Why You Need to Ring the Freaking Cash Register

Posted on Jul 16, 2013 | 82 comments


I work with a lot of startups. I start to notice when bad behavior creeps into the system as a whole. I have seen much of that behavior over the past 2 years get worse.

Nobody seems to want to make money any more. I remember just a decade ago in 2003 when we all laughed at how dumb people in the 90’s were talking about the race to “capture as many eyeballs as possible” before your competition. You would figure out how to monetize later.

I say ring the freaking cash register. I have said so for years.

Not everybody agrees and in some cases they’re right so you have to decide for yourself.

If you are a super young, well-connected, Stanford CS or EE, worked at Facebook early, have a bit o’ dosh and have VCs chasing you … you are exempt. Or anybody who remotely resembles you.

Why? Because at least while the VC spigot is open and flowing for high-potential individuals that fit a pattern that some VCs seem to favor they can access cheap capital that isn’t terribly dilutive and can use the to fund development and swing for the fences with limited focus on monetization.

Ok. That leaves 99.99% of you.

Ring the freaking cash register.

These days you’re told not to. I understand the logic.

It goes like this, “If your next round investor can see how fast you’re scaling then you can raise money based on your user traction and your valuation can hit the sky. The minute you try to monetize now they have metrics with which to beat you up and say you’re business has limitations.”

Case in point: Facebook, Twitter, Tumblr, SnapChat.

This is certainly one Path you can take if you have the right background.

But that’s not what happens to most of you. What mostly happens is you get some growth. Enough to convince you to work the next 49 weekends in a row to get to your next round of funding. When you arrive at your funding milestone you have enough growth to raise money. But not enough to get 5 offers or to delay your raise.

And you’re not independently wealthy. Nobody is offering to put you on their scout program and pay you to be an angel investor.

You’re out of money.

So you take the offer you get. And the dilution that goes with it.

I see this weekly. The company with no revenue and a $150k burn rate that raised $2.5 million and has 4 months cash left. I often wonder why they didn’t find a way to bring in some revenue to cover costs.

Isn’t that what mere mortal businesses are supposed to do?

Newsflash – if you had $75k revenue / month you’d have 8 months cash left in stead of 4. And maybe by the time you got near month 8 you’d be at $110k / month and only burning $40k.

It’s much, much easier to get an internal round done when your ask is only $400k to fund 10 more months and you might even make profitability on that.

As an investor that’s a no brainer. Hmm. Let’s see. Should I write off my $2.5 million or put in 16% more ($400k) to see if we can get to break even and maybe find more money and/or find our magic growth curve?

That is exactly how most investors think.

But you’re not necessarily going to put $2.5 million to save $2.5 million if you’re not seeing growth because you know that you might be back in 12 months without growth and needing another $2.5 million. After all, if nobody external was willing to fund you now without the accelerated scaling why would they do so in a year?

Or better yet, what if you actually did get to break even?

I know it’s not as sexy as a faster growth rate and a larger round of capital. I have argued this often to journalists and industry pundits that simply don’t understand the trade-off between profits & growth.  I with every entrepreneur would forward that article to their favorite journalist so we could stop having this conversation of “yeah, but company so-and-so isn’t profitable!”

But some businesses take time to find their magic. And I only know one reason companies go out of business – they run out of money.

Delaying going out of business gives you way more chances at product / market fit than any other strategy I know of. And if your ultimate strategy is a small sale of the business that recovers investment and puts some cash in your pocket – having more time to make this work makes a lot of sense.

Plus think of it this way – it’s order-of-magnitude easier to convince a company to buy you when they know that they are buying something that isn’t draining cash than if you have to say, “pay $10 million for my company and …. oh, yeah … we’re going to lose another $5 million over the next 2 years.”

Ring the freaking cash register.

Wait, a second, Suster. You’re full of shit!

My VC told me that if we monetize too early we will scare away our nascent marketplace and not grow as fast. We all know it’s “winner take most” and if that’s not me – what am I doing this for?

Fair point. If your goal is to be the next Instagram or bust that’s a great strategy. And revisit my point about whether you are the archetypal founder who will get tons of money thrust upon you. If that’s you, you can ignore my advice. Your VC is right. Sincerely.

