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Founders: How are you making money & generating cash?

on Wed, 02/06/2019 - 19:58

Tech startups often do not think deeply enough about how they are going to make money. More focus on this would be greatly helpful.

During most of my weeks I'll meet with anywhere from 5-10 founders of tech companies to talk about their business. Many are looking for investment, and though I've invested in a fair number of startups, I've slowed down my investment rate quite a bit - and tell founders this prior to meeting. Those that still want to meet are simply seeking for feedback.

The privilege of seeing this many startups gives me a different perspective than I had when I was a founder. Back then, I kind of hated the idea that a venture capitalist would make a decision about me in the first 10-15 minutes, despite all the things I could share about my business in less time than that. They called it "pattern recognition", and I hated it - convinced as I was that I had a unique insight, and their "pattern" just didn't apply to me.

While there is some truth to my complaint, I now am the possessor of said investor pattern recognition. I can name a half a dozen or more things I frequently see that entrepreneurs fail to consider, or have convinced themselves of which will likely prove to be an issue independent of whether their business idea is sound, or whether they are an incredible entrepreneur.

One example I see often is failure to do fundamental math about revenue. A typical example is an entrepreneur who presents a business that will charge $x for some incremental item. In the common case, the entrepreneur has not thought rationally about how many of those need to be sold in order to create a sustainable business, and where those customers will come from.

For instance, assume a business selling an online service to small-to-mid enterprises for $15 / month, or a discounted for up-front annual payment of $150/year. Assume also that a successful tech entrepreneur wants a business that produces $3M in annual revenue, which sustains the founder and a handful of employees. To reach that revenue, the business must have 20,000 customers.

For the record, that's a hefty amount of customers. And despite being able to spend 15 minutes in a spreadsheet to fabricate a curve that shows how to get to that count, the number of startups that have reached 20,000 SME customers is small, and the capital / effort it will take to reach them is non-trivial - ignoring the unit cost of customer acquisition (CAC).

This might suggest one of two alternate paths:

  • Maybe the target customer might need upscaled; or
  • The price per month may need to be lots higher, focused on a much smaller segment of businesses for whom the value of this service merits paying a higher price.

My point here is that startup founders do not often do simple arithmetic that would reveal some significant issues they have not yet dealt with.

A good fix for this might be to read a decidedly non-tech-business book that shines a bright spotlight on keeping "How to make money & generate cash" front and center. I recently read The Great Game of Business. It's a book written by the CEO (ret.) of an industrial business. But it was so refreshing in how he was able to keep the entire team focused on making money & cash.

Today I also saw an example of this when I heard the company story behind Wistia, which bootstrapped until there was a real money-making business, then used only a small amount of outside capital - which they paid off! - to grow to a business that is now generating substantial millions in revenue (they shared the number; I'm not sharing because I don't know what they wish to disclose). But they paid attention to the money-making, cash-generating portions first, and got it right.

I hope more founders will look harder at this. I'm happy to help.

Also posted at Medium.