Profitability and adaptation: success strategies for founders in challenging times, Bastian Krautwald, OWWN & deineStudienfinanzierung.

Good to see you all. I know we're not the first ones talking about what currently happens with all the market conditions and how this affects founders and the funding environment. Quick introduction about myself and then about my guests. My name is Fabian. I'm running a founder-centric podcast called Unicorn Bakery. And that's why we're talking today about what it currently takes to make proper strategic decisions in a market environment where you're like in an early stage funding gap sometimes. My guest is Bastian Krautwald and he's running two products. One is market leader in Germany for study financing called Deine Studienfinanzierung. And it's a very, it's a profitable case. Solid product. And then he built a fintech and banking play on top. And we will also talk about how this affects the different products and different strategic decisions. So Bastian, good to have you here on stage with me. First question to dive right into everything is how does the current market environment where we all know that it's a very tough one affect your decisions as a founder and especially you running two different products in two different stages of their life cycle? Yes, thanks for having me. I think you already correlated 80% of my hypothesis. So more or less as one founder owning two different products and two different stages. When you come up and see that probably funding environment gets drier and drier, you need to elaborate which opportunities does exist. We have one product with 200,000 students being profitable on a month per month basis, generating a couple of millions in revenues. And on the other side, they make the decision that we want to build a banking app, right? Full funding needed, probably a couple of 10 million just for building up this infrastructure. All the installment costs are quite high. So one very, very big bet that you can build on top of a profitable business and one profitable business and then crisis or you feel that the development is coming up in the market made me thinking like how do we probably separate teams even more? How do we need to adjust on the business model side? And I think the summary is quite often the same, right? You should go for cash. I think that's common sense. That's the knowledge that you have. What secures your cash and on the other side, probably what increases your revenues and having a look at the profitable business like study financing. For us, it was quite sure that we need to somehow increase the margin, the EBIT margin that we are getting much more profitable. And on the other side, having a very cash heavy business on the banking side, I think the quote was coming from one of our leading investors, Lars Jönö from Mikuti. He was saying like, and I think that's a quite rational approach. Yeah, yeah, start the de-investing in this other areas, right? And de-investing on our side meant that we needed to more or less decrease the team size. We needed to evaluate much faster how we can generate revenues, obviously being profitable on a unit economic side. And something that we discussed earlier, even if you recognize that all your unit economics are much, much better than the market, right? We come up and like evaluate all the funding situations. And we understood that custom acquisition costs of probably five up to seven euro is much, much better on the banking side. But anyway, you need to de-invest. You need to decrease the team size because it's probably not affordable anymore. And if you don't do this decision right away, and we made this decision in the end of last year already in October, we were chatting about the timeframe of two weeks. So come up with a conclusion. And then in the end, like laying off some team members, fully focusing on the rebalancing the business model to generating more revenues. Long story short, like one founder and on this perspective, two different products with completely different conclusions. One just tried to increase the margin, even investing more on the team side. That's crazy because we saw opportunities to improve. And on the other side, a banking app that probably needs to be de-invested and built together with a larger partner who brings the funding on a strategic side. Let me ask very specifically, because de-investing, it always sounds like, okay, something didn't go right. And didn't you reach your goals? Or why did you have to really actually de-invest? Yeah, that's a very strange situation. We had a board meeting in October 2022. And we said, yeah, we already reached all the numbers, right? Customer acquisition costs much better, payback time much faster. We thought about two years being a bit more aggressive. We came up with 15 months, so even much better than we assumed in a pre-seed stage. So obviously we can improve it over time in the next two years up to six months. But in this early stage, all the unit economics worked quite well. And at the end of the board meeting, we said, cool, we are on track. And one week later, you get the gut feeling that probably on track means speaking to extended people that these goals don't count anymore. So you realize that everything until this moment was completely right. And it was even better than we assumed. But you need to adjust your goals in a different environment. And these goals are not we are taking the risk and believe in the next two years, it can be much better outperforming the market. No, the new reality is like, save your cash and try to be profitable right away. And if you're not profitable right away, kill this product. And that was quite a strange situation, right? Coming up in a board meeting saying everything is fine. And one week later, recognizing like this fine situation doesn't count in the new market environment anymore. I think we have to give some context. Would you say it's true for every business model that if you can't get profitable immediately that you need to shut it down? Or for what kind of business models is this true? And why was it true for your business model? We had a conversation yesterday around R&D businesses, right? Like the idea of like when you build up something that's unseen yet, obviously you need to invest. But all of us saw a banking