- Tanguy Vanderlinden
"Grab the market, worry about profits later",... really ?
Updated: Sep 1, 2019
Unless you have a savvy knowledge of financial institutions, or are followed by an adivsor with a previous successfull tech entrepreneur experience who exactly knows what he is doing and which door to knock when you'll desperatly need cash to keep the machine rolling, ... this is a bad idea. If you go for the "grab the market, worry about profits later.." strategy, you will have no other choice than being wealthy/rich or having investors steadily coming in. Going for that direction impacts a whole organisation/ management style. Some startups add a CFO from straight the beginning at their board in order to include this crucial step. A wise (but costly if you are bootstrapping) move. Cash is king. "No cash" equals "bankruptcy". Getting investment is hard - despite all the flashy news with fundraising of $ millions for startups A, B, C,... shadowing the majority ones - it is a whole job by itself, and does not usually happen in a 3 months time. It is a micro-ecosystem where you need to know and understand the rules. Investment cycle, investment seasonality, investor's profiles and so on so forth. A basic rule in this world is "If you are looking for investors because you need money now (or even in 3 months), then it is too late". On "Grab the market, worry about profits later", please pay attention to the "profits" word. "Profit later" does not mean indeed "no revenue now" ! It does not mean neither that your product could be free and you should be only focusing on your market expansion. If nobody is paying for your product, it is either a hobby (and you are the one paying for it) or an NGO. Even in this latter case, hopefully the cause you are fighting for worths it, and you have donors funding it (in other words, someone is still paying for your work).
If your startup opt for this agressive market conquest, the best preparation advice to effectively fundraise is to make revenues. Especially for the further following reasons :
you have customers ! you have people who value your product enough to pay for it. You have the "ultimatest" proof that you deliver enough added-value for someone ! Angels, VC and all are investing in a business, not a project - they want their money back + a bonus. You are a business, congratulations !
you will raise more interest and can negotiate ! in order to get that reasonnable deal with reasonable term sheets (clauses in your investment contract) including the difficult valorisation negociation step. Having cash history can give as well ideas about the time your venture becomes profitable (soon of course). This makes the valorisation step (how to give the value of your business) easier as well, things start to be suddenly easier. It will become a powerful ingredient for picking up the adequate valorization methodology everyone will be (rightfully) nagging about. Combined with strong market metrics traction, some magic could happen.
you might not need to fundraise ! If by any chance, in the process, you make enough money, you might as well not even need to fundraise. Do always keep in mind that fundraising is selling, welcoming someone at your board who might have completely different views on the strategy of your company. On the other end, getting extra cash from these special investors could provide you with a serious competitive advantage. The more cash you get, the faster you lock stronger market shares. There are no best choices - it all depends on your ambition (without any judgement on it from my side).
Besides all the myths everyone gasp about, Sillicon Valley practices are not different (even if due to the heavy competition, there are always more funds taking more risks to differentiate themselves,...). The most famous unicorns "did turn profitable way before a decade"... and usually all made income from their early days.
Some even became quickly profitable (yep!):
Netflix had revenues from straight the beginning, with a market price for the service.
In 2005 fiscal year, Facebook already made a net gain of 5,6m$, just a year after it got incorporated (2004).
Google was created in 1998, and made 20mio$ revenues in 2000, jumping from 220k$ the previous year, having a positive net income in 2001 (7m$). When filing its IPO in 2004, Google was already profitable.
Their metrics / KPI were quite stunnning:
After its first 3 years, Netflix made 330.000 customers paying 20 USD/month. adding a few years later a million customers a year, then five million,... exponential.
Facebook got incorporated in 2004. By 2005, 6 million people joined the network, focusing mainly on universities at first.
Google wise, in 1999, it was processing 500k queries per day... finetuning its search engine...
These companies were pretty well advised from straight the beginning, by people who had the right connections to boost it up, opening doors, advising ... :
The first investor of Facebook was ... Peter Thiel who put 500k$ in exchange of 10,5% of the capital. 1 year after, corporates were already looking for acquiring Facebook (but Zuckerberg denied).
The Netflix founder was not a newbie/ starter, having sold his previous company (purify) for 700m$. The company had ups and downs, having even offered to sell in 2000 half of the company to Blockbuster - a no-longer competitor at that time - who turned down the offer.
For Google, like Facebook, Brin and Page were students, part of Stanford with a wealthy ecosystem of tech entrepreneurs. One of their first investors was a co-founder of Sun Microsystems (Andy Bechtolsheim). Stories diverge though on how next the story became... 1999 being a roller-coaster year where they tried to sell their entire company to Excite (a no longer present search-engine at that time) for 750k$ and managed to secure a 25m€ round of Venture Capital funding in the same year... the history path is quite blurred and discrete. In 2001, they hired a experienced Chairman & CEO, Google was growing too fast, and the duo did not have what it takes to go forward. Wise decision.
So, in conclusion, losing money is acceptable, but at least you need to show a working business model, a proven revenue stream, jaw-dropping metrics and a way to keep on with business without funding.
There must be customers somewhere, or someone paying for the service or product you put in place.
Having dedicated advisors, high quality mentors can change the whole game towards your growth. At Ubiz, we "just" focus on these 2 metrics : business development & early stage financing. On the other end, if your company has not already made a buck, we cannot really advise you throughout our business development acceleration program or fundraising advisory service (go to incubators or apply to more junior acceleration program first). We keep a close eye and ear to the entrepreneur's ecosystem, preparing talents, entrepreneurs and pushing them to reach their limits (and ours as well sometimes). This kind of "Grab the market, worry about profits later" growth needs a special long-term relationship, and if that's of interest to you, just enter in contact with us and we'll see if we can do something together.