📈Cash vs Growth: What should I prioritise?
Pete Flint (NFX), Jeppe Rindom (Pleo) & Henry Lane Fox (Founders Factory) answer this real-life founder challenge
In a break from our normal Startup Bulletin, we’re sharing a new series launched in collaboration with Founders Forum. We’re taking real life challenges from founders and putting them to an expert panel of seasoned entrepreneurs, investors, and operators.
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Refill subscription platform for home and personal care products, Bower Collective, was founded in 2019 by Nick Torday and Marcus Hill, launched in our Venture Studio and scaled through our Accelerator. They’ve since raised over £4.5m in funding.
"Coming into a volatile and uncertain economic climate, how do we best manage the tension between cash management (runway) and growth velocity?"
Meet our experts:
Pete Flint - General Partner @ NFX / Founder @ Trulia (oversaw IPO & $3.5 billion merger with Zillow)
Jeppe Rindom - CEO & co-founder @ Pleo (raised $438 million, valued at $4.7 billion)
Henry Lane Fox - CEO & co-founder @ Founders Factory / Founding team at lastminute.com / Partner at firstminute capital
What do our experts think?
Pete Flint, General Partner @ NFX & Founder @ Trulia:
I shared some thoughts on this in April 2020, as we were facing up to the largest economic disruption in a lifetime. The key points were:
Decisions you make depend largely on your cash position. If you are enduring losses relative to a modest cash position, sadly you don’t have the luxury to invest in growth. You should prioritise reducing your cash outflow and extending your runway (either through reaching profitability or raising a new round).
Profitability in your unit economics should be a priority regardless of your position (you can’t afford to make a loss on every transaction)
Focus on strengthening your LTV/CAC ratio (the metric comparing the value of a customer over their lifetime to the cost of acquiring them)
Much of this remains as true now as it did then. The public markets (which in turn will be reflected in the private markets) are favouring profitability over growth in the near term—so founders should prioritise this.
If you’re looking to extend your runway through raising capital, you must have exceptional metrics (both rapid growth AND strong unit economics/profitability driven by high NPS and retention in big markets). Otherwise, you should optimise to raise your next capital after the start of 2024, giving you enough time to improve your metrics and your product.
Crucially though, if you are pre-product market fit (pre-seed or seed), then don’t push growth. A great signifier of good product market fit is that growth finds you. So keep your team small and nimble, both helping you extend your runway and making it easier to evolve and pivot to find product market fit. Once you’ve got your product-market fit, then it’s time to focus on growth.
Jeppe Rindom, Co-founder & CEO @ Pleo:
As a co-founder/CEO of a hyper growth business, I know all too well the tension between runway and growth. While we are globally experiencing macroeconomic factors beyond our control right now, some key common practices can and should be upheld to ensure we ride out the storm:
Don’t lose sight of your North Star: a well strategised and articulated growth strategy should be able to temper the storm.
Always forecast. Making your runway projections as reliable as possible will not only give you a clearer picture of your company's health, but also how money moves in and out of it, ensuring you avoid any nasty surprises. It also aids making faster, more informed decisions that will drive growth.
Cash is king, but simplicity is queen. Ensure transparency and a good helicopter-view for all people accountable for a cost centre within your organisation.
Automate and digitise as much as you can, to ensure wider visibility and control of spending as it happens—not just before!
Henry Lane Fox, CEO & co-founder @ Founders Factory, Founding Team @ lastminute.com, Partner at firstminute capital
I think it's fair to assume that the next 18 months will represent a very tough operating environment. With inflation out of control and interest rates likely to rise substantially, consumer spend will come under increasing pressure as the prices of energy and food continue to rise and contribute to a cost-of-living crisis. Businesses in turn will feel pressured as the cost of debt rises, revenues likely stagnate, and hopes for growth diminish.
Where does this leave startups? I still argue in a great position. Across all industries the speed of digitisation is increasing and yet incumbents will find it harder and harder to invest in innovation and growth, which provides ambitious entrepreneurs with a clear opportunity to disrupt.
To capitalise on this opportunity a few things will be of central importance: the development of a product that offers clear and immediate 10x value; a relentless focus on constantly improving underlying unit economics; an understanding of the most scalable growth channels; accurate cash flow forecasting.
Clearly there is variability across business models and sectors—metrics for enterprise SaaS, consumer marketplace and deep tech start-ups all vary. But some universal truths exist:
For those fundraising now, try to bank enough cash for a 24-month runway, rather than 18 (If ever there was a time to do a convertible note at your last round's price to help you put some more cash in bank, this is it)
Be relentless in understanding and optimising your unit economics, so that any investment in growth you make has a fast and positive payback
Talk to your board and investors (current and prospective) to understand what metrics you are likely to need to hit to raise your next round of financing
Build your financial forecast around these metrics and report against them consistently
Do all this while keeping the question in the back of your mind: if you had to drive the business to cash-flow breakeven in the next three months, what would you do?
Overall though be positive, opportunistic and take risks—startups rarely succeed, none hit scale, by playing it safe.
Do you agree or disagree with our experts? Share your thoughts in the comments below.
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