I was caught up in the scale mentality and corrected by a friend who is an excellent CFO.
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?
I cofounded a robotics startup a decade ago and one point we needed cash to keep going. We received 2 offers:
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.
I work for a company with founders that have a similar philosophy, I'm paid reasonably and really like my job, but one thing that bugs me is that I don't see a path towards making more money in the long run. My equity will likely be forever worthless, or a small windfall in the longshot event of an exit. I wonder if there's a path as an early employee that gets me further ahead than a nice job with decent work life balance.
Ask for more stock/promotions/pay. You won't get what you don't ask for. As an early employee, you have value in your company knowledge.
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'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.
I did the same, although we took the other path, figuring we'd learn faster by going all in. We learned that the slower path is likely more appropriate for most hardware based robotic startups.
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.
This is how I understand business, being a small scale kind of guy. But how does it align with the prevalent business model of supercharging growth with capital?
These companies are unprofitable and not default alive, but if you can keep pumping them until they become profitable, they survive.
It doesn’t, because “venture capital backed hyper growth startup” isn’t a business model, it’s a pyramid scheme. The survival of the business after IPO is irrelevant.
Increase value for the shareholders taken to it's logical extreme. Just gotta increase the perceived value to the potential bagholders so the current bagholders can wipe themselves clean.
Maybe for the investors who (intend to) sell all of their stock in the IPO, but surely a founder/CEO has both emotional and financial reasons to ensure the continued survival of the company?
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?