For all others please know that your VC has a vested interest in your trying to go big or go home. They need outsized returns in the shortest period of time possible. They do OK when you take big risks, make huge progress but run out of financial options. They acquire more ownership that way.

They are not rooting for you to fail – please don’t misunderstand me on that. They would prefer you always move up-and-to-the-right. I’m just saying that great progress with no revenue and you needing more money isn’t always at odds with a VC’s interest. Sorry to give away the game.

I have this conversation all the time. I tell the founders I work with,

“Listen, our incentives aren’t always 100% aligned. I want you to do what’s right for the business and for you.

In this situation I think we should be increasing burn rate and not immediately focusing on revenue [I do sometimes believe this]

But know that unless we do gain the traction we hope for it may make it harder to price the next round as a big up round.

There is always the safer strategy of going slower and charging. If we do that and you lower your burn rate then you’ll have more time to prove things out before we fund raise.

The choice is yours.

In your market conditions knowing what I know I would tend to go for it. But I’ll support you either way.”

Many times I say the opposite

“It has been a while that we’ve been trying to get the viral coefficient up but we haven’t seen progress. Our engagement figures look good but they’re not as strong as some companies, which might make it hard to raise money.

If you started to bring in some ad revenue or some data revenue we could lower our burn and have longer to search for options.

If I have to call our co-investors to ask for $4 million more it will be a tough conversation. If that narrows to $1.5 million between 3 of us it’s a no brainer.

If I were you … I’d ring the freaking cash register.”

I’ve said this so many times I’m sure many founders are smiling thinking I’m talking about them when I’m really talking about you. You. The market.

Ring.

What about M&A?

Yeah, I know. I know. Same thing.

If a buyer sees meteoric user numbers rising with no monetization you can apply a “theoretical” ARPU (average revenue per user) without having to prove it. Once you roll out your ad product, your subscription service, your paid version – whatever – and it delivers a real number you’re done with theoretical valuations.

Again, all true. Especially in the world of hyped-up, over-valued, I’m-buying-you-in-a-bullish-market M&A.

We’ve been here before. Sometimes it produces Sharks.

Many times hyped companies don’t reach the finish line unscathed – especially when there is climate change.

I’m not saying don’t try to pull an Instagram. Ok, I am. Don’t try to pull an Instagram.

Ring the freaking cash register.

Photo credit Wired

  • Anthony Gair

    My quandary is a matter of perspective. How do you know wether you are part of that 0.1 pc or the 99.9 pc. If you are in a startup and you are planning on being as big as google, dosn’t that put you in the 0.1% till proven otherwise, probabilitys have a way of changing drastically along assumption / time curves.

  • Chris Craft

    It is a team motivation tool, so either sales, marketing, or developer teams can have real world experiences tied to digital world events. And it works, it is really exciting to hear every new customer that joins or every new sale that happens. :D

  • http://www.justanentrepreneur.com Philip Sugar

    I agree with your post completely. There is one thing you left out. Raising preferred money at $X valuation does not mean you are worth shit! If you get a wire in your bank for common stock certificates then you are indeed worth $X

    Otherwise it means you gave up at a minimum Y% of your company with the expectation that you burn money and grow or die with a ticking time bomb of liquidation rights, preferred governance, and puts.

    If you don’t or can’t pay the money back you are fired and crammed down.

  • http://joeyevoli.com/ Joe Yevoli

    Absolutely agree, Mark. Our goal is to get to the point where we can say to VC’s, “We don’t need your money… But we’ll grow 10x faster with it.” That’s a much better conversation to have. We’ll be there this fall!

  • Nick Ambrose

    Excellent article. Couldn’t agree more really.

    In the three experiences I’ve had in startups so far, the only one still in existence is the one that incessantly managed initial costs (sometimes a little too much!)

    But also focused extremely hard on revenue and getting past breakeven.

    “Never be afraid to ask for the check” was the saying of their best salesperson.

    The first and third startups never learned that and ended up with their customers doing huge open-ended “evaluations” or “waiting for the next and better product” that the salesperson had told them was “coming real soon now” in a desperate bid to make a sale

    *never* appear desperate when you are selling something (even more important if you actually *are* desperate!)

