$0 to $1 MM ARR in 15 Months
How we funded our company and achieved profitability
Building a company is like me building my wife an enclosure to expand and protect her garden from squirrels. I made it up and had no idea what I was doing, I’ve never built anything in my life. The same is true for most founders including me. But that did not stop me from building the enclosure and nor should it stop people from starting companies. Don’t let lack of money or fear stop you from fulfilling your destiny.
What You Will Learn In This Post
My cofounders and I are building a big business that is changing lives and that is growing very fast. Despite all of that, we are laser focused on ensuring it makes money for us, families, employees, and our sole investor (Indie.vc). No one else. So, when we launched in October 2017, we knew that hitting $1 MM ARR as quickly as possible with at least a 40% gross margin was the key to achieving our goals. Hitting $1 MM in ARR in a highly regulated industry with a business model that has a 12-month sales cycle and a minimum annual fixed cost of $750,000* was not easy. I will describe here the nitty gritty of what we did. It is not glamorous, but it will show you that if you put your mind to it, and take on risk, you too can get there** without asking for permission from traditional investors, even if you don’t want to blitz-scale. I will focus on the methods we used to fund the business and less on the operations of our unique business model to make this write up more applicable to a broader audience.
How Much Does It Take to Run Nice Healthcare
First, if you want to know what Nice Healthcare does just go to our website. Or read it here: The short version is, we are a technology enabled primary care clinic that comes to you. Through our app you can have chat visits and video visits with our certified medical clinicians. If we can’t resolve your issue, we will be to your house, usually the same day, to do in-home x-rays, blood draws, and exams. We also have an in-house pharmacy and will deliver over 30 common prescriptions to your door at no additional cost.
To make this business work well financially and scale appropriately one must be maniacal about the business model and keep a close eye on fixed costs vs variable costs and manage the gross margin the way you would a wild beast that could devour you at any moment. We have a robust financial model that captures every single variable in our business-model, so we can experiment with changing variables to modify business performance. It also allows us to compare actual performance to projected performance across about 60 different levers. My co-founders Genevieve and Allison run the daily operations and are ruthless about adhering to our financial model. Yet, even with all this, without cash to get going, this business does not work. Out of the gate monthly expenses are between $40,000 and $62,500. So how do you fund that?
Debt, debt, and more debt
I put in $30,000 cash that I had made doing some consulting in the months leading up to our launch and I continued consulting for the first few months. Genevieve worked part-time at other clinics while working full time at Nice Healthcare to preserve cash. We decided Allison would be the first to go full-time, so she jumped right in. Next, I personally took out a $50,000 loan through my American Express card. Then we maxed out the AMEX card itself which has a $13,000 limit. Any expense that we could finance with a vendor, we did. For example, our malpractice insurance was financed by the insurer, we had to pay 21% interest over the year, but we could not part with the $4,000 up front as that had to be reserved for other start-up costs. Genevieve also took out a personal loan on her Discover card in the amount of $40,000. My parents were gracious enough to borrow us $100,000 as well. I went to many banks to try and get a line of credit and failed, banks don’t get startups. I eventually was able to partner with Thrivent Financial Credit Union and got a $30,000 line of credit. But Genevieve and I also had to guarantee this personally. Lastly, I also signed up for one of those crazy lines of credit at Blue Vine, the kind you have to pay back weekly, this was $20,000. We reserved that for our emergency fund and only ended up using it once in the first 15 months. By now some might be cringing at all the debt we are taking on and income we are giving up. I say, no risk no reward, and this type of debt this early in the game is much better than taking investor money this early which if you believe your company will be valuable, the investor money ends up being far more expensive. And even all of this does not even compare to the crazy risk (in terms of dollars) I took on personally to start the first version of this company that was dashed to pieces by VCs.
