With venture rounds bigger than ever, it can be difficult for a founder to make the decision to pull back on growth initiatives and focus on finding the path to profitable growth.
Seed rounds used to be $250k. Now they are $1.5 – $2.0 million. $5 million Series A rounds have ballooned to $15 – $20 million. The $50 million Series B can be the biggest trap of them all if the company scales into unprofitable marketing channels.
In each case, venture capital is raised with the expectation that the cash will be deployed in the next 18 – 24 months to fuel the next leg of growth. And that growth will then lead to the next fundraise, a step up in company valuation, and a happy group of investors and board of directors.
But at some point you’re going to realize that your marketing spend is growing, your top line growth is faltering, and your cash burn is accelerating.
Don’t close your eyes and hope the growth comes back before the cash runs out. Chasing unprofitable, unscalable revenue growth is a death spiral for a company.
The challenge with the growing size of venture rounds today is that too much cash is put into far too many companies before they are ready. In the early days of a company, a small pool of cash to work with is part of the fuel that forces a founder to dig in and find that path to product-market fit and scalable growth.
If too much cash comes in too early, you find yourself ramping up the spend on marketing and customer acquisition before you’ve truly found that product-market fit. Sure, you’re successfully pushing people into your acquisition funnel, but over time you’re going to realize that you’re not getting real traction and engagement, Too many of those new users are one and done. No retention. No loyalty. No value.
So here we are, in the last quarter of 2019. You’re building your budgets for 2020. Setting revenue goals with your team. Your next board meeting is rapidly approaching. They likely have high expectations for growth. They want to see momentum. Ambition. The path to that next
Now is the time to decide if you’re on the right path. If you have enough positive traction to keep pushing forward at the same pace you’ve been running all year.
Or maybe, as you stare at your dwindling bank balance, your accelerating cash burn, and weakening CAC:LTV metrics, now is the time to decide to slow down. G
We are entering a cycle in venture investing where profits and gross margin are going to matter.
As long as you still have cash in the bank, you’re still in the game.