Raise less, build more
trohan.com
trohan.com
We looked at the finances for our company, and the way he laid it out was that we only need a very few number of customers, relative to market size, to be profitable. That's default alive. Ignore growth beyond that number, just get to that number.
Then look at growth past that.
I had modelled growth directly, and because we're in subscription hardware, there is a scaling cost. If you want to add more customers, you have to keep building more hardware, which introduces a cost.
My takeaway when forecasting is figure out your default alive state and how to get there. Once you're there, then you can look at growth.
Another way to look at it is your company is like a person dying in a hospital, and you're the doctor. You're not going to give them a work-out program and tell them to go to crossfit to get big and strong, you're going to figure out how you can keep them alive and get them out of the hospital. Once they are well, then you can get into the strength (building) stuff.
Everyday until you are profitable, your company is dying. So what are you doing to save it?
These companies are unprofitable and not default alive, but if you can keep pumping them until they become profitable, they survive.
1. VC offer of a couple million dollars for significant share and crazy expectations about growth and scaling up and short timelines etc.
2. Half a million from a private investor for a reasonable share ask who insisted we just kept doing what we were doing.
We opted for 2 and have been running the company successfully ever since. Slow manageable growth. Moderately profitable-nothing a VC would be happy with but it’s enough for us and our 25 employees. I’m not a multi-millionaire but I’m making decent living and have a great work-life balance.
Looking back this is probably the only way we could’ve made this company work. Attaching an industrial air compressor up to it would’ve blasted it to smithereens.
To each their own, YMMV, different types of companies have different financial needs, etc etc but if I ever did a startup again this is the way I’d choose again! It’s manageable, sane, low pressure, etc.
We're looking at this a bit differently because the scale opportunity is available to us. The market we are in is huge, and growing, and we have a unique take.
But that doesn't mean default profitable should be ignored. It shouldn't be an either or.
I guess I'm likening it to a fire to keep you warm enough to survive in the cold vs a bonfire.
Build the fire to keep you alive, THEN put huge amounts of wood and fuel on it to grow huge.
I feel like the VC model is "we'll get a bunch of stuff that might burn, throw gas on it, light it up, and then see if the stuff we put in will actually burn or not".
We had a VC turn us down, not because he didn't believe in the market or the opportunity, but he didn't believe we could grow fast enough.
Otherwise, I'd probably just leave for a company with better pay and better work/life balance.
I've done the startup rodeo before. Worked several nights till 1am. Once worked till 4:30am, slept 3 hours and then right back to the office. After 18 months at that job, badly burnt-out, I was rewarded with layoff and had to find a new job. Never again.
It's much less stressful to just get a higher paying job where you only have to work 6-8 hours a day, with maybe an on-call rotation.
We had fantastically supportive VCs, and raised nearly 10 million, but some things just don't go faster with more money, especially selling to slow moving industrial buyers. We stopped trading a few years ago and helped our employees find other roles while we entered cockroach mode to try and revive it, without success.
I'm happy to share my learnings with anyone who may benefit. It was still a wonderful experience, and worth it just for the people we met along the way.
So many folk show up asking to raise because they only see how their company can work "at scale". They have forgotten to do things that don't scale. It's like they skip problem-market fit, jump way past MVP (but still call it that) and almost have to raise - then try to force the market to exist.
Many (most?) of these companies I've seen could have started with a smaller fit. That could test the market theory for cheap (Lean) - cheap in terms of time and money. If the fit is good one ends up with a small business with medium good margin - and a way better idea of what the scaled up universe looks like.
Much easier to raise when you've got a) solid foundation and b) actual unit economics. However, now the raise is on real numbers - so less likely to be the crazy raise one could do on dreams alone.
Like, do you want a 0.01% chance to raise money or a 2% chance to build a business that keeps you and a few others well paid and perhaps out of the rat-race.
But how do you get it so that everyone else has one first?
Maybe that is the optimum way to get investment? Like how coders at an interview could talk about how they solve business problems with simple solutions, but instead need to talk about how they have kubernetes and microservices experience, know Martin Fowler's patterns inside out, can recite what the L in SOLID means, etc.
Or, you do a raise; it keeps you out of the rat race for a couple years; and you move on when it implodes.
The problem VCs are having right now is that people have figured them out. If I have a business which can throw off cash, I don't need VCs unless I have a competitor I need to outrun. If I don't have a business which will get to cash, it's fine to take VC money to leave them holding the bag if I never find a "real" market.
It's fun to see articles like this one popping up more frequently now that the market has shifted, which amount to a "back to basics" entrepreneurship push. In contrast, the last ten years saw tons of articles pushing founders to raise as much as possible as fast as possible.
