We hear stories all the time about 22 year old startup founders who raise $20 million dollars at $100 million dollar valuations. We think, "Wow! Those people are massive successes."
They have money, an amazing company, and are recognized for their bold and daring vision.
But when the tech blogs stop writing about their capital raise, the reality sets in--even for a company with $20 million in the bank. Founders are thrust into a race to stay alive until their next round of capital comes in.
And now, their investors are watching their every move. The founder may still be the CEO, but at the end of the day, she has a board to report to.
Some companies successfully play this game, carefully jumping from round to round. Many companies with massive valuations never make it anywhere. Many simply fail--and in the end, the founders are left with nothing but some nice news articles and hopefully some lessons learned.
The drive to create a multi-million dollar startup is often just ego (another affliction entrepreneurs suffer from). Having a venture backed startup that raises millions is not a success story--it's only an impressive start.
The good news: This trap is avoidable.
The not-so-glamourous other option
Launching a game changing, paradigm shifting startup and raising millions does sound cool. But you know what's even cooler? A business that's actually cashflow positive and earning a profit.
Does it sound as cool to tell your friends? Of course not. But in the end, you have to remove the ego of running a business. Why not start now?
Build a financial foundation
If you start a venture with the goal of having it generate profits, you can build a personal nest egg and can launch into more daring ventures with less overall risk. Approaching bigger ventures with a security blanket buys you more time, allows you to make better decisions for the company, and hopefully focuses priorities towards building a sustainably company.
The reverse route is more difficult than anyone is openly talking about. The number of young people who come to Silicon Valley with big dreams of venture-backed companies that get chewed up and spit out is enormous. And when they fail, they go home with nothing, sometimes not even valuable business experience. That is the greatest kind of failure there is.
But if we can change the conversation to prioritize viable, profitable businesses, maybe more young people would start companies with the goal of making $500,000 in a few years. To be sure, that is an ambitious goal--but I've seen far more entrepreneurs succeed in that endeavor and become quality business leaders in the process.
Taking this route, you at least have five years of experience and a financial foundation built--meaning you can then go launch into a venture-backed business with peace of mind financially and years of lessons learned scaling and running a business.
Learning the basics
I believe a company's one true north star should be profit. When you are funding your own business, this is certainly the case. You need to make it profitable and then you need to keep growing and scaling.
When you are operating your own business, you watch every dollar spent because it comes out of your pocket. That is the result of playing the business game with your money, not someone else's.
When you play the venture-backed game, your north star can be something completely different. In the past, it could be metrics like users and signups, now revenue is becoming the most popular metric.
But revenue does not mean profit and many companies with high revenue are losing money just to acquire those customers to generate that revenue because that is what they need to show investors to raise that next round of funding.
Going back to my example, if you spend five years focused on profit and carefully watching every dollar that is spent, you build a valuable discipline that can only come from experience, which if you are just starting on this path, you most likely do not have.
Deciding where to go
Cashflow business and venture-backed businesses are both very different. If youu're an entrepreneur with fire in your belly and enough hustle to make it through the good times and the bad, you will probably end up in the same place regardless.
This article is meant to encourage people to be open to the not-so-sexy option of spending a few years learning and growing a cashflow business before jumping into the venture-backed game. But in the end, as entrepreneurs, the call is yours!