Often, when I meet companies and we talk about what milestones they will accomplish with their seed funding, one of them is to get to cashflow positive. I don’t have hard numbers but would guess that 1/2 think they will do this with seed funding and another 30 – 40% will do it after Series A.
The question on my mind is: is this a realistic or even a good goal to be shooting for?
Readers might accuse me of completing my transition to the darkside after reading this, but I have always wondered about whether it’s good for a startup to be cashflow positive or not.
My feeling is that anything that is worthy of investor $ and expectations is going to take a lot of capital to realize. If your startup truly needs a few hundred K then you’re just not on a path to being the next Facebook. That’s totally cool. And a core aspect of our fund is the flexibility we have re: exit outcomes. We are a relatively small fund and we invest small amounts iteratively as a company hits its milestones. This enables us to generate good returns on early exits but also be able to swing for the fences.
From a fund perspective, it’s less important that you get to cashflow positive, than it is that you establish a profitable business model.
Let’s look at my favourite sector SaaS as an example.
The biggest barrier to growth in SaaS is customer acquisition cost. SaaS vendors typically have to spend many months of subscription revenue up front to acquire a customer. They recover that investment in the coming months and after that the customer is profitable. So, each customer contributes margin and profit, but if you want to grow fast you need the cash upfront for acquisition. Otherwise, you have to wait to collect months of margin before being able to grow more.
Dharmesh from Hubspot is (I believe) on record as not loving VC and does not encourage entrepreneurs to raise lots of capital. Yet, Hubspot has raised over $65M! Why? Not, I assume , because he’s a masochist, but because it enables the business to grow faster. Hubspot customers pay $500/ month. The capital gives him the ability to acquire customers far faster than he could organically.
I know a CEO that has gotten his business to cashflow positive each time he has raised capital in order to prove that the business can do this and also to not be burning and hence vulnerable (by “needing” $). I think this is a bit extreme. If your business is profitable and growing on a per customer basis, that’s enough.
I know another CEO that recently raised millions for his SaaS business that was already profitable. He could have just kept going, but by raising the capital, he has positioned his company to become the dominant player in the category.
So, I guess in the end, it comes down to your objectives. If you want to be the market leader in your space and/ or if you want to work with “tier 1″ investors (those objectives are highly correlated) then accept that your company will raise many rounds. If you don’t that’s fine, but don’t try chasing down the Sequoia’s and Union Square Ventures of the World.
That’s my take. What do you think?