What We Gave Up
To save money we had to sacrifice many things. For example, Allison agreed to work for a tiny salary and I agreed to work for no salary until we had the cash. We all purchased our own work equipment to save money and required all of the other employees to do the same in the beginning. Genevieve and some of the other nurse practitioners even used some of their own medical equipment in the beginning to lower start-up costs. We did not have a fancy office, in fact, we did not have an office at all, and still do not. Our employees agreed to work at salaries just a tiny bit below market rate with no benefits. Our employees in the field drove their own vehicles as well. We kept employee count low, so Allison, Genevieve and employee number 1, Lindze, had to work (and still do) insane hours. No outsourcing allowed to preserve cash, I did all the back-office tasks, HR, legal, insurance, technology, accounting, etc. Lastly, we did not hire developers, instead we used 3rd party applications and their APIs to create a tech stack that accomplished the minimum of what we needed, knowing that we would develop our own technology once we could pay for most of it from cash flow. This was a painful strategy as we were unable to optimize many behind the scenes process flows.
The Genius Move
The most important financing we did was customer financing. Our client contracts are annual and auto renew. What we did though is we set the payment to quarterly — in advance. This was probably the most genius thing we did and allowed us to survive the first 15 months. You see, our clients are businesses and most of them pay invoices right away. So Allison would send the quarterly invoices out a month in advance. That means in many cases the last day of the of the quarter was getting paid 3.5 months ahead of time! Interest free. We are so thankful to our customers that believed in us. And billing quarterly vs monthly also reduced administrative work for us, so it was a double bonus.
We Need More Cash
By February 2018 we knew we needed more cash to keep growing and we did not want to raise from traditional VCs. So we targeted Indie.vc and closed a $350,000 round with them in May 2018, you can read about that here. This gave us the boost we needed to make a few hires we had been putting off and to purchase a whole pile of prescription drugs to help save our clients even more money. It also allowed us to invest in our marketing collateral which Allison and I had done ourselves. It looks way better now, marketing and design is not our strength. We increased everyone’s salary and added benefits like 401k, dental, and health insurance. I also started drawing a salary. We also bought a few laptops and other equipment we had been holding out on. We do not believe that people should work for less than they are worth, and they should have good benefits. We believed if we disciplined our business financially it would produce the fruit that would allow us to treat people right, right out of the gate vs the traditional model of holding on to some type of hope that there would be a fairytale pay-out in the end.
Cash Flow IS King
From the beginning, in addition to the financial model we monitored almost daily, I built a cash flow model that went out 4 years in two week increments so we would know exactly how much cash we would have for each payroll. When we received the cash infusion from Indie.vc in May 2018 the cash flow model showed we would have less than $25,000 in our business checking account before the last payroll of the year (the worst payroll to miss). That amount was less than one full payroll for us at this point, so it was pretty scary to see that on the spreadsheet and to continuously get closer and closer to that date. That summer, Bryce from Indie.vc was like, “dude — that is getting really close, but I believe in you, you know what you are doing.” We were reassured by the two lines of credit we had to back us up if the cash flow model proved correct (this is the one time in my life I wanted my Excel jujitsu to be wrong). And guess what? It never happened. Allison always has the invoices sent on time. The Q1 2019 invoices went out on December 1, 2018. And many businesses at the end of the year like to pay off expenses to keep them in the current tax year, so many of our clients paid us even faster than they normally do. And for our largest client who had an annual contract value of $120,000 we offered them a 20% discount if they paid the whole year up front which they did. Hah! In the first 14 months we never missed a payroll. And now going into our 15 month we had a pile of cash again! We devoted that to building out our tech stack which I will cover in a future post.
Our gross margin was creeping up every month as we grew from launch to January 2019. By the second to last week of January 2019 our gross margin was 42% and as long as we did not buy anything super expensive for a few days we would be profitable. So, in our weekly management meeting that week we were all like — “don’t buy anything!” And we made it. In January 2019, we achieved $1 MM in ARR by the skin of our teeth and were profitable on a 50% gross margin.
*In the beginning a large portion of the variable costs behave as a fixed cost due to the operating model. Once breakeven is achieved the spend above the threshold converts back to a variable cost.
**I want to acknowledge that even though I am an African American male and my cofounders are women we all come from privilege with highly educated parents, stable families, etc. And in my case, parents that are entrepreneurs and had the resources to loan me $100,000.