Many people associate startups with venture capital funding. But, according to a recent Kauffman study, venture capital is the exception, with only 1% of new businesses getting funded by VCs. In addition, many entrepreneurs don’t want to relinquish control and decision-making to investors.
While some entrepreneurs can bootstrap their businesses with their own funds or via bank loans, many startups—especially in the tech industry—need to find alternative ways to fund infrastructure required to build and grow their businesses.
Recently, I had the opportunity to talk to Thomas Brenneke, founder and President of Network Redux about the innovative approach he’s taken to create and grow an 'agile self-ownership business' in partnership with Dell.
Network Redux’s innovator’s dilemma
Network Redux was founded in 2004. Initially, the Portland, Oregon-based company provided inexpensive, shared web-hosting services for very small businesses. Demand for services was strong, and the business grew. But the market for low-cost services was quickly commoditizing, and according to Brenneke, “becoming a race to the bottom.”
However, as some of Network Redux’s clients grew, they began asking for dedicated hosting services. This offered Brenneke the opportunity to develop new, more profitable business. But it also posed the challenge of funding the much larger capital outlays required to build a dedicated hosting environment for each new client.
Complicating matters further, the timing couldn’t have been worse. It was 2008, and even though Network Redux was profitable and had deals on the table, most banks just weren’t lending to small businesses.
Finally, Brenneke didn’t want to cede control and decision-making to external investors. As he puts it, “We built the business on an outsourcing model from the outset. We didn’t hire a lot of people, we outsourced when possible to avoid debt and interference from investors. I wanted to continue to grow the business, and maintain an 'agile self-ownership' model.” But, Brenneke adds, “I threw my hands up in the air. To execute on these high value contracts, I needed to invest in infrastructure, but I didn’t have a way to fund the investment.
Financing agile self-ownership
Network Redux had been a Dell customer since day one, standardizing on Dell servers and storage. Over the years, Brenneke had formed a strong relationship with his Dell account team. “I looked at Dell more as a partner than a vendor. When I started the company in my twenties, my business experience was limited. I learned so much from Dell about everything I needed to provide strong shared hosting and private cloud services,” notes Brenneke. “I could just pick up the phone and ask, “How do I do this?”, and Dell would teach me. There’s no question that our relationship with Dell helps us provide better service to our customers.”
Brenneke was confident that Dell’s products would continue to provide the cost, reliability, performance and support he would need for competitive, high availability dedicated hosting business. Now, Brenneke decided to share his financing dilemma with Dell. “I explained to my account rep what I needed and why. He connected me to Dell Financial Services (DFS). I had a long conversation with the Dell credit rep, and they looked over my financial statements and business model. For the first time, I had a lender explain to me what they were really looking for when they evaluate loans, and the best way to structure them.”
After due diligence, Dell approved Network Redux for its first, 36-month term loan, tailored to coincide with the lifetime of Network Redux’s client contracts. Four years later, Network Redux has borrowed over $1 million dollars from DFS. “We get the money we need for infrastructure to bring on new clients. As we grow and pay down our loans, Dell raises our loan ceiling, and we keep growing,” explains Brenneke.
Membership has its benefits
In 2012, the partnership got even deeper. Network Redux’s Dell account manager thought the company would be a good for Dell’s Founder’s Club, a hand-picked group of innovative entrepreneurs. Unlike Network Redux, most Founders Club members are funded by a venture capital or angel firm. However, all Founder’s Club members view technology as critical to future growth, and have significant technology needs. In addition, according to Brenneke, “Founder’s Club members want to be owners, not exiters.”
Members can take advantage of many benefits, such as concierge-level support, expedited shipping, the opportunity to network with other fast-growing startups, and the Dell Innovator’s Credit Fund, a $100M credit financing program. The idea of the fund is to give entrepreneurs access to technology to help fuel growth, while helping them to preserve equity capital for other business needs. Just as important to Brenneke, “We are treated like a global player. We have access to the best and brightest technical and business resources at Dell for advice and guidance.”
The result? This close vendor partnership has helped Network Redux to increase revenues 100 percent year-over-year. As Brenneke puts it, “This is mutually beneficial—Dell wants us to be a healthy business.”
There are many ways to fund a startup and one size does not fit all. However, some startups may not even be aware of external funding options beyond traditional venture capital firms and banks. Furthermore, as this case illustrates, non-traditional financing sources may be a better fit for some businesses.
Network Redux’s technology and financing partnership with Dell illustrates that a synergistic financing partner can provide a startup with more than money. The right partner can also provide services and guidance to help young companies better capitalize on market opportunities.