Companies don't set out to become mediocre, they get there by prioritizing the wrong actions.
If you have a SaaS business, should you operate your business for growth or run it for free cash flow?
Let's define the terms first:
Growth = taking venture capital money and running the business to grow as fast as possible.
Free Cash Flow = Bootstrapping and optimizing the business to make money.
Two sides to the coin.
What side is the right side?
Let's circle back to that.
For now, let's talk about "Unicorns". BTW, a unicorn is a privately held startup that is valued at $1 billion or more... Uber, WeWork, Lyft, AirBNB, Pinterest, Snap, DoorDash, etc.
These are fabulous companies. Total disruptors. Think about it, when was the last time you took a taxi anywhere? These unicorn companies have created such improvements to our lives. They are truly amazing companies.
Or, they were truly amazing companies.
WeWork is finished. Done. Short-sellers on Wall Street are piling into WeWork bonds, sending prices to record lows. Landlords that have WeWork as tenants are scrambling. The only way to save them is if Masayoshi Son (CEO of Softbank) helicopters in and puts even more $$ into WeWork.
BTW, if you want an excellent read... check out THE article that literally blew up the WeWork IPO: Scott Galloway's WeWTF.
Uber is almost finished. Since 2016, UBER has burned $6 billion in cash on over $25 billion in revenue. It has yet to post a profitable quarter. So yeah, they destroyed the taxi industry, but they remain unprofitable.
Now let's look at the free cash flow companies. Or, rather, the "lifestyle business" companies.
Quick aside: all venture capitalists will call your business a "lifestyle business" in a derogatory tone. First time I heard this, I laughed my ass off! F U bro. You're calling my company a "lifestyle business" like it's a bad thing.
Cash Flow Based Companies
The first cash flow company that comes to mind is 37signals, now Basecamp. These guys are the best. Their philosophy is great: Make a great product that helps people and charge money for it. Simple. They've been running a profitable business since 2004.
The second example is ConvertKit, started by Nathan Barry. It took him a couple years, but now (10/3/19), they do $1.52mm in MRR. ConvertKit is pretty cool, because they're battling some pretty big gorillas: Mailchimp, Drip, Constant Contact, AWeber, etc.
Both of these businesses rely on free cash flow to fund operations and set strategy.
The Devil's Advocate
To be certain, access to capital provides massive advantages. And in some industries, you cannot build a business without a lot of it. But, the downside to taking venture is loss of control.
So, I guess it really matters what your business goals are.
My business goals are simple:
- Provide a software product that truly helps lawn mowing companies manage their business.
- Charge money to use the software.
- Reinvest the profits to create more verticals in the home services industry.
- Have fun.
VC goals are much different.
Venture capitalists need to provide returns to their LPs (limited partners). Not a 2 or 3 or 4x return... they are looking for a 10x+ return. The outsized returns are the reason VCs want in on software companies. With so little input from labor, the returns flow back to the investors.
A venture capitalist in today's economy could fund another Instagram, which sold for a billion dollars (with only 13 employees).
I completely understand their position.
Just know, if you take VC money, you lose your ability to manage the company the way you want. Venture capital always comes with strings attached. And, you're gonna get f**ked in one way or another if you take venture money.
BTW, a good read on VCs and how they impact your company, is Rand Fishkin's book "Lost and Founder: A Painfully Honest Field Guide to the Startup World".
At any rate, I believe we're in an environment that is drastically changing. The WeWTF fiasco and the other "unicorns" are changing the dynamic.
It's time to come back to reality. Time to build and run businesses for profit. This la-la land of billion dollar valuations and growth at all costs is over. Ask Masayoshi Son and Softbank how it's working out.