Bootstrapping to $1M ARR: Klaviyo
Intro
Klaviyo is a marketing automation platform that lets Ecommerce companies collect accurate data on their customers and use it to create personalised marketing. It’s unlikely to be a company your elderly relative has heard of, but this business is a beast.
Klaviyo currently has $650M in annual recurring revenue and is still growing at >50% a year. Efficiency is at the core of the company. Despite raising c.$780M, founders Andrew Bialecki and Ed Hallen have burned just $15M to reach a private valuation of $9.1bn and an upcoming IPO. In this blog, we want to focus on the early days. How and why did Hallen and Bialecki bootstrap the business for three years and reach $1M in ARR before raising? Let’s dig in.
Start small and iterate
The idea for Klaviyo came from a side hustle, where Bialecki was struggling to reach out to people at scale for his evening company and recognised the need for startups to have accurate customer data and scalable contact channels. When they started the business, the founders spent their entire time talking to potential customers and trying to understand their problems in this area deeply. They didn’t design logos, talk to investors or even incorporate the company before they signed their first customer.
Contrary to start-up gospel, the two founders also didn’t spend any time mapping out the competitive landscape and where they could slot in. All that mattered was what it would take for a customer to pay them for the product. ‘Oh, it sounds good, it’s just not what we need right now’ was the warning klaxon to readjust and focus on what would be valuable today.
Ironically the major product unlock for the company came from not being aware of their competition. A chance conversation with a customer who was paying $100 a month for Klaviyo’s early database product revealed they were also paying $200 a month for email automation but weren’t wild about the service. Bialecki chose to focus on the fact he could possibly triple revenue by adding email automation, instead of dwelling on the strong claim that companies like Mailchimp and Constant Contact already had on that market.
Ship fast and focus on where its easy
“It’s important to try to optimise for getting something shipped as fast as you can. The magic of that is you want to go somewhere where the development’s gonna be really easy. And then I’d say go where people already are. That was a big part of our strategy. Finding customers is really hard. Anything you can do to make it easy to find the first one, two, five, 10, helps a ton. You want to be in a fast feedback loop.” — Andrew Bialecki
Very early on in the iterative journey for Klaviyo, Hallen and Bialecki realised that Ecommerce was an area where the idea of pulling disparate and sometimes non-existent information on customers into a single database would have huge value. Ecommerce also had the advantage of rapid feedback loops — allowing the founders to quickly test, iterate and upgrade their product. They chose to focus their entire efforts on this segment and to prioritise Shopify as their first integration. At the time that was because they had a potential customer on the platform they wanted to land, and because Shopify had a high quality and expansive set of APIs for developers that made it easier. In the years to come they benefitted massively from that move as Shopify experienced explosive growth between 2013–15. A hallmark of many other capital efficient success stories (e.g. Veeva) is that they chose to ignore platform risk and prioritise where the opportunity was and who the dominant platform was likely to be.
Automate what you can
Many founders feel they need a team of engineers, product and customer support staff to build a valuable product, which simply isn’t the case most of the time. Despite making early sales Hallen and Bialecki chose not to hire anyone else. That meant in addition to their core discipline of engineering they were also handling sales, customer support, legal etc. and would often arrive into work with an inbox overflowing with support tickets.
Whilst a huge workload, it had two positive effects. The first was that both co-founders were engaging with customers every day, and Bialecki claims that some of their best product insights came from that unfiltered interaction. The second was that constraint breeds efficiency — the two co-founders looked for ways they could optimise every part of their operations, aiming to squeeze a little extra value and time wherever they could.
Consistent with other capital efficient success stories, Hallen and Bialecki chose to build on top of best in class products where possible, rather than build everything from scratch. For example, building their attribution engine on top of Sendgrid and Twilio saved them time and allowed them to focus on where their product added value versus what was already in the market. Even for founders not following the bootstrapping path, recognising where to build and where to borrow can be the difference between sales or delay.
Sell the ROI
“One of the things that we learned is when people buy software, they’re always doing some sort of cost-benefit analysis. The easier you can make that for them, the better.” — Andrew Bialecki
Hallam and Bialecki think of themselves as anti-sales people. As such, they didn’t want to have to guess how much their product was worth to people when pricing it. Instead, they wanted their product to sell itself by providing an explicit and quantified value to the end customer. That meant building attribution algorithms into their software early, so they could measure exactly what each customer was making using Klaviyo’s product. After that Hallam claims “proving ROI became ridiculously easy”. The company would charge on a monthly basis and could demonstrate they made their customers multiple times that in increased income. Focusing on the ROI your product creates is a must for any founder — ideally you have a tangible impact on the top or bottom line, and the higher in the income statement your product appears, the better.
Bootstrapper Mentality
As is always the case, efficient growth comes from the founders. Bialecki and Hallam never set out to become a venture backed business. In fact, the two felt completely out of their depth approaching and talking to investors, and were turned down by four accelerators early on. At the same time, Bialecki romanticised his mother’s family business that had been running for 50–60 years and employed 20 people. In his own words
“It was a business that was real, that was profitable. It took care of its employees. And I always felt a lot of startups missed that.”
Other role models came from their professional lives. Both co-founders had previously worked at APT, which had bootstrapped to become a well known East Coast tech firm. With those influences at play, the founders decided to focus on getting customers, knowing that if they did ever decide to raise, it would be a whole lot easier with some customer traction under their belt.
So why raise?
In the end Klaviyo decided to do a small angel round of $1.5M in 2015. By that time they had hit $1M in ARR and knew they were onto something significant. There were two factors that pushed them to raise. Firstly, as a bootstrapped business they had a ‘sawtooth’ cash flow profile — every month they would receive subscription revenue each day from customers and then when payroll ran at the end of the month their cash balance would drop back down to almost zero. That made it hard to hire people when they wanted, having to wait for revenue to increase until they could afford a new salary in full. Secondly, one of their largest customers, accounting for almost 20% of their revenue, gave Klaviyo notice because “you guys can’t keep up with us”. That threat of not being able to grow with their customers pushed the founders to accelerate and raise capital. Crucially though they did so from a position of strength, knowing exactly what they had and what their product could become.
Conclusion
Klaviyo’s lessons sound simplistic but that’s because they’re fundamental. Prioritising customer engagement and benefit, not hiring until you absolutely need to, and rapidly iterating is salient advice for any founder. Equally, myopically focusing on what your customers need, rather than the competitor landscape or what VC’s like, is the fastest path to drive revenue and to give your business the best chance of success.
