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Happiness is positive cash flow.
You hear it a lot: if you’re building a startup, don’t expect lots of cash.
There’s the myth of the poor entrepreneur that survives for years on cereal and pasta. And there’s the idea that building a tech company means that you can afford to never make a profit, even after the IPO (ask Uber). In the end, everyone on board (founders, investors, employees) will eventually make money by way of capital gains.
However, don’t believe the hype.
Many US tech giants effectively enjoyed steady revenue from the get go (see the details about Facebook here). And all those entrepreneurs who talk about not paying themselves a salary often have someone else supporting them: a spouse who’s a well-paid professional in financial services, or wealthy parents who are happy to buy that well-located flat with a view.
There’s a reason why Silicon Valley doesn’t really care.
The Bay Area is not only home to the most supportive entrepreneurial ecosystem in the world. It’s also a foothold on the great US domestic market, which rewards tech ventures with very high returns to scale. This is the reason why profitability doesn’t matter that much, especially if cash is flowing in early on. Every founder in their right mind would prioritize growth over profits in this context: there’s abundant capital to fund the growth, and there’s a very large market to eventually realize the resulting value.
Elsewhere in the world, cash efficiency is essential.
By experience, I know that Europe’s fragmented nature, for instance, makes it very hard to achieve returns to scale comparable to those of US tech companies—which in turn explains why it’s harder to raise venture capital here than in Silicon Valley. And there’s only one way to accommodate lesser returns to scale: cash efficiency.
By the way, it’s one lesson we can learn from Chinese entrepreneurs, as written by seasoned China-based investor (and author) Kai-Fu Lee:
Startups locked in venture-funded battles are almost never profitable at the time, but the company that can drive its losses-per-customer-served to the bare minimum can outlast better-funded competitors. Once the bloodshed is over and prices begin to rise, that same ruthless efficiency will be a major asset on the road to profitability.
Remember that “corporate happiness is positive cash flow”.
The fact that there’s such a thing as investing in growth doesn’t mean you can lose money forever. In fact, what really makes or breaks a fast-growing business these days is figuring out the appropriate level of investment in growing your user network. If you spend more than is necessary, you’re simply wasting money—and your customers think the product is cheaper than it looks, a mindset that is very difficult to change along the way.
So while you might not be profitable yet, definitely don’t wait before you focus on cash efficiency!
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.