Image representing Fon as depicted in CrunchBase

Image via CrunchBase

Last Spring we cut our burn rate at Fon. We reduced our head count from close to 100 to 60. It was painful. It was sad. But it had to be done, since then Fon has grown faster than ever. Not because the people we let go were not doing anything. Quite the contrary, they had been doing a lot. But many times, a start up is about first building a platform and then managing it. And just as it takes hundreds of people to build an office building but less to run it, it also takes less people to run a platform like Fon than it took to build it. Bottom line is that when we went from 100 people to 60 we managed to grow revenues faster than ever before and to cut losses from over 1 million euros per month to 350 thousand. We also grew to one million foneros around the world. Our revenues grew from 20K euros per week to 50K and the good news is that these sales are mostly cash into the company (Fon is like a telco without capex or opex). What we also achieved is to stretch our investor´s money into 09 and to need a very small round to break even.

Looking back, I am very pleased we did our adjustments in the Spring, because if we had had to be raising money this October we would be in serious trouble. The markets simply suck right now, and even though VCs tell you that they are in this for the long run with Google, Yahoo, Apple down over 50% and no exit horizon, believe me, either they will pass or ask for a 50% or more haircut in valuation themselves.

My advice to CEOs of start ups then it´s tough, really tough, but it is to do what we did at Fon. We cut our burn rate by 70% mainly by reducing headcount, raising revenues, raising margins, and particularily by raising margins on the sale of the foneras themselves, which we used to give away practically for free. In our case, we discovered that the free mentality of the internet was not especially good for a wireless community, as most people who got their routers for free did not connect them, while those who paid were more serious about the whole thing. Moreover, we are now about to raise the rates we charge Aliens who connect to Fon. Partly because we need the money but also again to show the value of becoming a fonero and share and never have to pay. We only charge $2 per day while other WiFi companies charge way over $10. Plus the value of our passes increases as we have more hotspots. Fon now has 10 times more hotspots around the world than our second closest rival. In the UK and Japan our coverage is especially good. With this crisis, Fon cannot think of deep pocketed investors continuing to cover high burn rates, regardless of the fact that our investors are BT, Google, eBay, Itochu, and some of the largest VCs in the world. eBay for example, announced today that they are letting go 10% of their workforce and this is probably the beginning of many job reduction programs that will happen in the next 12 months at the big companies.

I know it´s hard to tell a start up CEO to fire half of the people he or she has in the company, because in a start up environment groups are small and strong emotional bonds develop. But the way I see things, we are on to a period similar to 2001-2005 and it´s either half, or all. And maybe it´s first half and then all but it´s worth the try.

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