The simple truth about fundraising

Here are the only three things you need to do to succeed as a venture-backed company:

1. Be in a hot market
2. Have “good” revenue growth
3. Always be within 12 months of breakeven

That’s it. If you’re missing any one of these, you’re eventually in for a world of pain. I know this first-hand and I’ve validated it in many candid conversations with my other founder friends. The lingering concern is that the funding market is only getting tighter. The bar is going up.

I’ll explain these three points further.

Be in a hot market

A hot market is forgiving. It allows you to make mistakes in hiring, marketing focus, and product roadmap. You can go after the wrong customer for a while, circle back and find the right one, and then make up for lost time.

You can do this because the market is pushing customers and hires your direction. They’re excited to work with and for you. They’re already educated about the opportunity, making it much faster to close.

This makes it easy to recover from the mistakes you’ll inevitably make. Everyone screws up. It’s how fast you recover that matters, and a hot market helps you recover fast.

You’ll know you’re in a hot market when you see growth in attendance at the main industry conference, and then you see copycat conferences everywhere. There should be more and more companies popping up to handle every slice and sliver of an opportunity. And then there will be money announcements. Mergers, financings, and IPOs.

That’s what a hot market is, and it’s the best place to be if you want to raise money.

Have “good” revenue growth

This one is perhaps more controversial and specific to B2B companies. However, I hear also from my B2C friends that the same principal applies.

You need the lifetime value (LTV) of your customers to be greater than the cost to acquire them, and you need the payback period as short as possible. (For B2C substitute “user” for “customer.”)

That’s a mouthful, but the essence is this:

Let’s say you run a 3-month online programming course and charge $300 for all three months. Let’s assume you have only one course to sell, so your LTV is going to be $300 for every customer.

If you run Facebook ads to get customers, you may find that it costs $100 in ads to get one customer. That’s great! Your LTV / CAC ratio is 3 ($300 / $100) and your payback period is 3 months (if they pay at the end of the course) or, more likely, one month (if they pay at the beginning).

However, paid ads rarely work out so nicely. If it costs $300 to get that one customer, then you’re just breaking even on a unit economic basis (LTV less CAC), and losing money when you consider all your other costs, like production, hosting, and rent.

A lot of companies operate with negative unit economics. I know, because although we’ve recently fixed it, for a long time Scripted was one of them.

Operating with negative unit economics kills your cash, gives you a false positives about your business (revenue may be growing, but your losses will be growing faster), and forces you to continue the fundraising cycle.

Worse, it means you’ll never reach my third point.

Always be within 12 months of breakeven

I just can’t stress enough how important this one is.

Fundraising sucks. It’s draining, distracting, and dilutive. So sure, you’ll celebrate when you get the big check and deposit into your bank, but what’s the cost of that check, really? It’s control (another board seat, at least) and millions of dollars less value for yourself and your employees.

When you’re within 12 months of breakeven, you have the ability to pull yourself out of the vicious cycle of fundraising (spend, fundraise, spend, fundraise, etc. etc.) If you get tired of your board, want to slow the pace, or simply weather an economic storm, you can do that within 12 months. If you have less than 12 months, then you can, in a worst case, cut your way to breakeven. This way when you lay off your employees, you have a tangible win to point at: positive net income.

I’ve had the unfortunate experience of going through some big cuts. One very big one earlier this year, when we cut from 35 employees down to 15. That was hard. It was probably the hardest day I’ve had as an entrepreneur. And the worst thing? We cut more than half of our staff, and we weren’t even close to breaking even.

I’ll never make that mistake again.

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This isn’t a story about Scripted per se. We’re in a much better position now, having worked very hard to make up for lost time. Rather, it’s a combination of advice I’ve received from my board and my startup friends.