  • http://youareelectric.com/ Katherine

    This post warms my heart. I think the logic that revenue limits your ability to raise capital discourages potential founders of profitable start ups with a working revenue model. Since when is a hypothesis a business model? If not everyone can be the next Twitter or Instagram, how do we support the people that want to create the next eBay without punishing them for growing organically or bootstrapping?

    I think of companies like Threadless, Crowdspring, Etsy, Dabble, etc. Here’s a profound idea for potential founders: create a sustainable business by taking a percentage of a transaction you facilitate (Airbnb). Or sell helpful software that people actually want to use (Mint).

    Why is it so important to massively scale, when you could be a medium-sized tech business, employing 35 people, in an awesome loft office, taking Fridays off during the summer? I’d rather have the loft office than an “It’s okay to fail” story I’m blogging about because my hypothesis-based company went under after 4 rounds, but maybe that’s just me.

  • secretarycleary

    The odd thing is that this needs to be said at all. Somehow the idea of a “startup” has been unlinked from what we’re actually doing, which is starting businesses. Euphemisms like “traction,” “users,” “engagement” distract from the only metric that matters in a business: money.

  • Sofia Fenichell

    Dear Mark, This is a very informative blog. I think the basic principle of trying to conserve/generate cash is prudent, as it would be in any household. But more broadly speaking, the devil is in the details. One needs to differentiate between companies that ‘have no defined revenue model’, have a deferred revenue model, and have a high cost structure and should monetize today. Ultimately, value is created by a return on capital assessment that varies by sector, business model etc. The inputs and outputs aren’t really that complex.

  • http://www.justanentrepreneur.com Philip Sugar

    “The inputs and outputs aren’t really that complex.” are you kidding me? If you have figured that out you would be the best entrepreneur/vc ever. They are so complex that even after 20 years and three exits, the only thing I know is that I have no clue about either.

  • cjwesterberg

    Great post, Mark. In hindsight, think the outlier qualities of The Social Network and Steve Jobs (RIP) have distorted reality and expectations for so many young people. ONce I thought their back-stories were great inspirations to our youth (aka drop-out role-model) but after talking with young people, the view is that some idea will take on its own life and BOOM, it will just happen.
    Worse yet, A million dollar company is no longer a really good thing. (really?) VCs everywhere want scale – the billion dollar company. How to get that? It’s called free.

  • Sofia Fenichell

    Ha! You are right about that! I agree and think the blog is brilliant advice. I just meant that you can further segment your analysis and try to make a better decision by adding more criteria to the revenue/capital allocation decisions. If you are going to make a decision to defer revenues, you should at least know why other than ‘if you build it, it will come’.

  • Ger Kelly

    Spot on. One of the worst things in business to happen since the internet is the confusion of user with customer.

    That said, I love me some internets.

  • http://www.mywifipassword.com/ Parham Beheshti

    I think where entrepreneurs read about millions of dollars in M&A and investments everyday, money has lost its true value. People don’t think $150k burn rate or $200k revenue to cover that burn rate.
    I think VCs investing in companies with no hope of every making money or recovering the money back are to blame. Ad revenue and demographic data value if not directly translated to clear business benefit for small businesses is pretty useless.

  • http://www.justanentrepreneur.com Philip Sugar

    Yes, and have a plan to get to the point where revenues will come. My favorite take on this:

    http://www.southparkstudios.com/clips/151040/the-underpants-business

  • Libor Supcik

    Horrible writing

  • http://bothsidesofthetable.com msuster

    Dick

  • ClarkBenson

    Great post Mark, this is probably one of the absolute top things that VC backed entrepreneurs (and frankly, many of the younger VCs themselves) need to understand, and I don’t recall ever seeing an article dissecting it this way. There is truly a lot of nuance around it – “lots of times i tell entrepreneurs this” and “yet lots of times i tell entrepreneurs the opposite”. Contradictory-sounding, but not when you take context / timing into account.

  • ClarkBenson

    actually not as simple as East Coast / West Coast – even within the West Coast, LA startups are far more focused on monetizing early (and LA investors are far more skeptical of not monetizing early), than their Bay Area counterparts. (BTW I’m not saying that is always a good thing, LA investors sometimes miss the boat on true local rocketships, and overinvest in expensive-to-scale eCom plays)

  • mike gilfillan

    Damn Phil, you nailed it. Having lived this situation for 10 years, I recognize that you speak the truth:

    VC money (preferred stock) = acquiesce control and become an employee hoping for a big payday (M&A). Some win, some lose.

