Ophelia Brown
Software founders have never had so many metrics thrown at them by VCs on how to run a business. Across social media, in newsletters and at events, it’s been hard to escape charts on measuring CAC, cash burn, growth and efficiency.
We’ve never believed that great businesses are built solely on metrics or KPIs. Rather, we guide founders to build a strategy that helps them understand when to grow, when to pull back, when to spend and when to save.
Below, we’ve put together some answers to the questions we keep hearing around growth and fundraising.
What’s the goal of the journey from Series A to Series B?
Just as the journey from the seed to Series A stage is about finding product-market fit, the journey from Series A to B is also defined well.
The purpose of the capital raised at Series A is to take the company from initial signs of product-market fit to having predictable revenue growth.
By the time of your Series B, you’re expected to have a go-to-market engine that lets you know if you invest $1 into sales and marketing, you’ll get $X back (hopefully, X is more than $1).
It’s helpful to have that goal in mind when planning your spending and team structure.
Most common mistake: Getting to Series B without a scalable go-to-market plan.
How aggressively should we grow this year?
In 2021, the answer would have been to grow as fast as possible, regardless of burn. In 2022, you’ve been told to forego growth and pursue profitability. We say: Don’t let the financial markets dictate your strategy.
There is no definitive answer to this question. Just remember that you raised money to capitalize on an opportunity not to preserve cash. As a founder, you should be comfortable with taking risks, but that doesn’t mean you should be reckless. There’s a difference between cutting back on spending because the opportunity isn’t evolving as expected and running out of cash at short notice.
Fortune favors the brave. If you are benefiting from structural tailwinds, now is not the time to pull back.
Most common mistake: Being overly focused on cash preservation over growth when things are working.
How should we plan our spending?
For each year, make plans for best- and worst-case scenarios. With so much economic uncertainty, it’s advisable to adjust your plan every quarter.
You can also safeguard against uncertainty. Deals often fail unexpectedly because of budget cuts or layoffs. Deal with this by budgeting for a bigger sales pipeline than you think you’ll need.
Take your expected conversion rate at each stage and reduce it by 20%. That will help buffer against unexpected losses.
Every role should be considered to be generating revenue. Maximize the productivity, and therefore revenue, of your team. Are product and engineering shipping features fast enough to unlock more revenue? Are the sales team maxed out for demos? Are the leads from marketing actually converting to closed customers?
Most common mistake: Being overly optimistic about revenue assumptions and not allowing a buffer for things going wrong.
How should we think about runway and capital preservation?
Capital is no longer abundant, so it is sensible to think about the cost of growth and how far the money needs to go.
How much runway you maintain should be a function of how much you need it.
If you’re confident in the opportunity, customers are banging on your door and selling is easy, then you can afford to be more aggressive in your spending to accelerate growth.
On the flip side, if your account executives are missing targets, or the product-market fit doesn’t seem to be working for a broader customer base, then it’s time to slow down spending to gain room to experiment and figure out what works.
Most common mistake: Not knowing which category you fall into. Scaling when things aren’t working just amplifies problems rather than fixing them.
Plan with strategy, not metrics
Early-stage companies are, by nature, quite different from public tech businesses or companies further along in their journey. Rather than following metrics that might have worked elsewhere, your role as founder is to be responsive, agile and anticipative. That puts you in control.
If it were as easy as following a single roadmap, many more founders would find success. The best founders take as much advice as they can, but they know their business well enough to understand what will work and what won’t.
Knowing where you want to get to is only half the battle; finding the right way to get there is key. Forget about planning your business based on the metrics of the past decade. We live in a new world order.
Comment