In Silicon Valley, we spend too much time celebrating the wrong metrics. In particular, we overemphasize the celebration of funding and related valuations. Daily, we're inundated with announcements of funds raised and the associated valuation, then we're invited to the related parties. It sometimes feels like we forget that the point of all this funding is to fuel businesses whose objective is to create great products that customers want to pay for and ultimately reach sustainable profitability.
Somewhere between the fundraising announcements, relatively few unicorns and a huge number of dead companies, is the heartbeat of Silicon Valley: the profitable and growing startup. More often than not, this group of sustainably profitable startups and their processes go unnoticed and their successes under-celebrated.
Of course VCs want to fuel and celebrate valuations because it enables them -- especially the early investors -- to drive higher returns for their limited partners. But it's important to draw a distinction between when a VC does their job well and when we as CEOs are doing ours. The issue with this valuation-centric mindset is that it takes the focus off building a profitable and sustainable business.
When startups chase "vanity" goals like becoming the next unicorn or raising more money than the company needs, it's often at the expense of fundamentally more important factors like focusing on profitability and producing a high-quality product. Fundraising and unicorn status should never be the goal. They should be the result of strong products, great execution and customers repeatedly finding value in and paying for what we're delivering -- and doing so profitably.
And there's nothing wrong with celebrating fundraising as a milestone or as an outsider's validation of our business idea or early success, but we should see a much larger percentage of our celebration energy and efforts going into acknowledging sustainable profitability.
The Dark Side of Our Fundraising Obsession
Throughout its lifetime, Jawbone secured $930 million in funding from top VCs. Today, however, the company has unfortunately become known as "one of the most spectacular failures in the history of startups."
What Jawbone's story shows us is that high funding rounds don't necessarily indicate long-term success. In fact, there are extremely risky downsides to basing your company's business strategy solely on "explosive value generation characteristics." It can create a huge potential for volatility and short-term value. If we optimize for and celebrate reckless growth and valuation, we can quickly lose sight of our goal of delivering value to customers.
When securing huge rounds of funding becomes the primary goal, we tend to spend more wildly. While product market fit and execution risks are part of the start-up challenge, we want to limit risks attributed to poor discipline.
We've seen endless examples of companies that over-emphasized growth and ultimately failed -- Jawbone, Yik Yak and Beepi, to name a few. In these cases, the market has been pretty punishing. What we can learn from these companies is that it is irresponsible to raise huge rounds of funding and grow wildly if there is no clear path to profitability within a reasonable timeframe. Profitability at the expense of growth can also be suffocating. It's about striking the right balance and celebrating that more.
There are three key elements to building a sustainable business model:
1. Fundraise responsibly.
When we raise money, we should directly relate the growth of our business to profit and revenue. That's not to say we want to get to profitability at the expense of growth. Fundraising to grow talent and to expand the customer base is important, but fundraising is simply a tool, like SEO or digital marketing. We should also emphasize and focus on growing through the sustainability of our product and its value to the customers that are paying for and using it.
2. Make sustainability the end goal.
Creating a sustainable product and business model helps manage burn rate and helps us find ways to accomplish key goals. In fact, Facebook was valued at $1 billion when Yahoo looked at acquiring the company. Instead of selling, it found a way to monetize and become profitable; now, it's valued at $500 billion and still growing.
3. Celebrate profitability, not raising financing.
Making profitability your company's primary goal demonstrates the value of sustainability for your business. Instead of communicating to employees that fundraising is the primary mechanism for fueling growth -- or worth celebrating -- it puts the emphasis on us building a great product and business.
Getting to sustainable profitability means we've put in the work to make a great product, we're executing at a high level and our fundraising round paid off. Now that's something to celebrate. After all, Amazon, Google, Facebook, Netflix, and all the other companies that we admire most, all share one common characteristic -- they are profitable.