Strange encounters of the VC kind
Context: I’m a seed stage startup and I take quite a lot of meetings with VC across Europe. While most encounters are helpful and really an absolute delight, sometimes you get a one-off.
Where things got off the rail: monetisation. While an important subject, there is a time and place for this theme. Why? Because there is an order of operations. A startup is an organisation trying to derisk a new business model. Work on too many issues in the same time is a recipe for failure - you need to prioritise. Before getting to this, some background:
Why people invest in SaaS businesses? SaaS has a recurring revenue model, therefore while the CAC (customer acquisition cost) is paid before subscribing, the LTV (life time value) is hopefully realised over many months. For a business to stay afloat in these conditions it has to focus on 2 core metrics: VALUE CREATED and VALUE CAPTURED. For a business that cannot achieve scale (think a restaurant) the 2 metrics have to be managed in parallel because only profitability can keep you afloat while you have a limited capacity to serve. SaaS-es are different:
Because it takes long until you see money from your customers, this limits your growth (Acquisition). Because growth is also contingent upon not losing the customers just acquired, you need a good product to keep them around (Retention).
Therefore an investment round buys time until you need to figure out MONETISATION. You can first focus on building a great product (how else could you dominate a market and drive growth?) with the help of a Seed round; and then you can focus on figuring out customer acquisition — and not before because otherwise you will bleed out customers — helped by an A series round. Here is an illustration of the right order of derisking:
But what if we switch the order of operations? If you succeed to figure out monetisation so early on then congrats! you figured out in who knows how much time how to capture value from a handful of customers that are probably not representative for your market.
Not focusing on monetisation is actually a competitive advantage! Because my narrow problem space is unaddressed, I can focus on building a great product for an underserved market, without charging them a dime, and focus on being the default solution. This makes us a purpose-driven organisation. I believe it’s more than that: while others might have skin in the game, we’ve got soul in the game.
Mark Twain said, “Time is what keeps everything from happening at once.” Obviously this is why us founders raise money. That runway money buys us is exactly the time we don’t have to deal with other issues but one.
Uh, and you know what is the most expensive thing on Earth? Legitimacy. Unit economics are nice, but being the best solution, the right solution, the only reasonable solution is much more rewarding. And I believe it opens up many more opportunities.
Am I being unreasonable or is this the norm? Uber was in 2020 $6.7 b in the red. The only year it was profitable was when they sold some of their national units.
A 2019 Pitchbook report showed that, of 100 startups worth more than $1 billion to successfully complete an initial public offering since 2010, 64% were unprofitable. Last year, unprofitable companies that went public fared better than profitable ones, according to Recode.
So fellow founders: be inevitable! … and only then profitable! 🤑