    Lot’s of luck gentleman.

  • http://www.justanentrepreneur.com Philip Sugar

    Next time I’m in Atlanta we’ll grab a beer.

    If I had to say the two biggest fallacies entrepreneurs have are:

    1. You think you are worth the post money valuation of a preferred round
    2. You think it is Other People’s Money and if you lose it no big deal.

    For venture capitalists its:

    1. Somebody else could run the company better, its always the CEO’s fault.
    2. They let the fact that everybody else is on the ask, they somehow are the most important part of the ecosystem.

  • http://www.ericgfriedman.com/ Eric Friedman

    Thank you for writing this excellent post.

  • MJGottlieb

    Hi Mark. I definitely follow your thinking here. As a person who has been on the asking side of the table more times than the giving side, I know how important it is to have some tangible revenue for a few main reasons. First, if the product or service is in an emerging or unproven market, it shows proof of concept. Second, while the engagement may be great, it doesn’t always reflect projected revenue as it may be a product or service that people love when free but, when you charge for it they may not have or see the ‘pain’ (your words) enough to pay for it. Furthermore, even if you have a product or service that is a derivative product (I think that was the name you referred to in a previous post), a person needs to show there is enough of a differentiation point in their product or service for people to go to their product as opposed to what is already out there. Again, thanks so much as I always learn quite a bit from the content. Best- MJ

  • Gillian

    awesome, we just put real cash register to our offices, and after every sale our guys can ring once! https://www.facebook.com/photo.php?fbid=515456471857099&set=a.332098876859527.72911.112780525458031&type=1&theater

  • mike gilfillan

    Anytime. Are you still in PA?

  • http://www.justanentrepreneur.com Philip Sugar

    Close

  • Ryan Lelek

    @msuster:disqus – I see what you did there, capitalizing the “P” in “Path.” :D

    “Case in point: Facebook, Twitter, Tumblr, SnapChat.
    This is certainly one Path you can take if you have the right background.”

  • bryanweis

    Hey Mark, this article was full of great points. It seems the majority of start-ups getting funded these days have no monetization model, which, as you point out, seems very counterproductive. Your line “I only know one reason companies go out of business – they run out of money.” is spot on and it’s always surprising to me that more start-ups don’t realize this!

    I reached out to you a few weeks back regarding a Skype call for Bearcat Launchpad, the University of Cincinnati’s student run business accelerator. I sent an email to the email you provided me and I still haven’t heard back. I was hoping this was still something you were interested in!

    Thanks again,
    Bryan

  • wfjackson3

    “Wait, a second, Suster. You’re full of shit!”

    You beat me to it! Nah, I am saying the same things on a nearly daily basis out here. I don’t get what people are so freaking afraid of.

  • http://www.victusspiritus.com/ Mark Essel

    Word.

  • http://DigitalCollective.co/ Mical Johnson

    “Ring the freaking cash register.” If a small business or startup focused on getting one more customer everyday what would it do for their bottom line?

    Too much time is spent on the process or product and not enough on making the cash register ring.

    Great post all the way around.

  • paula brogan

    Here’s what I think would help. It’s kind of disruptive Mark, you’re the guy to do it. Angels and VC’s should take some of that money they have to build their own sales infrastructures to deploy within their start-up portfolio companies. Founders are almost always engineers employing engineers. They don’t know the difference between sales (ringing the cash register) and marketing. And with all due respect, and present company excepted, the VC’s are finance people, who have never worked the sales trenches so most of them can’t help either. Complex, enterprise sales is a skill that it takes years of experience to hone – and there is a marked disconnect between the plethora of solid, veteran enterprise sales people with track records of revenue generation, and the start-ups.

  • https://tripcover.com.au/ Desmond Sherlock

    Kaching! I couldn’t agree with you more Mark. We have been there and done that with $1.5m and burnt it all and almost zero equity left and therefore lost interest….goodbye.

    This time we are 1.5 years into slow growth and now have the kachings increasing at 50% every 3 months and I am loving it, running on revenues and no pressure from anyone, …heaven!

    PS I really do have a Kaching sound every time we get a sale.