Learn how to embrace constraints in business
Constraints are very likely the differentiator that makes companies that embrace (or live with) them succeed and thrive — by being forced to be economical, laser focussed on customer needs and satisfaction, driven to bring in new revenue, and build the product that resonates with the market today.
People talk about constraints like they are a bad thing. “If we just had the capital, we could build the product out and hire a go-to-market team that’ll drive revenue”. Yet we consistently hear stories of companies thriving against the odds — starting in a down-turn, bootstrapping, being turned down by everyone — funders, prospects, recruits.
I think founders should beware of raising vast amounts and large valuations and hiring ‘fully coverage’ large A+ teams. There aren’t many stories of these being the reasons a company succeeded. But the graveyard is littered with companies that over-spent too early during frothy times.
When you have money — you spend money. Human nature sets you up to build everything ‘right’ — the right team, the best culture, everything done thoughtfully, the best ‘minimal viable product’ (the irony!), and then launch when you’ve got there. It’s the cash-to-spend spiral — what gets raised gets budgeted for and spent in pursuit of perfection.
You think you’re moving as lean and quick as possible, but you’re not.
It’s simple — when you don’t have money — you make money. In the software world, where getting started is effectively free (i.e. AWS credits, SEO and other low-cost marketing activities, Stripe), and consulting and paid proof of concepts are common, if you are laser focussed on ‘keeping the lights on’ you increase the chance of actually doing that while also building a business that has a market.
Getting this far isn’t all that uncommon — it’s what happens next that really sets people up for problems. Too often the goal becomes “we have validated Product-Market Fit, now we must raise money to scale the business”.
I call this the ‘Tech Blog School of Management’ → founders read the fantasyland outlier stories and assume this is the yellow brick road, and go raise a large pot of money. And the more that do that, the more that follow this misleading signpost.
When you have money in the bank your focus becomes internalized “how to we use this money to build a successful business”. Whereas, when all your money comes from cash flow your focus is external “how can we use our cashflow to generate more cashflow”. The first is the ‘cash-to-spend spiral’, the second the ‘success based investing model’.
The constraints of success based investing are good for business: they force you to made trade-offs. There’s always going to more people to hire, product roadmap prioritization issues, not enough marketing activity (and budget), and people looking for raises and money for their department. All these requests are reasonable — but when you have limited resources, you innately become good at allocating money and resources to things that will move the needle most.
Constraints do not mean putting the short-term over the long-term. I would argue that removing constraints (i.e. raising too much money) puts too much focus on the long-term without continued market validation and near-term operating effectiveness.
Constraints do mean thinking about how to use what we have today, to iteratively build a long-term sustaining business. Constraints help balance short and long term decision making.
Lastly — when a bump in the road occurs — macro in the economy or micro in your category or location — businesses that work with constraints and capital efficiency are far far better suited to adapt and weather the storm than those with unsustainable cost structures and lacking the revenue to support them.
Follow the ‘success based investing model’ and reinvest every dollar of operating cashflow back into growing and building the business. Pour fuel on the fire — but avoid funding ‘plans’. Consider raising debt or other alternative finance instead of costly VC. to accelerate growth with a short-term cash infusion, without sacrificing equity.