David Hauser will tell you that it really pays to protect your business equity. He built his business from start-up to $30 million in revenue in just 12 years. In doing so, he also managed to retain the majority of his equity. When he sold his business to Citrix in 2015 for $165 million in cash and $8.6 million in Citrix stock, I’m sure he was pretty happy he didn’t have to give up tens of millions to other investors. Find out more about his story.
It takes being faced with a problem to understand selling the solution.
Since high school, Hauser owned several small, profitable ventures, eventually graduating to owning a web design business, then onto an internet advising agency throughout the 1990s.
In the late 90s, we need to remember that technology wasn’t like it is now. While today’s entrepreneurs worry about which CRM would work best for their business, back then, Hauser’s most frustrating element was acquiring a simple phone system for his small businesses.
Back then, a professional phone system that could route calls through a switchboard was astronomically expensive, and thus, reserved solely for large-scale organisations that had additional revenue to put towards such ‘luxuries.’ For small to medium-sized businesses, this came with a price tag most couldn’t justify.
Instead, the price they paid was not being able to appropriately scale.
It was a lose-lose situation.
So instead, Hauser and his mate, Siamak Taghaddos, brewed up an ingenious business idea: They would create their own virtual phone system that harnessed the latest and greatest invention: The Internet.
Their affordable phone system allowed SMEs to leverage the power of the internet in order to set up their business phones without purchasing the expensive hardware. The initial iteration of this business was called GotVMail, which was later rebranded to Grasshopper.
By 2004, the company had built a small customer base and the pair were looking for opportunities to grow. To successfully scale up, they would need to invest in better servers and a lot of advertising in order to drive - and supply - demand.
Creative Ways to Grow a Business and Protect Business Equity
As this business was developing on the coat tails of the 2001 dot com bust, Hauser made the executive call not to rely on venture capital rounds. While an injection of this capital would’ve expedited Grasshopper’s growth process, and made Hauser and Taghaddos industry leaders overnight, the two decided to protect their equity and bootstrap their business instead.
To save costs, Hauser looked to a local computer company and asked whether the owner would build him a server at below cost. His argument: If Grasshopper achieved its business goal, then Hauser would place an order for many more, boosting the small company’s revenue. He could not have brought this offer to the table of a bigger company like Dell.
To bring his ad spend down, Hauser partnered with Howard Stern, who had recently moved his show to satellite. Grasshopper supported Stern’s show in exchange for a steep discount on commercial fees.
Hauser was creative in other ways as well. His business plan offered discounts if customers paid annually. This was effective in turning customers into business financiers - with the customers none the wiser. They were happy with the discount, and Hauser was happy with the larger injection of cash.
These bootstrapping strategies paid off. In just 12 years, Hauser grew Grasshopper from start-up to $30 million in revenue, and he was able to hold on to the majority of his equity.
This meant that when he sold his business to Citrix in 2015, he walked away with $165 million in cash plus $8.6 million in Citrix stock.
Action Plan - How You Can Protect Business Equity & Build Company Value
What we can learn from Hauser is that you don’t need to seek external funding in order to get off the ground. Be creative! And more importantly, don’t leverage your equity unless it’s a last resort.
Value Builders know the value of business equity and hold onto it at all costs, knowing it’ll pay off in the long term game. When you’ve been the one to do all the hard yards, you deserve the payout in your pocket.
To be more like a Value Builder, it’s imperative that you stop chasing low-margin revenue. This will only dry up your cash and force your hand in selling shares.
Instead, shift your focus internally, back to your product and service offerings. Hone in on whichever has the highest margins and best cash flow opportunities, and begin to build your business strategy around that.
This will give you the best opportunity to grow, without draining your equity.
For more tips on how to think like a Value Builder, read the 8 other case studies on entrepreneurs who got it right.
Be sure to catch up on our previous articles in this series
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