Find a Business Model Before You Run Out of Money
Originally posted on 7/10/19
Collin Gutman is a Co-Founder and Partner at SaaS Ventures, with over a decade of cumulative experience as both an investor and a startup founder. Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world’s first pure enterprise tech accelerator. Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup. Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.
Ask ten investors and ten entrepreneurs for advice on your startup and you’re likely to get 25 different opinions on the most important advice for your startup. Investors are going to tell you to get big quickly, so you can attract them. Seasoned entrepreneurs will tell you to be very choosy about your investors, not just take money when it’s on offer. More novice entrepreneurs will tell you to take money whenever it’s on offer, so you don’t run out. In truth, they’re all right.
The only uniform law of physics that applies to startups is: find a business model before you run out of money. To break down the two corollaries:
1) Find a business model – sure, we all know of companies like Snapchat that grew and raised massive amounts of funding without a business model. But they’re the exception, not the rule, and 99% of entrepreneurs who are focused on acquiring users and figuring out the business later end up going out of business. It takes a rare combination of an exceptional entrepreneur, a visionary and passionate VC, and quite frankly, luck, to make such a company work. If you find a business model, however, you will NEVER run out of money. You can at least run as a breakeven business while figuring out the evolution that catapults you forward into the scalable winner we all want to build. Finding a business model lets you have the optionality around raising money – from whom, when, or whether to do it at all – while making the business more attractive… every VC loves to see revenues.
2) Don’t run out of money – finding a business model and getting to a state where the company could be breakeven is, of course, great. But companies raise capital and have a “burn” for a reason. Well two reasons. Either because it helps you grow faster, or because you don’t yet have enough revenue to be breakeven. These are both great reasons to raise money. So the universal rule here – don’t run out of it. If you’re out of money before you find a business model, you have no optionality. You either go out of business, or take money on whatever terms you can get.
So what are the implications of this law? How do you run your company based off this principle?
1) Focus on revenue from Day 1. Building community and user base are great, but in order to raise money and have optionality, focus on finding real customers willing to pay for your product in reasonable numbers.
2) Raise more money than you need. When things go wrong before you’ve hit your milestones and proven out your business model, this lets you have a little extra runway so that you don’t run out.
3) Find investors aligned to the growth trajectory you want. If you’re going for a home run with aggressive burn, make sure you have deep pocketed investors willing to fund the company if things don’t take off exactly as planned. If you want to get to breakeven and evaluate your options, make sure you have investors willing to take that path.
4) Manage your burn. Once entrepreneurs raise money, the temptation is to spend it. Take your burn up to $50k/month, $100k/month, whatever you’ve heard is right. Don’t do that. Burn in a way that your investors have signaled will get you to future funding milestones (or breakeven). Because if you burn through all your cash, and you don’t have investors who believe you deserve more funding, you’ve broken the golden rule.
Find a business model before running out of money.