What’s the most important goal for the money a startup spends? If I asked this question to a bunch of different founders and investors I bet the answers would vary. Some would shout one word like “revenue,” “customers,” “team” or even “profitability.” Others might give me formulas like, “LTV:CAC ratio” or “burn multiple of 1.0 or better.” That’s not what I’m hoping to hear. My point of view isn’t that any of these are wrong per se, and certainly there’s nuance based on type of company, stage of growth and so on, but we often forget one very specific outcome that umbrellas some of these other responses: to increase enterprise value. Startups spend a $1 to ultimately try and create more than $1 of company. If you do that repeatedly and efficiently we will all make money together. If you fail to do this reliably then any positive outcomes are more about luck and timing than durability.
Once the markets started crashing in 2022 there was a swift swerve towards “just stay alive” and having enough capital on hand to make it through a downturn. Cutting burn, topping off funding rounds, optimizing pricing — there were many levers to pull. Now a year later, still in a lull but I believe with more evidence that macro economy has stabilized (although there’s the lagging indicator of startup closures), there’s less generalized advice and more company-specific work to be done. Picture an armada of ships that went through a storm and evaluating which need repairs, which should be scuttled, and which have gained momentum, versus making broad statements about the condition of the entire fleet.
A year ago I emphasized that David Sacks was correct about ‘default alive’ being a terrible true north to maintain. Now, in 2023, I’m coming for startups where that is still the overarching strategy; ones who have more capital than hope. What’s a major indication that a company is still operating with simply a ‘default alive’ mindset? Their investor updates lead with cash on hand and months until cash out as the top line KPI.
If you interpret that last sentence as “Hunter doesn’t care about burn rate” or “VC thinks founders should be spending whatever they need to grow” you’re incorrect. I care very much about both. But what I ultimately care about is that you are playing out a specific strategic bet right now. In the best case one which confidently gets you to a next funding milestone or profitability. In the next best case, one which we all agree is an intermediary set of goals which at the very least increases your optionality and likely enterprise value. I’ve got several companies in that camp right now. We don’t know yet whether the plan of record will get them fully to a next round *but* we do collectively believe that spending a portion of the cash on hand over the coming quarters can get them to customer and revenue milestones that result in increased enterprise value. That reaching, say 100+ customers and $5m+ ARR, make them a more attractive acquisition target than they would be today if we transacted the startup. And so spending $3m of the cash on hand to see if they can get there is a worthwhile goal for common and preferred shareholders.
In the other category, if you’re a company that has more cash than strategy; has more capital than momentum. Boy, let me tell you, your investors are likely either already talking with you about landing the plane or will be having that conversation shortly. There is no good reason for a company to just keep existing in the hope that something magical will happen in the future. It’s not worth the time of your team, your executive leadership, or your investors. My job is to redeploy that capital elsewhere it can get a return. Maybe even in your next company when you’re ready.
There are most certainly ways to resolve these types of situations which are fair, respectful, and balanced. That deserves a separate blog post. For now though, the quicker you can make sure your team and your investors are all aligned behind a “spend X to generate something greater than X” strategy, the more likely you are to produce an outcome which rewards your time and hard work as a founder. Which should always be our collective goal. And if there’s not agreement about where the capital is going, don’t assume it will necessarily remain in your bank account.