What happened to making a profit?
The number of recent articles in the Wall Street Journal would indicate that the public markets are finally waking up to the fact that companies, especially SaaS companies, must stop their uncontrollable spending and focus on getting to profitability. Could this finally be the wake-up call needed to remind entrepreneurs to focus on business fundamentals?
All too often, founders are more focused on raising venture capital, then selling their solution. I am not suggesting that companies should not raise capital; the right money can make the difference between a company’s success or failure. But often it is the wrong money and at the wrong time. Somehow the path to success has become raising venture capital.
Venture capital has always been about funding disruptive innovations and great ideas that could change an industry. Some of these ideas need significant capital investments and commensurately have to generate big returns to justify the risk. But not all companies fit this mold and should not focus on raising capital as a milestone of success.
Venture capital is critical to a thriving economy, and today, there is more capital in the markets, funding more companies, and ever-larger deals. But I would posit that venture capital has dulled the entrepreneur’s senses for problem-solving and how entrepreneurs build their companies. Venture capital has become cool and made venture capital-backed companies the cool kids on the block.
Is venture capitalism to blame? I am suggesting that
. Too often, management teams are focusing on the investor pitch with creative business plans backed up by PowerPoint and spreadsheets. It all sounds great, but most of these plans involve the company buying their way through problems that are better solved with lateral thinking. As an investor and entrepreneur, I want to see a customer’s validation, and nothing is more compelling than a purchase order or even a conditional purchase order. I prefer teams that show perseverance, tenacity, and can sell ice to Eskimos, over a fancy business plan with hockey stick revenue curves. My suggestion, “Get disruptive.”
I have three golden rules:
1. Go out and sell it. Get your customers on board. If you have a real solution to a problem, your customer can be your partner and even help fund the business. Work openly with your customers, meet their needs, and you may find they are flexible to help you. Revenue or the commitment of revenue can fix many problems. With an order in hand, there are many more options and even alternatives for capital.
2. Surround yourself with the right people. I like having a board of advisors that can open doors and help maneuver through land mines. I have found that advisors can do more for the business than most boards of directors. Network and get your message out there; typically, the right people can help you move mountains.
3. Strategic partners are worth more than gold. Find partners that have the most to gain from your solution and build a “win-win” opportunity. Many times partners can help in funding, provide channels to market, and eventually even acquire your business. Strategic partners can also make a big difference to your valuation if you eventually raise money.
Get creative and leverage the assets you have available now — think “bootstrap.” Necessity is the mother of invention, and when capital is tight, entrepreneurs get creative. Stay focused and have a plan that keeps moving the business forward with realistic milestones that are not capital dependant. Tackle the problems in evolutions that the current team can manage. For example, how do you sell 10, then 100, then 1000, etc. Make sure you can sell ten before focusing on a plan to sell a 10,000.
The appetite for growth at all costs is fading. There are only so many Amazon, Tesla, and Netflix. Focus on getting to a profit quickly, and it will provide options if things go wrong, and something always goes wrong.
The key to raising venture capital is understanding the problems money can solve, and when it is needed. But at the end of the day, entrepreneurs must be able to show that he or she can make a profit.
