Magazine Article | October 1, 2018

Why A New SaaS Entrepreneur Ditched His Financiers

Source: Software Executive magazine

By Abby Sorensen, Chief Editor

Joel Ragar didn’t know there were alternatives to raising money when he dropped out of college to cofound a golf course management software company – and since then his philosophy of how to run a successful, profitable, sustainable business has changed drastically.

Joel Ragar
Joel Ragar didn’t know anything about writing code when he dropped out of Brigham Young University to cofound a software company. But he did know he was supposed to raise money for his new company. So that’s what he did. And then a few years later, he paid investors back.

"All that was ever preached to me about the tech industry is that you go raise money, you raise money, you raise money,” says Ragar. “It’s all about raising money. You get an idea, you pivot, draw up a business model, and then you immediately raise. Then your problems are supposedly fixed after that.”

Except his business problems were far from fixed after he collected $200,000 for foreUP, a golf management SaaS platform. Ragar wasn’t being naïve when he started hunting for outside funding. While at BYU, he was entrenched in a culture of entrepreneurship — a top 25 business school in the nation that produced the kinds of alumni who went on to lead Dell, Domo, 1-800 Contacts, and Bain Capital, among many others.

But Ragar didn’t have the pedigree of these BYU alums — he was brand new to the world of entrepreneurship. Although he considers himself tech-savvy, he wasn’t a software engineer. Actually, his plan all along had been to learn the ropes in the business world while pursuing an MBA and then a JD. As with most entrepreneurs, things didn’t go according to plan. What happened instead was a wild ride involving legal loopholes, threats of takeovers by investors, and a desperate phone call to a most unlikely source.

Today, Ragar has a very different business worldview than the “raise as much as you can” mantra engrained in so many young tech entrepreneurs. He’s adamant about the importance of profitability. Here’s how his perspective on business has changed.

"All that was ever preached to me about the tech industry is that you go raise money, you raise money, you raise money. ... Then your problems are supposedly fixed after that."

THE JOURNEY TO A DEBT-FREE COMPANY

Looking back, Ragar is surprised he was even able to raise money at first. But he did — a $200,000 convertible loan on a 24-month term that was put together by an angel investor pool. With that loan came a few board seats, one of which went to an investor who liked golf but who had never worked in tech. A passion for foreUP’s vertical didn’t translate into a functional business relationship.

Instead, the relationship was so distracting and harmful that it was stunting the company’s growth and preventing the company from taking the next step (which was to raise more money). Ragar knew he couldn’t get the valuation needed to raise on favorable terms, so the foreUP team asked for the loan to be extended. The investor wasn’t interested in that plan — the loan was about to be due, and Ragar and his cofounders were weeks away from losing the company.

Then he found a legal loophole: if the investors didn’t formally submit, in writing, that they chose to convert, the cofounders would have the choice to pay them back at the call of the note. The investors didn’t submit the request in writing, a lucky break for the young entrepreneurs, but the company didn’t have the cash on hand to take advantage of this luck. That’s when Ragar picked up the phone and called the owner of the company that had asked about acquiring foreUP a few months prior.

"It was distracting for two years. ... But at the same time, what isn’t distracting about doing a startup? You’re just moving distractions into different buckets."

Ragar remembers asking, “‘Hey, I know you wanted to acquire us. It didn’t work out. I hope we’re still on good enough terms. I need $250,000. Is there any way you can do that?’” It was a Hail Mary pass, but it worked. “As shocked as I still am telling this story, he said yes, and he sent me paperwork. Within a couple days, he wired me the money. I sent checks to every investor but one that we let stay in, and then obviously the hate mail came.”

The “hate mail” quieted down after investors reread their bylaws. Even after two lucky breaks, foreUP wasn’t in the clear yet. The company had less than 90 days to pay back this loan. Instead of trying to find new investors, Ragar raised three more loans to pay this one back. Over the next 12 months, the company paid those off. No more investors/recreational golfers dictating business decisions, and no more debt.

Financing the early years of the business had its fair share of stress. “The appeal of raising money is if you fail, you fail. There’s no personal collateral. You didn’t put up your house on it. You don’t have a loan hanging over your head,” Ragar points out. “It was distracting for two years while we paid back those loans. But at the same time, what isn’t distracting about doing a startup? You’re just moving distractions into different buckets.”

The real-world lessons of raising money and paying off loans taught Ragar something much more valuable than the scripted “raise, raise, raise” mentality taught in business school. His business philosophy today centers around autonomy, profitability, and sustainability. He’s a firm believer in caring just as much about the company of tomorrow as the company of today.

PROFITABILITY: THE SINGLE MOST IMPORTANT KPI

When I asked Ragar what KPIs he pays closest attention to, he rattled off the usual list including ARR, churn, adoption rates, etc. And he clarified that KPIs should be moving targets depending on a company’s maturity. Two years ago, for example, he cared more about new recurring revenue than CAC. But the one measure of a company’s health that Ragar really, truly, passionately cares about is gross profit margin — and that will always be at the top of his list of most important metrics. He says he lives and dies trying to keep that number above 80 percent. The luxury of being autonomous, self-funded, and debt-free is that a company can care about profitability, without the “grow at all cost” pressure from investors. To its credit, foreUP has been profitable for the past three years and counting.

“What really helped us be financially savvy and get through those financial trials in the beginning was paying attention to our cash,” Ragar says. For example, he doesn’t believe in hiring a new employee unless a company is stable enough financially to offer that person a potentially career-long opportunity. In some years that has meant the pace of hiring is slower, and therefore growth is slower. But it’s intentionally slower since his primary focus is on long-term profitability.

When he meets other entrepreneurs and CEOs, he’s almost always asked how many employees the company has and how much he’s raised. “To me, those answers never really explain how a company is doing. It only lets you know how much they’re spending.” Ragar knows spending cash at a breakneck pace isn’t the only way to scale a company. In fact, he believes growing at a steady, manageable pace can make a company smarter because they can’t just rely on mountains of cash from investors. “Being frugal forces you to be more innovative,” he says. “Being scrappy makes you to be a little more panicked and a little more focused.”

To be clear though, Ragar has nothing against raising money to fuel a company’s growth. Instead, he says, “I have a lot against raising for the sake of raising.” His opinion on outside capital is that it should be injected into a business that money is the only thing holding it back from significant growth. At the time he founded his first company, that was the case. The initial $200,000 loan was necessary to get an idea for a software company off the ground. Today, having cash in the bank and operating comfortably in the black is more important to Ragar than being able to brag to fellow entrepreneurs about how much he has raised.