In the wake of a few IPO flops, sustainability and profitability have also come into focus. There has been quite a buzz about raising too much, founders diluting themselves too early on, and hyperinflated valuations.
By now, we are all familiar with “too big to fail” companies; “corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system.”
On the flip side, startups are prone to fail. Keeping the lights on in the early days is tough. Pursuing different markets, products, and ideas can spread a company too thin and ultimately lead to their demise. So how do companies avoid the stockpile of failed startups while balancing the fine line of growth and profitability? Start by being too small to fail.
Don’t Raise Too Much
Raising money is hard enough. Raising the right amount of money can feel like a mixture of art, science, and luck. A general rule of thumb for a fundraise is to raise enough so you can clear your goals for your next fundraise.
As much as it may sound like a scene from “Goldilocks,” you want to be careful to not raise too much or too little. Raising too much can lead to irresponsible spending, a lack of focus, and ultimately spread the business too thin in the name of hyper growth.
As Suhail, Founder of Mixpanel, puts it, “when investor demand is high, most founders choose to raise more money at a higher valuation with the same % dilution. You could raise less money (just what you need) at a lower valuation w/ less dilution. Then you have a lower pref stack + easier time growing into your valuation.”
Raising less money will also allow founders to solely focus on what is vital to their success. Simply put, “scarcity is the mother of innovation.” However, raising too little can be dangerous. Too little at an aggressive valuation can put unnecessary stress on the business and can ultimately lead to the company’s demise.
Control Your Burn Rate and Headcount
One of the easiest ways to remain “too small to fail ” is by controlling your burn rate and headcount. According to a recent CB Insights report, The Top 20 Reasons Startups Fail, the second most common reason that startups fail is because they run out of cash. As the team at CB Insights wrote, “Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by startups.”
Keeping your burn rate and headcount in check is a great way to ease the stress of properly allocating your capital. Hiring before necessary is fuel to a burn rate fire. As the saying goes, hire when it hurts. As Wailin Wong of Base Camp said, “Hire when it hurts means that if you feel overworked for a sustained period of time, or you feel like the quality of your work is sliding, that’s when it’s time to hire. And the pain should be persistent. Something that can’t be resolved by using a new tool or saying no to extra work.”
Ramping up burn rate can be incredibly dangerous, especially for a company that has yet to find product market fit. Keeping tabs on your burn rate will allow you to stay agile while you search for product market fit and profitability.
Explore Alternative Options
For those really looking to avoid dilution and keep things growing at a modest rate, explore alternative financing options. Over the past couple of years, venture debt and other funding options have picked up steam across Twitter and different VC’s blogs.
Earnest Capital, Pipe, and venture debt in general have all been in the spotlight as of late and can be good options for companies focused on sustainable and profitable growth. As Tyler Tringas says, “The New American Dream is to build a profitable, sustainable, remote software business that can be run from anywhere, scales nicely, and prints money.”
While being too small to fail can’t guarantee success for your business it can help balance the fine line between growth and profitability. To learn more about venture fundraising and raising the right amount, check out our other posts here.