While many startups are able to raise millions of dollars at each funding round, sometimes at global level, veryfew founders have been able to garner the profits from their business model. But can a company grow without raising external funds? Is it possible to do well through self-financing?
By Pierre-Marie Mateo December 09, 2013
Joint interview with Alexis de Goriainoff and David Brette, respectively Chairman & CEO and Associate Director of Sewan Communications, a Paris-based provider of integrated communications solutions. With turnover of €12 million and a staff of around forty, the company has so far not taken on any external funding.
Alexis de Goriainoff: What we’ve been doing is taking advantage of the changes taking place in the telecoms sector. Before 2007, being a telephone operator meant having a huge infrastructure, which required several million if not billions in investment. But IP convergence means that the sector has become relatively easy to get into with comparatively little equipment apart from software. We managed to set up without too much capital. By putting in our own money, we got €60,000 together, which still constitutes our total capital.
David Brette: The role of a telephone operator is evolving and that has dramatically changed the sector from being an infrastructure business to a creative business offering new services. While in the past it was impossible to be an operator if you didn’t have infrastructure and substantial funds, it’s unthinkable nowadays to be without ‘grey matter’, i.e. talented people who are able to get together to form a good team.
Alexis de Goriainoff: From the very start we’ve kept our fixed costs to a minimum, i.e. the expenditure needed to set up and run the business. As regards variable costs, we didn’t go in for loss leaders in order to win market share. Our solutions are paid-for and profitable. We haven’t ‘bought’ customers. Our model is based on creating value and on continuous investment. We increase our product lines only as the number of customers grows.
Alexis de Goriainoff: Well, the model can be reproduced but not necessarily in all sectors. When you develop very innovative applications, this may require considerable initial investment. Our role is as an operator. Our service is all about intermediation and what differentiates us from the competition is our basic operations. We are in fact an innovator in terms of the unique service we provide. It’s not always necessary to reinvent the wheel; you just need to use it better.
David Brette: What you have to have is a clear vision for both the short and medium term. If you don’t have funding, you need to generate revenue straightaway. So what you need to do is develop applications which meet customers’ immediate needs and at the same time plan for an overall system into which these applications will fit so as to cover wider, more complex requirements in the near future. These days some people try to finance an idea without having any plans to make it profitable. Then they’ll need to think about selling stakes, raising larger amounts of funding or other far-off solutions just in order to pay back the initial stage finance providers.
Alexis de Goriainoff: Well, you always have to keep things in balance. It’s a culture of ‘make-do-and-mend’. You have to smooth out your investments as far as possible. For example we hire most of our physical assets. That has certainly put the brakes on growth.
David Brette: In the past, we’ve had to decide to go for a one-off opportunity which called for special development for a particular customer, in order to get some money in, despite the fact that this work diverged from our overall strategic vision in terms of the developments we needed to make. However, it was still a good sales move. Moreover, I think we’ve now made up the time we lost then and we’ve even done better than we would have if we’d been looking for investors or spending time on making presentations and explaining our strategic decisions to backers. And while you have to be smart about your investments, you also have to be prepared to make some concessions. All this has certainly slowed our growth, but it has meant that we did some real business before having to think about scaling up. The other advantage we now have is that we’re able to attract good staff.
Alexis de Goriainoff: In the short term, we plan to go on this way. In fact we’re waiting for the most opportune moment, when partial loss of control will be balanced by opportunities to develop the business.We haven’t yet found that opportunity. But, yes, it’s true that our situation is different today. External funding now appears to be more useful if we want to grow and become a leader in Europe. However, our current size means that we don’t yet have to go head-to-head with the major players. We could continue as we are for a long time.
Alexis de Goriainoff: I think it’s a well-developed sector in France. Not a week goes by without a fund or brokers contacting me. I was actually quite surprised to see the range of funding on offer, compared with seed funding sources – which by contrast I think are inadequate. The fact that we have no or very little debt certainly widens our options. But I think we’ll continue to run counter to the trend. We’ll go on building up our projects and only when we need to set up a funding deal will we go and see investors, and not the other way round.
Alexis de Goriainoff: Well, you have to be the ‘band-leader’ in your own company. One important point is that you need to demonstrate and prove to investors that you can manage perfectly well without any external help. That’s a pre-requisite for obtaining funding.
David Brette: Basically what you have to have is an idea, a team, and a business model. This is what you need if you want to obtain funding. And if you can persuade a customer you can also persuade an investor, by showing you have a solid project and a strong team. That’s what investors are looking for. In fact, if I were starting out today with a choice between keeping control of the business and simply obtaining financial investment, it wouldn’t take me long to make my decision!