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After funding, count the days, not the dollars

Posted by Andy Singleton on Wed, Nov 21, 2007
  
  
My colleague Sesha Pratap observed of a friend that "now that he's got funding, he needs to start counting days, not dollars".  An entrepreneur who has been counting every dollar, every penny, keeping afloat by coaxing cash from customers, minimizing expenses so that he can last however long that takes, is suddenly asked to go fast and spend money.  Invested money contributes nothing if sits in the bank.  To have an impact, it needs to be invested in operational losses.

In the VC world, speed maximizes rate of return.  I observed a strange statistical fact (yes, this is a familiar theme) in a paper on VC returns.  An investor made about the same markup on investments held for one year as on investments held for five years, so the rate of return was five times greater on the one-year investments.

Funded entrepreneurs face another shift with less optimal consequences.  They have to start thinking about maximizing valuation, not cash flow.  They think about stock as a product and investors as a customer base.  And, they think about the next funding round as an important product release.

How hard is this change of focus?  Very hard.  I do a lot of bootstrapping. I have a hard time changing the way I plan my own business.  However, we often get pulled into product development jobs by VC's, so we get turned around and absorb the VC perspective.  I love to hit the accelerator if someone else is paying the bill.  In many of these jobs, the established management team is counting dollars when they should be counting days.  It's very hard to change their priorities.  When the days are counting down to the next planned fundraising round, the investors start scheming to bring in a new CEO who thinks big and is ready to spend money.

Is it a good idea to make this shift?  That depends.  Investor-funded companies are quite different from bootstrapped companies.  The funded companies are faster, and the bootstrapped companies are more efficient.  According to an M&A guy, having grown to a similar size (which is a long and painful process), the bootstrapped businesses have more repeatable processes, and make more money, and have a higher market value.  Google shows the great possibility of a VC-funded business.  The ugly side is represented by Webvan, which burned $800MM in capital.  Contrast Webvan with Walmart, a ferociously efficient bootstrapped business which became the world's largest retailer.

Investors, and a focus on investors, creates a host of behaviors that are not always related to operational success.  But, investment is necessary if you are doing something expensive.  And, the grand triumphs of modern capitalism, the CPU's with billions of transistors, the wonder-drugs, the planes that can fly 10,000 miles, are expensive.

And, if you need to go fast, Assembla processes will help you go very fast.

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