A key question(s) I've wrestled w/ before as a product founder & have been asked a lot now as a VC is this:
a) How should you think about growth vs profitability
b) How should you think about fundraising based on this?
Some thoughts below:
a) How should you think about growth vs profitability
b) How should you think about fundraising based on this?
Some thoughts below:
1) At a high level, depending on the product & business model, growth and profitability don't always need to be at odds with each other. But sometimes they are. The most important thing to understand is what kind of business ar e you? That will answer these questions for you.
2) First, ask yourself if your business has strong network effects. Simply, does having more customers, affect your ability to get more customers? And to what extent?
3) Obviously, to a certain extent, all businesses are affected by having more customers than fewer. You get some word of mouth and some credibility from having worked with other customers.
4) But I'm talking about strong effects. For example, Uber & Lyft - having more drivers available affects your ability to get riders. And more riders affects your ability to get more drivers. In general, there are strong network effects in most marketplace businesses.
5) In contrast, if I have a B2B saas sales platform, there are probably fewer network effects. Getting a Fortune 1000 company as a customer helps me with brand, but having 10 vs 100 of those doesn't really help me that much more in getting my next customer (in most cases).
6) But, you can't generalize this. There are B2B cos w/ network effects. (sorry - clarification of network effects -- also increases value to addl customers). Eg: there are now B2B companies that use a lot of ML. Having more customer data increases value to the next customer.
7) Secondly, in addition to network effects, does your product have any virality? Does having addl customers help your marketing? Calendly, Mixpanel, Intercom, and Github are all good examples of this. You see their link or site on someone else's, you try it out.
8) Thirdly, what does the payback period of your product look like? Is it immediate? Or does it take 5 months of SaaS revenue? Or 3 transactions to pay back?
9) After you've asked yourself these 3 questions: network effects, ability to market through your users/customers, and payback period, you can pretty much figure out your game plan.
10) If it turns out your business has near zero network effects and no virality and you have quick payback, then you really don't need VC money. (or not that much) There are actually lots of companies in this category -- most B2B companies with a high price point fit this.
11) Moreover, I'd also add that if these are the characteristics of your business, then using VC money to grow unprofitably generally won't help you either.
12) If you do have strong network effects where having more customers improves value for future customers, then I would strongly recommend VC money. It becomes a moat. (both the money and your customers). This is why you see a lot of marketplaces raise big $$$$.
13) If you have good virality, you don't need VC money per se, but it could help you expedite your growth, because your growth goes exponentially, so you may want to run with that fast even if currently unprofitable.
14) Lastly, if you have a sales cycle where there is a payback period, raising money can also help you with this. However, a couple of caveats here -- is it subscription rev or transactional rev?
15) If subscription rev, then you may want to consider other growth options -- like revenue based financing instead of VC. You basically just have a cash flow challenge. I.e. in 3 months, you will pay back the customer, so you are just waiting for 3 months to go by.
16) If it's subscription, there's pretty good confidence for a short payback period that they will pay, so you can get money upfront with rev-based financing to put towards further growth.
17) If it's transactional rev like in e-commerce, then you don't have that level of certainty. But you will likely need to raise VC money in order to continue to grow to wait out payback periods.
18) tl;dr Growth and profitability are dependent on your business model and product. Look at network effects, customer virality, and payback periods to decide how much to raise.
