It takes extraordinary conviction to build a business from scratch, but this is a character trait often overlooked by VCs when they are investing in a company and its team. If you can provide clarity on your vision of the future, you will build a team with incredible conviction who also understand the importance of building a sustainable business. And, you will be able to establish operating metrics and rewards that support achieving your vision, which will enhance people’s conviction toward this future state.
I outlined this fundamental recipe for business success – revenue growth that outpaces operating expense – in a post I wrote earlier this year, ‘Building a Growth Company the Old Fashioned Way…Earning It’. The formula seems so obvious, yet with tech companies raising hundreds of millions at huge valuations and having little revenue, that investment philosophy began to feel outdated.
Around the same time, I met with a prospective investor and his advice was to “go big” and raise more money. He was shocked to see our focus on growing top line faster than expenses. I left that meeting questioning my own conviction and wondering if we were being too conservative.
Has conventional wisdom become passé?
It seems that it hasn’t.
Over the past few weeks there have been several blog posts in the VC community that focus on Silicon Valley taking on too much risk. The debate was sparked by Bill Gurley’s interview in the Wall Street Journal where he essentially noted that tech startups are burning too much cash.
This article spawned a flurry of commentary about cash-burn rates at startup tech companies. The most recent came from legendary entrepreneur and investor, Marc Andreessen, who the New York Times notes “took to Twitter…to warn against excessive spending by start-ups that have attracted capital from investors.”
I find it surprising that this fundamental principle of building a successful business is just now resonating with the investment community.
Remember the end of the classic scene in Spinal Tap where Christopher Guest (Nigel Tufnel) tells Rob Reiner (Marty DiBergi) that his amps all go up to 11?
Marty DiBergi: Why don’t you just make ten louder and make ten be the top number and make that a little louder?
Nigel Tufnel: [pause] These go to eleven.
I feel like Marty in this scene. I have been scratching my head and wondering if I’ve missed something so incredibly obvious after all the buzz in the VC community over the past few weeks.
How is this is actually news?