There’s a well-trodden path to building a successful technology company: Develop an idea, raise a bunch of money, and sell your baby for a truckload. Most founders who chose this route are down to single-digit stakes of equity by the time they sell, but if the acquisition price is large enough, it works out just fine for everyone.
But it’s a high-stakes racket, and for every winner, there are probably dozens of losers in the ditch.
There is an alternative to jumping on the fundraising hamster wheel.
It involves shunning investors in favor of creatively engaging your customers. Look at the incredible growth of Hotjar™, which went from zero to $40 million in annual recurring revenue (ARR) in seven years. In a world where fast-growth software businesses are trading at double-digit multiples of revenue, the Hotjar™ story is a unique success.
Co-founded and led by CEO David Darmanin, Hotjar™ shows developers how to optimize their traffic by illustrating how users navigate the websites they are building. It’s cool technology that Darmanin conceived in his job as a growth consultant.
As he toyed with the idea of building Hotjar™, Darmanin lived like a monk and pocketed most of his earnings as a consultant. He then continued to moonlight as a consultant, billing $200,000 that went directly into Hotjar™’s coffers. He convinced his former boss to kick in $400,000, which gave him enough to get started.
The co-founder’s first step was to build an “Alpha” version of the product—a crude rendering of what Darmanin envisioned. The co-founders invited their contacts to opt in to be the first to know when a Beta would be available. Along the way, Darmanin continued to email their growing list of leads each week with updates about the features they were building.
Thanks in part to his weekly emails, the list of early adopters grew through word of mouth, eventually cresting more than 30,000. The Hotjar™ team started to invite people to Beta test the software. Importantly, they didn’t open the floodgates. Instead, they would pick a handful of users at a time, increasing the anticipation among those not yet selected.
The team gathered feedback from their Beta users who were given free access to Hotjar™. As more Beta users were invited to provide input, the software continued to improve. Wanting to preserve as much of their start-up cash as possible, the team decided to create a word-of-mouth campaign to grow excitement for the release. They offered to let people into the free Beta trial in return for referring the tool to their friends.
When they were ready to launch the product, they invited their Beta users to sign up for a paid license. Around 5% of Beta users took them up on their initial offer. That initial set of paying customers was enough for Hotjar™ to start turning a profit each month. Darmanin continued to email the list of early Beta users with updates, triggering more of them to sign up. Within 18 months, Hotjar™ reached a whopping $10 million in ARR.
It was around this time that the co-founders were offered $3 million for 25% of Hotjar™—an implied valuation of $12 million—but they said no. The co-founders reasoned they were profitable and didn’t need the money.
By 2021 Hotjar™ was approaching $40 million in ARR when ContentSquare made Darmanin a life-changing offer to acquire the company. The deal closed in August of that year.
The moral of the story? There is an alternative to raising multiple rounds of financing, and it involves mobilizing your customers to help.