app, right? And even if you probably improve the process and you make it more convenient, make it better at a different angle, that's something that you saw. There's no R&D time necessary, right? And like on the consumer side, if you're not profitable right away, we didn't see any model yet that anyway was funded. Because the risk that you probably can achieve this payback period is so high that doesn't fit to the existing fund cycles at the moment that people will take the risk and do the bet for the next two, three years. Just seeing your companies going from a series A into a series B stage, probably reaching all the numbers. But this is still a high bet. I think for R&D it's different. I think on a B2B side, we heard the speech before the conversation, it's much more reliable. On a consumer side, it's just a big bet, right? And going with this bet is probably not the right time anymore. I think another question to ask, because you said you had to de-invest and it's because of the market environment. I always ask myself, and I'm not the person to make the decision, but is this an easy answer out of a tough market environment or is this really a necessary consequence? I think that the baseline is a very necessary consequence that you should have anyway, right? Having a look at Uniteconomics and give an understanding how you probably can be profitable per customer is something that you should assume. We had a couple of years now where the tolerance was just there to invest two, three, four years achieving probably the results that you want to see now after a year. So more or less, I think the foundational questions are simply the same, but they were just more diluted before, right? They were just more diluted by the amount of cash available in the market and the acceptance to invest even more after a certain timeframe. So more or less, the baseline didn't change, but from our point of view, we came back on the very aggressive product from a very aggressive product side and understood that probably the right now is not the right timing because the tolerance to cover this time is not available anymore. So I think it's not just like out of the question, it just forces you to make this decision even faster because over time, do it in six, seven, eight months is not an option, right? Otherwise you cash out and then you risk two major products instead of just a major app. You mentioned you had the board meeting, everything was fine, you ticked all the boxes, everything was on track, and then you one week later realized, oh shit, we have to change something. How do you communicate this to the stakeholders? When do you talk to the board? When do you talk to the team? How do you get all of them on track to communicate such a decision that's completely different from what you said a week ago in the board meeting? Yeah, I think first of all, full transparency is key, right? So the week later is the example of getting external signals, right? You every day elaborate on opportunities, is it fundable? You discuss with external advisors and more or less the signal that you get is, we didn't see that this will be invested in the market anymore. And from my point of view, that was just necessary quickly to be fully transparent and make transparent that even all the perspectives were right. We are wrong right now and let's discuss it. And what we did is like a four hour session with the necessary advisors, with the necessary shareholders, and discussed all the opportunities, right? Opportunity to make a pivot, the opportunities to generate revenues faster, the opportunity to just probably stop right now immediately and go double down on the one product. And I think that was the necessary conclusion, right? That you need full transparency, we communicate immediately to the most important shareholders. And then you try to find a solution with your team, because the team is also infected, right? And saying that probably stop whatever you build now, we need to evaluate together and find a solution together now was quite important to make everybody encouraging in this process, right? And that's what we did. Full transparency to the, you said, most important stakeholders, in this case, shareholders and the employees that wants to go on this mission together with you. That's what we did. And in the end, I think the most helpful thing, because everybody reacted quite fast, helped us in adjusting. And adjusting in our case means narrow down the own banking product to the core and find a strategic partner at the moment. That's what we do. So what was their initial response? Because I can imagine a week before I hear, oh, everything's on track. A week later, I hear, oh, we completely have to reassess the situation, even when I thought a week ago. And I know we're sticking to the one week example here, but how was their initial response? Quite great. This is the advantage of having operators on your board, right? So I mentioned last year, who was founding Kenny Crush before. So he saw all the ups and downs that you can have as one example, or Oli Roskopf, very early team member of Zalando. And in this perspective, you immediately see their skills of being a great operator. What they said is like, yeah, I get it. Let's go. Not question a lot, like not chit-chatting about many things that why didn't you see this because they also didn't see this coming. And even if they are very close to the market, if they make their own investment decisions, I think that's the most helpful thing that you can do as an investor. Be there, be available right away and start collaborating on the outcomes that you want to achieve. And for me, as a founder, it was the most eye-opening moment. And everything is fine. Two years, you see numbers are going up. You see the product is coming up. They can try the product. They like it. They use it as a main account. This is quite a nice environment, right? This is okay for a founder. But if you see that we need to make a full stop and everybody's still up and running, I think that's the moment you realize you probably brought the right team members to or right for me, it's team members, but the right members even to the board who go also through this very difficult time together and not just supporting you by side, sitting working on the core questions and also