Editor's note: This article first appeared on Mark Suster's blog.
I work with a lot of startups. I start to notice when bad behavior creeps into the system as a whole. I have seen much of that behavior over the past 2 years get worse.
Nobody seems to want to make money any more. I remember just a decade ago in 2003 when we all laughed at how dumb people in the 90′s were talking about the race to “capture as many eyeballs as possible” before your competition. You would figure out how to monetize later.
I say ring the freaking cash register. I have said so for years.
Not everybody agrees and in some cases they’re right so you have to decide for yourself.
If you are a super young, well-connected, Stanford CS or EE, worked at Facebook early, have a bit o’ dosh and have VCs chasing you … you are exempt. Or anybody who remotely resembles you.
Why? Because at least while the VC spigot is open and flowing for high-potential individuals that fit a pattern that some VCs seem to favor they can access cheap capital that isn’t terribly dilutive and can use the to fund development and swing for the fences with limited focus on monetization.
Ok. That leaves 99.99% of you.
Ring the freaking cash register.
These days you’re told not to. I understand the logic.
It goes like this, “If your next round investor can see how fast you’re scaling then you can raise money based on your user traction and your valuation can hit the sky. The minute you try to monetize now they have metrics with which to beat you up and say you’re business has limitations.”
Case in point: Facebook, Twitter, Tumblr, SnapChat.
This is certainly one Path you can take if you have the right background.
But that’s not what happens to most of you. What mostly happens is you get some growth. Enough to convince you to work the next 49 weekends in a row to get to your next round of funding. When you arrive at your funding milestone you have enough growth to raise money. But not enough to get 5 offers or to delay your raise.
And you’re not independently wealthy. Nobody is offering to put you on their scout program and pay you to be an angel investor.
You’re out of money.
So you take the offer you get. And the dilution that goes with it.
I see this weekly. The company with no revenue and a $150k burn rate that raised $2.5 million and has 4 months cash left. I often wonder why they didn’t find a way to bring in some revenue to cover costs.
Isn’t that what mere mortal businesses are supposed to do?
Newsflash - if you had $75k revenue / month you’d have 8 months cash left in stead of 4. And maybe by the time you got near month 8 you’d be at $110k / month and only burning $40k.
It’s much, much easier to get an internal round done when your ask is only $400k to fund 10 more months and you might even make profitability on that.
As an investor that’s a no brainer. Hmm. Let’s see. Should I write off my $2.5 million or put in 16% more ($400k) to see if we can get to break even and maybe find more money and/or find our magic growth curve?
That is exactly how most investors think.
But you’re not necessarily going to put $2.5 million to save $2.5 million if you’re not seeing growth because you know that you might be back in 12 months without growth and needing another $2.5 million. After all, if nobody external was willing to fund you now without the accelerated scaling why would they do so in a year?
Or better yet, what if you actually did get to break even?
I know it’s not as sexy as a faster growth rate and a larger round of capital. I have argued this often to journalists and industry pundits that simply don’t understand the trade-off between profits & growth. I with every entrepreneur would forward that article to their favorite journalist so we could stop having this conversation of “yeah, but company so-and-so isn’t profitable!”
But some businesses take time to find their magic. And I only know one reason companies go out of business - they run out of money.
Delaying going out of business gives you way more chances at product / market fit than any other strategy I know of. And if your ultimate strategy is a small sale of the business that recovers investment and puts some cash in your pocket - having more time to make this work makes a lot of sense.
Plus think of it this way - it’s order-of-magnitude easier to convince a company to buy you when they know that they are buying something that isn’t draining cash than if you have to say, “pay $10 million for my company and …. oh, yeah … we’re going to lose another $5 million over the next 2 years.”
Ring the freaking cash register.
Wait, a second, Suster. You’re full of shit!
My VC told me that if we monetize too early we will scare away our nascent marketplace and not grow as fast. We all know it’s “winner take most” and if that’s not me - what am I doing this for?
Fair point. If your goal is to be the next Instagram or bust that’s a great strategy. And revisit my point about whether you are the archetypal founder who will get tons of money thrust upon you. If that’s you, you can ignore my advice. Your VC is right. Sincerely.
For all others please know that your VC has a vested interest in your trying to go big or go home. They need outsized returns in the shortest period of time possible. They do OK when you take big risks, make huge progress but run out of financial options. They acquire more ownership that way.
They are not rooting for you to fail - please don’t misunderstand me on that. They would prefer you always move up-and-to-the-right. I’m just saying that great progress with no revenue and you needing more money isn’t always at odds with a VC’s interest. Sorry to give away the game.
I have this conversation all the time. I tell the founders I work with,
“Listen, our incentives aren’t always 100% aligned. I want you to do what’s right for the business and for you.
In this situation I think we should be increasing burn rate and not immediately focusing on revenue [I do sometimes believe this]
But know that unless we do gain the traction we hope for it may make it harder to price the next round as a big up round.
There is always the safer strategy of going slower and charging. If we do that and you lower your burn rate then you’ll have more time to prove things out before we fund raise.
The choice is yours.
In your market conditions knowing what I know I would tend to go for it. But I’ll support you either way.”
Many times I say the opposite
“It has been a while that we’ve been trying to get the viral coefficient up but we haven’t seen progress. Our engagement figures look good but they’re not as strong as some companies, which might make it hard to raise money.
If you started to bring in some ad revenue or some data revenue we could lower our burn and have longer to search for options.
If I have to call our co-investors to ask for $4 million more it will be a tough conversation. If that narrows to $1.5 million between 3 of us it’s a no brainer.
If I were you … I’d ring the freaking cash register.”
I’ve said this so many times I’m sure many founders are smiling thinking I’m talking about them when I’m really talking about you. You. The market.
What about M&A?
Yeah, I know. I know. Same thing.
If a buyer sees meteoric user numbers rising with no monetization you can apply a “theoretical” ARPU (average revenue per user) without having to prove it. Once you roll out your ad product, your subscription service, your paid version - whatever - and it delivers a real number you’re done with theoretical valuations.
Again, all true. Especially in the world of hyped-up, over-valued, I’m-buying-you-in-a-bullish-market M&A.
Many times hyped companies don’t reach the finish line unscathed - especially when there isclimate change.
I’m not saying don’t try to pull an Instagram. Ok, I am. Don’t try to pull an Instagram.
Ring the freaking cash register.