One model that also works before that phase but that's eschewed is consulting in the sector founders want to enter. They'll gain insight into what people say are problems, what problems people pay for, and the wisdom to know the difference.
They'll meet stakeholders between users and economic buyers who might later sign the checks. They'll build a network, gain in expertise and credibility, explore potential beachheads, hear what will be their messaging, and discover rough go-to-market strategies all the while having positive cash flow.
This works in their favor if/when they'll want to raise for they will come in homework in hand and coin in pocket. Even if they jump way past MVP like you pointed out, they'd be ahead of someone who didn't do that. Granted, it's service revenue but with money, like with a few things in life, you tend to get offered more when you're already having some regularly and can walk away.
Disclaimer - I have no consulting experience.
Like billions of people, since time immemorial, have started at their first job ever. How would they start at a job in a sector they have no experience or proven track record with? That argument cuts deeper with directly creating a product with no experience or proven track record.
The point of my original reply wasn't that of mutual exclusion, it was that of "de-risking", and a lot of the work is about reducing risk. Heck many if not most questions investors ask are about figuring out risks and their types. What's your story? (i.e: expertise and relevance of why you think you might be onto something or right about something or seeing a pattern, etc) Interviews? Do you have traction? Sales? Sign-ups? Usage? Growth rate? Churn?
Many technical people start coding right away because it's easier for them, but that's precisely why coding might have to come later: the technical risk is lower for an engineer than the other types of risk, so they should check those first. Is that a problem people know is a problem in the first place? That means prospects need "information/education", which impacts on your marketing and on your sales process (instantly becomes high-touch). It could obviously mean you're creating a whole new market, and if you win, you could win big, but it adds risk. Have they spent spent money trying to fix it? How did it go?
You can start building the product right away, then hope people know about it, love it, and buy it. Knowing people people have fallen off buildings and survived will not entice me to try my luck.
Even in consulting, this is useful. When the founder and CTO left, ~65% of employees left and I took over. I killed about a dozen projects we were involved in that were not generating revenue and were only a distraction. I was a contributor in practically all of them and, for some, was the main person (i.e: 70% of the code, and support, client relation, invoicing, ensuring we get the check, and you bet cashing it). The first thing I pushed for was revamping the very way we were doing "consulting" starting with qualifying prospects before anything is done, then understanding the problem before a word describing a potential solution is uttered, and it took as long as it needed until we got the problem down, and iteratively scoping, managing expectations, being aligned on what "success looked like" and pushing for all the stakeholders to be involved (execs/economic buyers and the users, including those who were adamantly against our "intervention" and understanding all the politics of whichever enterprise client we were serving), extracting a set of features, prioritizing for impact and usefulness, etc. and then and only then, we'd start building. All these steps were carried out while explaining the rationale of thought processes so the team could understand the whole process (and eventually each member would be able to operate on the whole life-cycle, create a company, build product, etc). Then extracting all this experience into a scoping document we'd send a prospective client so they do this effort, as opposed to doing ten or more meetings to come up with this (and our clients thanked us, saying that that document, which was a set of questions, really helped them pin-point their own problem and clarify what it is they were after). Then, the second mutation (the first was overhauling our consulting process), was product.
The "valuation" of the company was multiplied by a very large number, people turnover was ridiculously reduced, there was almost no-one leaving, and the service revenue generated in one year with mainly two people surpassed the almost 20 people, combined multi-year revenue since company creation.
There's a famous Antoine de Saint-Exupéry quote that guides this effort: "Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away."
PS: Excuse me for the muddle-head reply, I have something cooking.
Joining a consultancy business, unless specialized in the sector you want to enter, might be counterproductive because you lose control over what projects and problems you work on, and what sectors you work in. You definitely get exposed to many, though, which is nice.
I have avoided in my replies the famous bliss of ignorance that comes from not knowing much about a field. There are many founders who built a product for a sector or industry they knew little about and many of them said that had they known how hard it would be, they probably wouldn't have started. They were not aware of the Gods of Supermarket Aisles or the ways of the Golf Lawn Cartels and jumped with both feet. Being an outsider has its pros and cons.
I don't do startups to have a job, I do startups to do the hard things in an attempt to build something groundbreaking.
Presenting "raise money" vs "have a job" is a false dichotomy.
I've been re-reading this for the last 10 minutes and this is not an explanation for why the large fund would perform worse, which is what I was promised.
Is this an incentives argument? The large fund GPs are not incentivized enough because they earn a lot anyway? But their collective performance IS(supposedly, under a meritocracy) the funds returns and they would earn $600 million in carry if they would 4x. This just doesn't explain WHY large funds supposedly do worse than small funds, just that supposedly they do.
