How To Shift from a Raise-to-Raise to a Profitable Growth Mindset

Photo by Dave Goudreau on Unsplash

The economy is shifting the financial terrain beneath our feet. Founders should be asking themselves, “How can I find solid footing?”

Many founders have financed their startups using what I call the “raise-to- raise” method. Basically, this method involves raising money, first from family and friends, then incubators like Findaway or angel investors, then on to venture capital and finally to private equity or a buy-out from a strategic firm. Each successive “raise” is used to fund company growth.

In the past, this model of financing allowed companies to raise money while losing money, basically spending more money than they made in the early going to gain momentum. For example, I know a couple of companies that have used this model to grow sales to a million and a half a month, making them an $18 million company, but spent money on headcount and marketing as though it were a $30 million company.

It wasn’t an efficient model, but when the money was flowing like honey it nourished growth until the company could prove itself. It’s a model that’s also used pretty significantly in Silicon Valley. I also coach a personalization technology company that is utilizing this model as well.

The problem is that now the honey is no longer flowing as copiously as it used to. Inflation and the battering of the stock market has dented portfolios to the point where angel investors are taking a breath. As a result, deals and raising capital are harder to come by. On top of this, private equity and strategic investors such as Nestle or Unilever — strategics are large companies looking to buy small brands — are becoming less satisfied purchasing great brands with strong growth. They are now looking for larger brands that are not only growing but also profitable — and if they have tangible assets like manufacturing, all the better!

Do you see where this is heading? The raised model is designed to help you grow your company until you are ready to sell it to a strategic or large private equity firm. But these financiers are now looking for a larger and more profitable version of you than you can offer. What this means is simple: the upstream investors like angels and venture capital are going to have to stay with your brand longer than they used to in order for you to get up to size and profitability, which means they’re going to need more money for bridge rounds.

What does this mean for your change-the-world startup? It means there is downward pressure on you to start thinking more about a different financing model, one based not on the raise-to-raise rhythm but on “profitable growth.” When you switch to profitable growth, you are going to have to scale back on expenses like hiring people and marketing dollars and even new product launches, which can maroon cash in inventory. Switching to profitable growth doesn’t mean you stop growing, but it does mean you are likely to grow more slowly.

The transition from the raise-to-raise model to profitable growth is significant, and there are several ways to respond to it. These include:

1. Do what Zoom CEO Eric Yuan did and enact a “zero burn-rate budget” that pegs expenses to gross profit. Let everybody on your team know exactly how much they can spend and what they cannot spend. This article shows how Yuan did it.

2. In order to get that zero burn-rate budget working, you need to figure out what the most important thing is. To do this, revisit your strategic playbook — your customer, marketplace and purpose — to guide your decision making.

3. And then narrow your objectives for the next three to six months to only one or two objectives versus three or four or whatever it was; the narrower you can make your objectives, the farther your resources will go.

For example, one objective might be to own Amazon in your space. So take a break from retail, which can be more expensive for you, and focus your resources on Amazon for several months. Or, target your consumer research to knowing who your true fans really are and focus like a laser on them. Serving a narrower set of customers will make your marketing dollars go further. The benefit of these kinds of moves is that you’ll be able to grow your company in a way that’s more sustainable long term, which will start to attract investors.

This may come as unwanted advice for entrepreneurs who view their superpower as raising money, but the only superhero I ever saw actually reverse the Earth’s rotation was Superman, and that took place in a movie.

It feels like this is going to be the prevailing model for the foreseeable future, so my advice is to get in touch with a coach who can help you choose the best way to navigate a move toward a profitable growth model. And if transitioning to profitable growth isn’t right for you, whether you should think a bit earlier than you’d imagined about selling your company or some other way of exiting the business.

Sincerely,

Rob Craven, scalepassion

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All credit to my ghostwriting partner, Dave Moore, who is instrumental in getting my thoughts out in a coherent manner & into these blogs. Thanks Dave!