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Cash is king.
During my last visit to Silicon Valley, I was told that "Lower costs have never been a strategic advantage. If you’re building Whatsapp, I don't care how much you spend." And indeed, if you’re really exceptional, nothing really matters much.
Exceptionalism is dangerous.
Feeling exceptional can lead to terrible decision making because you accept any and all flaws in the name of that exceptionalism.
You're growing so fast that you can afford to make zero revenue?
Your product is so innovative that the market doesn't understand it yet?
The long-term vision is so right that you can overspend to get there?
The story being told isn’t the real story.
Remember when you showed up to that exam saying you didn't prepare at all? Well, entrepreneurs do the same. In the US, startups claim they ‘haven't started monetizing', but those companies are already making millions in revenue. What they really mean is, 'We aren’t focusing entirely on monetization yet.'
The story is told by the investors and entrepreneurs that won. And that doesn't teach entrepreneurs the right lessons!
Cash is king.
Cash is king is the mantra of financiers. They calculate what is called Free Cash Flow, the cash a company generates after accounting for outflows of money that support operations and maintain its capital assets.
All other indicators: revenue, MRR, gross margins... are usually misleading indicators for evaluating your business. And you shouldn’t be distracted by investors who judge your business based on them!
Revenue isn't enough. The cost of making your revenue can differ greatly (cost of goods sold, variable costs, marketing costs). And as many people have seen during this crisis, not all revenue is resilient. Have a look at this great article from Bill Gurley here.
A high gross margin doesn't correlate with greatness. Jeff Bezos famously said, 'Your margin is my opportunity.' At The Family we had to do a lot of convincing to help low-ish gross margin companies like Spacefill or Totem fundraise. I was (very) happy to see Fred Wilson recently write about this here.
Capital has a cost. We’ve been living in a ~0% interest rate environment for a while now, but still - money isn’t free. Non-dilutive money (money you get without paying for it with equity) to finance working capital and growth should be counted on to cost ~10% yearly, even if you can get a better deal right now. You don’t want to get addicted to cheap money, because when rates go up… ;)
Greatness is only correlated with generating Free Cash Flow. That’s what needs to be the norm, with only very, very few able to avoid that!
Have a knack for business?
Entrepreneurs need to become great at making money and allocating capital. And doing that isn’t any easier than becoming great at product excellence. It must be part of the company culture. Here are a few things to keep in mind while you build your business.
Be humble and start early.
You aren't Whatsapp - focus on revenue. Facebook made $1M in their first accounting year and most other great companies did, too. As someone once said, "$1M revenue, that's like a large kebab stand in Paris."
Learn the basics of corporate finance and accounting. You won't find it on startup blogs (my colleague Younes has a great newsletter), but it will be incredibly useful.
Optimize for learning and quality of revenue.
At the beginning of your startup, you want clients, revenue & lessons. It’s better to have 100 clients paying $100 than 1 paying $10k.
Don't underprice either - it’s just as difficult to sell a product for $100 as it is to sell it for $200. Entrepreneurs at The Family always make fun of me because I’m constantly telling them to double their pricing.
Quality of revenue beats high revenue. Focus on engaged, profitable customers.
Improve your cash collection cycle.
Optimize your pricing for cash flows (and top-line growth): implement yearly pricing plans with upfront payments, get your invoices paid early, implement factoring solutions, negotiate payment facilities with your suppliers. All this is useful even when you just raised a round.
Become a great capital allocator
As you scale, your job becomes allocating capital to growth. Don't buy assets with equity. Stay lean and keep burn low. Optimize for cash flows. Turn cost centers into profit centers if you can. Increase capital velocity. You can read Jeff Bezos’s 1997 shareholder letter to learn from the best.
At The Family, we strongly believe in the Atari ad that got Steve Jobs his first job: "Have fun, make money."
The Family’s next startup batch will happen remotely, starting in January! If you’re an entrepreneur willing to grow your startup in the best conditions, apply here. Get ready for an intense 6-week program: getting smart advice, accessing top operators and fundraising with the best investors.