say, I have no fucking clue what we do, but we will find it out in the next couple of days. And I think that's the security you can get from somebody sitting next to you. How was your personal journey with that? Because I can imagine building the company for a few years and then the new product for two years and then from one day to another, you have to decide, okay, shit, we have to change everything that we wanted to do. How was the personal journey with that? How did you go through the process and what were the ups and downs in that time? Quite simple, because as a founder, you're always driven to succeed with your solution, right? And in this case, you're looking for a solution to just move on faster and make a decision faster. And I think it's much more difficult and probably it's my attitude, but it's much easier to just act, right? And make a decision, make a quick decision when you have enough signals. For me, it was like a process of two days, two days, then calling everybody who was important. And we make a decision after 10 minutes being in a call and then executed 10 days later. So from having no clue to being executed with 25 people back in these days, it was like very fast, but I think the necessary speed to be still alive, right? And not just alive, being well equipped to go through a crisis and make stronger decisions. Honestly, I think it's something that a lot of founders are like, they are tied very strongly to their businesses and also emotionally very tied to the businesses. So it's sometimes super hard to make these decisions, even if you want to. So it's not easy for everyone. The journey was always the same, right? Study financing and then a banking solution. And there was a solution before and probably there's a solution in between. I never had this emotional attachment to a product. It was more like building a solution for a problem that I see. And if the problem was blurry and you just assume that there will be a solution necessary and you find out nobody needs it, that's fair, right? Then go on and evaluate what did you see wrong and adjust and try to figure out probably why you had this blurry view on a solution and stick to a solution. But the problem is much more important. And this was the same situation that you have with your product, like that you believe your product is a solution to a problem. In this case, the problem is that probably at some point you don't get the funding and that's much harder for everybody to understand this in a couple of days and set in a couple of months, right? And you have the time to adjust your business. So for me, it was always a win because you have the abilities to move and not like you're stuck because now is the last day and you recognize too late, right? I think that was much, much more helpful for me and also fulfilling to be honest, because a tough time, you make a tough decision, but I think this is how you grow personally and how the company can grow over time. The interesting thing is, and I'm not sure if you're happy that I say that out loud now, but you know the feeling of just having one day of runway. So you also experience how it is if you then get issues with all the funding environment and not everything is going your way. So how much did the past experience of having difficulties to raise a funding round and everything also play out in the foresight of, okay, I know everything changes. So I also have to think about that even harder. For sure. Like just a quick story, right? We were like with study financing, we were like just one day before being bankrupt. And two weeks later, we made 200,000 euro in revenues. Like sometimes it's insane. And I think this is the feeling that you have, right? And back in these days, we know that funding is quite hard. Study financing feels like a niche product. It's like assuming that students don't need funds, but they somehow need to cover their lifestyle costs. And these are 2 billion in funding needs per year in Germany. So there's a lot needed. But having the hypothesis that this is probably just a narrow niche use case, and then finding out that probably this use case makes a couple of millions in revenues. Sometimes between these perspectives are just like two or three weeks, right? And this perspective seeing for three, four years that study financing build it up with all the ups and downs, and then replicate it to a second product is much easier and gives you much more calmness. Because you know, at the end, something turns out, right? And you will see something that's coming up. Just you need to run and make decisions and be persistent to push it further. It helped a lot, yes. With all the 200 talks probably we did to angels and investors for study financing. One last question, because we're running out of time, sadly. But if you want to leave the audience with a guide on how to assess the current situation, what questions do I as a founder have to ask myself to understand where I'm, if I'm on track for the new environment, or if I'm not on track? I think the question that I asked always myself before we started study financing is, am I honest to myself? Because quite often you have enough knowledge and enough indicators to figure out that probably something is on the right path on the wrong path, right? You understand that your goals work out, but you still have a gut feeling something is blurry or you have a gut feeling that why is everybody reacting to crisis, but we didn't do it yet, right? And the question that helps me always, and I do diary once a week, asking this question is saying, am I honest to myself and where do I try to hide things for just accepting the situation on a low energy level that yeah, things are going on because not being honest to yourself and find out takes you so much energy to cover and to change and to adjust. And I think this is the most helpful question because quite often, even if you believe in business decisions, you're not, or I think in even any other perspective, you're not fully honest to yourself. And this helps out to, I think, stay on track and be successful all the time. Amazing. Thank you, Basti. And one last addition for everyone thinking, who are these two young peeps up there? Both pictures are five years old, so we're getting older. Good to see you, but a bit differently. Thank you.