Hypothetical: consider 100 startups each looking for $10m investment. One will return 10x while the others will return 1.5x. A fund with $50m invests in the 10xer and 4 1.5xers, total return is $160m, or 3.2x. A fund with $1,000m invests in all of them, total return is $1,585m, or 1.52x (the max absolute return). Also an incentive issue; suppose the $1,000m fund missed the 10x and instead only made 99 investments, total return is still $1,495m, or 1.495x - very close to max possible in this scenario.
Not really fair to compare performance between funds with such dramatic differences in cash under management IMO.
Larger funds supposedly being more risk averse COULD be a reason for less yield but it might as well on average yield MORE. All you said is just hypothetical. And again, the article frames it as an incentives issue, which it isn't.
>Not really fair to compare performance between funds with such dramatic differences in cash under management IMO.
This literally makes no sense at all. OF COURSE you can compare them and you should. If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. It makes no sense to NOT compare them. Is a dollar from a small fund's return different than a large funds? No.
Assuming there are 1,000 small funds with an average rate of return higher than the large fund, sure.
The problem is most early stage VCs don’t play this way. Their game is all about “selling” their investment to the next round up of VCs, who have a specific playbook for what that looks like. Rarely is that aligned with what makes most sense for your company.
Maybe in a post-boom era that’s going to change. Regardless, this blog post isn’t for founders. It’s for other VCs. So good for Terrence Rohan to try and evangelize the idea a little to the fast follow crowd.
But VCs don’t seem to be interested in funding less…
Whatever magical market forces that might change how funding works, they don’t seem to be at play.
> Whatever magical market forces that might change how funding works, they don’t seem to be at play.
I think money is scarcer these days, and founders who are constantly being burned by VCs will think twice about riding the big VC train in the coming years. As a founder myself who work crazy hours getting the business going, it's painful / bad optics to see full time VCs doing weekend Vegas trips, browse art galleries on weekday afternoons and fine dining every couple of days, knowing I've sold a chunk of my / my team's hard earned equity on that bs. Of course there are great VCs, and some businesses needing to be VC backed, but oh boy, are there really bad apples out there.
It seems to me that funds getting larger is driven by a flawed expectation from VCs that large funds will perform as well as small funds, not based on a cynical extraction of money from their LPs, but maybe I'm mistaken.
Seems unlikely. Does whatever you were doing with the 100MM really scale that badly?
People assume that profitability is perfectly predictable in a spreadsheet - anyone who has run a business for any sustained amount of time knows how false that is. Sure, if you run a SaaS, the margins may be so large that you can hand-wave profitability and probably be ok.
But remember, your first super productive workers are not the ones who are are around 5 years later.
Your first smart and capable customers are not your average customer 5 years down the line.
If you are pursuing revenue growth at any cost, you could end up with a lot of revenue and no hope at being profitable.
Spreadsheets and fancy decks can be made to convincingly present whatever story you want to tell, regardless of reality - look at Uber/Lyft. When you look at how the public markets are punishing this now, it seems obvious, but when you’re smaller and gunning for your next round, it’s probably the furthest from your mind.
> A $100M fund which does 4x earns the GPs $80M ($in carry, plus $20M in management fees)
Nope. 2% of $100M is $2M, not $20M.
> A $1B fund which does 1.5x earns the GPs $300M ($100M in carry, plus $200M in management fees)
Nope.
It's 2M x 10 years (for each year of the funds life).
Ditto for 20M (x 10 years)
It feels completely disconnected from reality, a very abstract way of thinking about money and business.
There is a correct amount of money for starting a business, and it's probably less than you think it is. Too much money in a startup tends to gum up the works and can kill a business just as dead as not having enough. If you have too much money, you're not only going to blow it on things that don't matter, but when you do, you're likely to do so in a way that incurs ongoing costs.
Things like leasing fancier offices than you need (or, in some cases, leasing any office space at all), hiring more people than you need, etc.
As he put it, if you're starting a business and aren't worrying about how you're covering your expenses next quarter, you probably have too much money.
There is a huge cost when you let go of people who would otherwise be kept on payroll if you could continue to pay them. You will get fewer internal referrals to new hires and remaining staff become less engaged in their work. There is additional long lasting damage to your staff as a whole who survived the layoff this time. The culture at the company shifts and never fully recovers.
I don’t think businesses always fully appreciate the long term cost and damage layoffs do to small and medium sized companies, but see headcount reduction as a simple way to reduce its own costs.
It's a bit like having your parents paying all your bills. You might never develop the skills and spending habits that befits your real budget.
Unfortunately I can't promote it to US citizens due to regulatory environment so I can't discuss it here.