One of the most common dilemmas an entrepreneur will face early in their company’s growth is balancing the need for capital with a more critical element—focusing on the company’s growth. Securing capital will take significant time and energy speaking with prospective investors, and sustainable growth can only be achieved if the entrepreneur is extremely focused and truly understands the underlying key growth drivers of his business.
I recently had a couple of really smart entrepreneurs stop by to give me an update on their early stage business. They excitedly and confidently updated me on how many new customers they were acquiring each month, how fast the recurring subscription revenue was growing, and how fast they were going to pass $1 million of annual recurring revenue. You could tell they had told the story many times, as they were passionate and excited about the business and its future prospects.
I started to ask the next level of questions about their customer attrition, revenue attrition, how the early customers were trending, did newer customers show the same characteristics as older customers, and how any of these metrics/trends affected their future growth model, sales cost, and actual ROI on their marketing spend. They both offered quick responses that had likely been used to assuage a prodding investor. However, as I dug deeper, it became increasingly clear that they really hadn’t thought through this second level of questions which were truly the key predictors of their future success.
It is actually completely fine to not know all the answers at this stage of growth. With a new entity, there is very little statistically-relevant data to make a definitive statement on the future trends of the business. However, in their race to satisfy investor questions and need to paint the rosiest picture of their business, they had neither focused on the underlying early trends, nor were they putting the right metric tracking in place to set the company up for success.
This dilemma gets further complicated if they are fortunate enough to raise the capital they believe they need for growth. As soon as the round is closed, their lack of internal focus will cause already, over-aggressive projections to be missed wildly and management will begin justifying their existence by putting out additional unachievable numbers. This reduces trust with a board they are just getting to know, and clearly, this type of dynamic does not increase the chances of future success for the company.
So what is the solution? I am sure there are many ways around ending this vicious cycle, but to me it comes down to two key decisions: 1) Do whatever you can to put off seeking external funding as long as possible. Move the company as far as you can on your own and gain as much insight into the business without using any external financial resources. The moment the first check is cashed, the clock starts ticking, and 2) Be BRUTALLY HONEST! Both with yourself and with key prospective stakeholders. This seems obvious but it is rarely a course of action. When you have exhausted option 1 and are pursuing outside capital, set proper expectations to prepare your company or project for long-term success by creating an honest and achievable forecast in the early stage of your business.
The reality is, most investors of early-stage companies are investing in the vision, the entrepreneurs and the long-term prospects of the company. Setting the course and creating the infrastructure for long-term success is significantly more important than any short-term gain in the company growth.
Putting yourself out there and asking others to invest in your vision is one of the hardest and most rewarding decisions you can make. However, avoid this entrepreneurs’ dilemma and give yourself the greatest chance for success by focusing internally first. Then, trust yourself and your vision so deeply that others will trust in you with their capital and other resources to help you deliver what you are fully and passionately capable of delivering.
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