“You only find out who is swimming naked when the tide goes out.”
— Warren Buffett, Berkshire Chairman’s Letter
As Inkshares was fundraising in 2014, we established relationships with investors who gave us an A-pass — “Keep in touch, and come talk to us when you’re raising your Series A.” Last year we contemplated raising a Series A and wanted to understand what metrics would be interesting to a prospective Series A investor.
So, we reached out to a VC with a Sandhill Road address and asked for advice. The advice we got was that revenue is unimportant. User growth and retention is what matters. If we focused on revenue growth, we wouldn’t spend aggressively, and we’d fail to “own the market.”
That’s usually a bad move for an early stage company — to get cash flow positive. I have strong opinions about that. Everyone I know who pushes for cash-flow positivity that early stops growing at the rate they should be growing, and gets so anchored by this idea that ‘we need to keep making money.’
We accepted and implemented this growth-over-revenue approach for about 9 months in 2015 after closing our Seed round. It almost killed us as we entered this tough fundraising environment.
This line of thinking is a disease in Silicon Valley. It’s great for unicorn hunters, but bad for startups. It conflates a startup’s survival with its ability to raise venture capital. It’s bad advice.
Not All Investors Are Unicorn Hunters
Buckle down and do whatever it takes to get cash-flow positive with your current cash balance. This might be the most foreign of all the choices, as your board of directors has been advising you to do the exact opposite for the past four years. You have been told to be “bold” and “ambitious” and that there is no better time to grab market share. Despite this, the only way to be completely in control of your own destiny is to remove the need for incremental capital raises altogether. Achieving profitability is the most liberating action a startup can accomplish. Now you make your own decisions.
Startups need to understand that, especially in this environment, revenue growth has primacy. Things like user growth and retention are important, but they only stand as general indicators as to whether revenue will be good or bad.
We made this realization at Inkshares in Q3 last year. During our transition to becoming a revenue-focused startup, several companies became interested in acquiring us. And nearly all undervalued us because we weren’t EBIDTA-positive — would-be acquirers won’t pay for negative net revenue.
We needed to become self-sustaining. It meant raising prices. It meant reducing COGS. It meant moving out of San Francisco to Oakland (companies can rent space for around $1.50/square foot there).
We did all these things, and user growth slowed (users are price-sensitive). But gross-revenue growth accelerated (our March, 2016 investor update, details month-over-month revenue numbers).
Throughout our fundraising process, we’ve found a pool of investors who are attracted to startups that value revenue generation as the one metric that matters. None of these have Sandhill Road addresses. But we’ve found them to be better partners as their advice tends to be more revenue-oriented.
As the tide continues to recede, we’ll be wearing a bathing suit (maybe speedos).