Finding Product-Market Fit 
The Cost of Poor Performers

The Peril of Growth At All Costs

Fire 6
I’ve had good luck working with many Venture Capital (VC) firms over several decades. For the right kind of high-growth business, they can be very helpful in providing not just the investment capital, but also opening doors to hiring executives, providing strategic guidance and financial counsel when needed. I have worked many times with Benchmark Capital, CRV, Index Ventures, Kleiner-Perkins, Matrix Partners, PointNine Capital, Redpoint Ventures and Scale Ventures. These are among the top firms out there and they have a long track record of working well with founders, CEOs and executives. There are many firms beyond this list that are equally good.

But when I speak to founders about raising venture capital I remind them in very clear terms: Venture investors do not care about them, their product, their team or their customers. In the end, VCs care about getting a return on their investment. And more often than not, the top firms are looking for home-run returns of 10x or better on their investment.

The entire thesis of venture capital is based on making dozens of investments wherein there are a couple of outsized 10x - 100x returns, a couple of smoking craters where the company shuts down or is sold cheap, and then a large number in the middle that get to some kind of a decent outcome over the long haul. VCs are in the home run business, and if your business is not growing at or close to 100% year over year and on it’s way to $100 million in revenue in a few years, it isn’t interesting to them.

There are plenty of great businesses that are simply not a fit for the high-growth model that VCs prefer. So before you go down the path of attempting to raise money from venture investors, you must be honest about your ambitions and your business’s potential in the market. How big a business can you build? How big is the market?

Much like novelist and screenwriter William Goldman said of Hollywood in the 1980s: “Nobody knows anything… Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one.”

Venture capitalists look at hundreds of deals and invest in only a handful each year. They turn down perfectly good businesses for a variety of reasons: lack of time, conflict of interest with an existing investment, beyond their area of expertise, too capital intensive, unproven founders, unproven business model etc.

If you decide to pursue venture capital remember that this is a long-term relationship. They are buying a portion of your company for an eventual payoff that could take five to ten years. They will be your partner, advisor, mentor and owner during that time. As with a marriage, it pays to get to know them before you get hitched. If you are uneasy about the venture partner you are working with, if they rub you the wrong way, if your views on fundamental topics differ widely, think twice before you take their money.

There’s a danger in venture capital which is worth remembering. Like William Goldman’s “Nobody knows anything” comment about Hollywood, much of venture capital is about making bets where the outcome is clearly not knowable. Even the most successful VCs are wrong at least as often as they are right. There is a grave danger when investors (or founders) believe that VCs are infallible.

In late 2020 for about a year we were coming off a surge in ecommerce growth due in part to Covid, public tech stocks and private company valuations soared. It looked like the whole world would go full-on digital / remote / everything online all-the-time for the rest of eternity. Valuations for SaaS companies reached and then exceeded historic highs. Companies with ten or twenty million in revenues were valued at a billion dollars. And soon it was more than that.

If you were selling into that frothy over-valued market, good for you. There’s nothing wrong with being lucky. There were three companies where I was an advisor or board member that sold for very nice prices during that period. The founders and executives of theses companies had built something valuable and were pleased to be taken out at more than generous prices.

The side-effect of an over-valued market, is that the investors encourage a dangerous game of “growth at all costs.” This idea of “blitzscaling” has paid off for companies like Airbnb, Facebook, Google, Linkedin, Uber and the like. The idea is to grow so rapidly that you leave any potential competitor in the dust.

Unfortunately, most companies are not like Airbnb, Facebook or Google. Focusing on growth above all else means that business fundamentals (like product market fit, efficiency and profitability) get short shrift. If a manager is busy hiring the next ten programmers how much time is he or she spending on managing the last batch of hires? Growing a business at 100% or more year-over-year is stressful and often chaotic. It’s easy to get caught up in the rush of non-stop expansion and taking on new initiatives that you can overlook the need to find repeatable, efficient go-to-market patterns.

And even worse, the Silicon Valley fundraising process encourages founders to think of themselves as being in that rare 1% of companies destined for hyper-growth success, despite statistical evidence to the contrary. I recall several meetings with top silicon valley VC partners when I was at Zendesk and Duo Security where they told us “we were one of a handful of companies that mattered.” It’s hard not to let that all that flattery go to your head. After all, what founder or executive doesn’t think of themselves and their company as special?

Not surprisingly, during the boom times founders and executives ramped up their hiring, increased their marketing budgets and tried to spend their way to high growth to justify the sky-high valuations. In good times, investors are fond of “pouring gasoline on the fire” which I’m pretty sure you are never supposed to do in real life.

So when the public tech stock market swooned in mid 2022, there was a reckoning to be had. Newly minted public companies were trading 40-75% off their peak. Some companies got ahead of the issue and did layoffs. Even the Blitzscale companies like Facebook, Google and Twitter did massive layoffs impacting thousands of employees. ("Thanks for working so hard, sorry we screwed up!")

Unfortunately, many companies moved too slowly or cut too little to make a fundamental difference in their trajectory. If you’re going to do a layoff, make it count by cutting at least 15% and eliminate under-performing areas of the business. Don’t try to keep doing everything you did before with fewer people.

Many of the companies that raised money at peak valuations will have a hard time adjusting to the new reality. Valuations that were once at historic highs are now at record lows in 2023. Venture investment has fallen off a cliff, and if your company can’t get to breakeven / cash-flow positive in the next twelve months, your survival is at risk.  It’s not easy, but you’ve got to reorient the entire culture of the company that has been built on “do more, hire more, spend more” to get a level of efficiency that enables your company to continue without raising additional capital. 

Companies can easily find themselves in a no-man’s land where they don’t have enough runway to get to profitability and no-longer have the high growth rate to make them attractive to new investors. If you’re lucky you might get an inside round from your current investors. Or maybe down round, at a lower valuation. (There are worse things, believe me.) My suspicion is that as we get to the end of 2023 and into 2024 there won’t be any rounds for some of these companies.

When that happens, you’ve got to figure out how to land the plane. That might mean selling to a larger competitor, a strategic partner or to Private Equity. Any of those outcomes can be preferable to going out of business or becoming a zombie company with stagnant growth. However, few companies want to acquire a money losing operation. So you still need to figure out how to get to healthy margins, even if it’s inside a larger company.

This is where you can put your VC investors to use in helping ensure that you not only have the right product for the market, but you have a well-thought-out pitch and introductions to potential buyers to help ensure a long-term strategic fit. 

Are you concerned about your company's burn rate? Let me know what questions you have by adding a comment below. 


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