We Will Never Need Another Financing

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.

  • Famous last – or first – words.

    Any number of things can happen that will alter the entire trajectory of … well, everything. You know my story from 2000.

    Like Monty Python said, they never expect the Spanish Inquisition.

  • Bill Stearns

    I’ve seen restaurants that have experienced rapid initial growth with little marketing other than word of mouth and a few decent food critic reviews. I’ve also seen them out of business six months later because they believed the initial trend had some longevity to it. Saying “never” or “couldn’t happen” about anything business related shows a lack of flexibility and foresight.

  • Yup. Great point on the accounting. Remember a startup that told me that. I had a chance to invest a year later.

    • Patience, investor, patience. There are often other chances, as you describe!

  • ahhh relativity. I vividly remember running around saying “we don’t need to raise anymore!” I also vividly remember coming to the realization that those words are so circumstantial and therefore meaningless in general. if your goal is to never raise capital again, then fine, congratulations if/when you get to that point, but as you eloquently point out, circumstances change (for better and worse) that may require a capital raise. at the end of the day you never know what lies ahead. be open, be flexible, and ready for whatever comes.

    one day you may be able to say “we’re crushing it, and I’m going to buy out our original investors so I can take all the profits home.”

    one day you may be able to say “we’re crushing it, and I’m going to do a raise to move to IPO.”

    • You were a great example of a company that was cash flow positive, sort of. While you said you never needed to raise more money, you actually did, which we raised in the form of debt, both through bank debt and capital leases. I was supportive of both because it was much less expensive capital than equity, but it was financing.

      So, the statement “we don’t need to raise any more equity” would be more precise, but even in your case the magnitude of the bank debt was raised mostly on the basis of me saying “we’d invest more equity if needed.”

      That doesn’t diminish the amazing progress you made on a very small amount of invested capital. But it’s another calibration, especially equity vs. debt.

  • My thought is you should not say “I will never need another financing” but you should think that there is a possibility that I will never get another round of financing.

    The key word is need.

    You might want another financing for all the reasons you state. There might be an externality that requires you to raise more money.

    I am not saying Plan A is to get to break-even. But there should be a plan that gets there.

    If things don’t go according to Plan A then you have to adjust. This is where you have to be very honest with yourself and the market. As you stated the other day if your growth rate slows in SaaS to below 50% you will have “massive consternation”

    This could be from lack of execution or that the market just isn’t quite there yet. If you hit break-even you will live. If you don’t you won’t: You will either run out of money or be replaced and massively diluted in the next round of financing.

    • Rick

      “But there should be a plan that gets there.”
      ,
      Finally someone else mentions having a plan that doesn’t include pie in the sky dreaming!

  • Rick

    The best approach would be to not bootstrap because you’re gonna’ need funding soon enough anyway. Instead plan carefully and as far into the future as possible. Then only do the start up if you can secure the funding needed to get to your first sale. That includes having sales people.

  • Rick

    Here’s something I don’t see talked about at VC blogs. I wonder how many ideas people analyze before finding one that shows promise enough to pursue it? I would think it would be a very high number.
    .
    So you get an idea. You analyze it thoroughly and you can’t figure out how to get to profitability or you can figure out how to fund it. Thus it has to be dropped.

  • Manish

    There’s also a whole host of reasons why you want to raise money when you don’t need it. Anyone who says this sentence has the delusion that you speak of, but more telling to me is that they’re not thinking strategically enough to understand why raising money when they don’t need it could be the best move for them (i.e. it’ll tremendously accelerate growth, or kill a budding competitor by rolling them into the co early). The threats are present, but opportunities exist w/ more raised cash as well.

    Just more reasons to never say this sentence…

  • judy shapiro

    Fine words of advice IF you fall in the “mainstream” bell curve for fund raising.

    Some ventures will struggle to get funding for reasons that have nothing to do with validity of idea.

    In those cases you either figure out how to grow given the constraints (and yes – you bootstrap assuming you wont get funding) or you give up.

    Perseverance helps you survive long enough for the market to prove you right. Its a high risk approach but definitely do-able.

    • Well said. Many, many companies survive and thrive without raising money. In this case, I’m only really talking about companies on a VC-backed trajectory.

  • Do you look at someone less seriously when they start off like that? “You are either delusional and therefore more likely to run into problems,” or maybe, “you know the truth and I don’t like being lied to?” Or do you treat it as more of an honest mistake founders make on the way?

    • It depends. I often challenge it and see where that goes. That’s the more interesting thing – the response – rather than simply making a judgement on the silly / naive statement.

      • What? You don’t judge people based on their first statement? Actually give them the benefit of the doubt? You dig deeper to understand their personality? You sure we are allowed to do that in 2015? It doesn’t fit in 140 chars!! 🙂

        Seriously, excellent. We all make mistakes; whether we learn from them, something else.

        I learned it in the army, tank gunner. First shot always misses, or gets lucky. Self-correcting and getting the second one on… THAT is the sign of a real pro.