. This tool, among other things, helped in organizing the aforementioned conference without spending money on marketing: I collaborated with major market players such as Skolkovo, Netology, Mate, Albato, Directual, and others, which sent out newsletters to provide information about the conference to their audience, while our company put their respective logos on landing pages and splash screens, and spoke about them in our newsletters. This allowed us to collect some 20K database registrations.
4. Engaging advisors. I have not always had sufficient knowledge in certain matters I am not an expert in – such as efficient scale-up. I approached SkillFactory, which helped me in building an effective team and provided a very competent advice on how to turn a small business into a large company.
– What are the disadvantages of investing?
– The major drawback is that the investor becomes a co-owner of your business, gaining the right to influence the company and its growth. Efforts should be taken not only to raise money but to attract smart money – investors who are experts in your field. Making investments without a proper understanding of processes in your area can have an adverse effect on the business, lead to disagreements between investors and founders, and ultimately destroy the company.
You should think in advance about the company’s long-term plans for using investments, choosing between following the dividend model and selling the business. In the latter case, you should consider the company’s potential buyer in advance. When drafting contractual arrangements, it is also important to envision a plan for getting out of the deal, with an option for buying a stake. But obviously, every business owner individually determines pros and cons of investing, which depend on a particular business model.
By Veronika Valeyeva