In the start-up world, it is nearly impossible not to be distracted by all the noise around Unicorns and feel pressure to match the pattern of always getting to the next round of funding.
The venture capital mantras of “go faster”, “hockey stick growth”, “multiples upon multiples”, and “crush the competition” are a lot of pressure for founding teams. While many succeed pursuing the Silicon Valley VC-backed company model, many many more fail. In reality, only about 1% of start-ups make it to Unicorn status, and only around 10% of start-ups succeed. The primary cause of failure is running out of cash.
What you don’t often hear from the venture community is: go slower and be more deliberate, get to profitability, take no more capital than you need, keep control of the company, beat the competition by building a superior product and team (which takes time) and you don’t have to build a Unicorn to achieve a life-changing exit.
There is not enough discussion about how to grow a business model that does not have to pattern match the hyper-growth Unicorn model. No one writes articles about all the companies with exits under $100M that only took a small amount of venture money, maintained control of their company and had a life changing exit. In fact, a $50M+ exit is often more meaningful to the founder than the $1B exit.
Start-up founders should know that there is a different way to build a business where you take less capital, keep control and still get to a meaningful exit. Here are the key ingredients to make it happen:
1. Build a great business
The VC rule of thumb of building a valuable company around product, customer and team stays true. You still have to build products that people will want to buy and you have to build a big enough company that would be meaningful to an acquirer. Just the pace of how you get there may be different.
VC- backed start-ups are often pushing growth at the same time the business is building the product, trying to figure out product/market fit and scaling their teams. It's a lot all at once, it burns a lot of cash and it’s unlikely they will get it all right. An alternative is to keep cash burn low or at break-even if you have sales. Focus on getting the product dialed-in and invest just enough in sales and marketing so you achieve market validation and can dial in your sales execution strategy. Build your team by adding the right people at the right time.
2. Pick the right growth strategy
There is no rule in business that says you must have hockey stick growth where you are growing your business by 300% year over year (this is also known as 3Xing). This is a pattern required by venture capitalists to make sure portfolio companies are hitting valuation multiples required to get 10X returns.
Only about 1 in 10 VC investments actually achieve a 10X return. If you are in the VC-backed game and not showing that 3X growth leading to the promise of the 10X return, you will struggle to get the value you need to close the next round. You might end up with an upside down business model because you made a lot of decisions to push that growth and burned a lot of cash to get there. Once you are on the VC funding round train it is really hard to get off.
What seems to get missed in all the talk about hockey sticks and unicorns is that 100% or even 20% growth is fantastic! Building a business is a marathon not a sprint, and slow steady growth can be a huge win with a lot of benefits. Steady growth could mean you cash flow the business and don’t have to take additional investment. You can have a healthy balance within the organization where you are properly scaling the team and processes. You will likely have a happier team than you would in a hyper-growth environment where there is a lot of pressure to meet fundraising milestones for fear of not making it to the next round.
3. Develop a capital efficient business model
The key is to get to profitability at a reasonable growth rate without having to burn a lot of cash. Experiment. Dial in your sales and customer acquisition strategy by trying several things and don’t invest heavily in sales and marketing until you know 1) what go-to-market strategy works and 2) exactly how much cash is needed to grow and support growth from an operational standpoint. Build out a detailed forecast of how to get to profitability in the most capital efficient way possible. Be diligent in how you invest your funds in the business.
4. Take the right investment
The vast majority of the large VC funds you’ve heard of are not interested in writing you a small check to achieve a $100M exit. They want the Unicorns. But there are plenty of smaller and more focused funds and angel investors out there that can see the value in a non-unicorn exit. Be sure you are taking money from the right partner.
Just because someone is offering you $5M for 30% dilution does not mean you have to take it. Only take the money you need. For example, could you take $2.5M instead of $5M for 15% dilution and get to profitability? Does that allow you to not have to do future rounds and keep control vs turning control over to the investors? If you were able to take less capital, get to profitability, only grow by 100% next year vs 300% and still keep control of the business, wouldn’t it be worth it to go a little slower?
5. Get creative on different ways to fund the business
There are plenty of new financing vehicles outside of traditional bank loans and VCs that have come on the market in the past few years such as revenue loans for SaaS companies or non-bank equipment financing. Can your customers help fund your business? Are there terms you can build into your contracts that will accelerate cash from customers such as offering a discount for paying for a year in advance, pre-billing for implementation services, or requiring partial deposits before orders are shipped? Getting accelerated payments from customers is one of your cheapest and easiest sources of funding the business.
Once you hit profitability your options expand to include traditional bank financing options that are not available when you are burning cash.
While your VC investors may pressure you to go faster and hit milestones so you can get the value on the next round of funding, if you can show them a path to profitability and an exit with a good return on their investment without taking further funds, they will be happy. They may still say “go faster” because it is in their DNA, but if you are not taking more rounds it also means they are not taking further dilution or having to write more checks to hold their ownership. An exit at a good valuation with less dilution is a win/win for everyone, even if it took you a little longer to get there.
One final note is that there is nothing wrong with building a company and not selling it. You can run the company and build your own personal wealth to pass on to your family. Or sell the business in 20 years. Lifestyle and family owned businesses can build tremendous wealth.
You don’t have to build a Unicorn.
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About the Author:
Rachel Williams is a Fractional CFO with Ascent CFO Solutions. She has 20 years of experience in finance, operations and strategic leadership roles. Rachel is passionate about working with entrepreneurs and helping early and growth stage companies execute on their vision and build value. Read More