I hear some version of this one all the time.
- “We will never need another financing.”
- “This financing will get us to cash flow breakeven.”
- “This is our last financing before we become profitable.”
It’s probably bullshit. There are so many reasons companies raise more money in the future that even making an assertion like this is generally nonsensical. But even if you, as the founder, believe it, you are still probably deluding yourself.
Now, there are points in time where a company doesn’t have to raise any more money. I’m on the board of several significant companies that are profitable and generating meaningful free cash flow. They don’t need to raise any more money unless they want to. And, there are a few reasons they might want to, but we’ll get to that later in the post.
There are also companies, like my first one (Feld Technologies) that bootstrapped and never raised any money. Well – almost no money. We funded the business with $10 (for ten shares of stock) and my dad personally guaranteed a $20,000 line of credit with his bank. We promptly spent the $20,000 on our first few months of operations, realized there was no more where that was coming from, fired everyone, paid back the line of credit over the next six months from our very modest positive cash flow, and then made a profit – and had positive cash flow – every month for the rest of the seven years of the business up until the day we sold the company.
But I’m not talking about bootstrapped companies. I’m taking about angel and VC backed companies. You know, the ones that generally lose money for a while before they make any money. And need money to fund their operations.
Imagine being an investor and being approached by a business SaaS company that has raised $5 million, has $100k / month of revenue, has been growing at about 5% per month, and is doing a $10 million round. “This is the last financing we’ll ever need” is the lead in statement. My first question is “how fast do you want to grow year over year for the next few years?” When the number comes back over 100%, my next question is “Do your customers pay monthly or annually, up front or in arrears.” Unless you are getting paid annually upfront, it’s highly unlikely that your cash coming in is going to outpace your cash going on on a monthly basis for a while. It’s simple math – give it a shot if you want. Sure, every now and then something magical happens (very high price point, very low cost of customer acquisition, zero churn), but that’s a serious edge case.
Now things are working nicely for you and you are growing quickly after raising that $10 million, but you have a competitor that is chasing you from below and a giant public company who is suddenly attacking you from the top. You decide you need to add a direct sales force to augment the self-service / low-touch sales model you’ve been using. Yup – that’ll be more money. Or you realize that you have massive technical debt because you’ve underinvested in scaling and your AWS bills are now increasing non-linearly with your revenue all of a sudden because of the way you’ve architected things. Or you have a major outage and decide you need some redundant infrastructure. I could come up with 100 more items.
You want to do an acquisition, but the seller wants some cash. Your revenue growth flattens out for a few quarters but you didn’t get ahead of the cost dynamic. There is a macro downturn and 25% of your customers vaporize (Don’t think this happens? Ask one of your friends who was a CEO of an Internet company in 2001.)
Where there is a wonderful fantasy about never needing to raise more money, and it does occasionally turn into a reality, I recommend you not lead with it when you are out raising money. It simply undermines your credibility.
(Brad Feld is the managing director at Foundry Group. He lives in Boulder, Colarado, and has been an entrepreneur and early stage investor since 1987.