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This article was published on January 18, 2013

Issue v1.1: Losing money, investing for the long term, and building a real business

Issue v1.1: Losing money, investing for the long term, and building a real business
Alex Wilhelm
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Alex Wilhelm

Alex Wilhelm is a San Francisco-based writer. You can find Alex on Twitter, and on Facebook. You can reach Alex via email at [email protected] Alex Wilhelm is a San Francisco-based writer. You can find Alex on Twitter, and on Facebook. You can reach Alex via email at [email protected]

Losing money, investing for the long term, and building a real business

This post is designed food for thought. You won’t agree with all of it, but it should give you something to chew on. – Alex

If there was a bubble before in early stage technology startup funding, it’s over. However, the easing of private capital for young startups isn’t a crunch, but more of a deadening squeeze: many firms that easily picked up seed capital, or perhaps slightly more, are finding it all but impossible to collect the next check that they need to grow.

It’s a non-trivial problem: cash is oxygen in business, and once the last dollar is spent few options remain for companies that lack hard physical assets that could be used as loan collateral, and little revenue to lean on as continuing cash flow.

In short, if you lose money and don’t have access to more of it, eventually you go out of business.

Enter the much-ballyhooed Series A crunch. Many tech upstarts had little corporate direction, focusing on product flow. In a way it’s hard to blame them; after all, some companies moved from idea to international success, just as many ideas writ companies managed to exit into larger, prestigious firms, making their team richer along the route.

A long-term vision and bedrock financial clear-headedness were almost priced out of the market of ideas; go big, and go big now, or why are you even trying?

It’s easy to have no pity. If you build a company, but only refer to it as a startup, thinking can become distorted. This is especially acute when startups that are only marginally successful attempt to mirror those that are; Big Successful Technology Startup X does Y for its employees! Thus we must as well!

That’s a great way to buy yourself out of business. If your employees are only loyal because you bought their favorite juice and hired a masseuse, you have made a mistake.

I bring all this up as there is a bit more angst than is necessary in the startup world as the money flow slowed. This is not to say that there isn’t capital to be had. If your company is worth it, the money will be there. That’s a maxim, in any economic climate.

The kicker to this is that exits appear, and I speak anecdotally, to be slowing, even as the largest tech firms sit on a combined pile of hundreds of billions in cash; they aren’t buying as they either don’t need the talent in the market, or simply don’t want to pay top dollar for a products team that they intend to shutter and fracture, respectively.

Build a Real Fucking Company
The other side to this is the idea of not building a startup, but applying startup principles to a real, growing business. You can tell if a startup is just that, or a quickly growing, young business applying the lessons of startup culture by asking its CEO about the numbers: revenue, burn rates, remaining capital, cash positions, debt, marginal profit rates and the like. If they dive into the minutiae, even obfuscating as needed to keep certain hard facts from free discourse, the company is generally in good hands.

If instead you are told the almost terrifying ‘we’re not focusing on revenue at the moment,’ remind yourself that this is a company betting its life not on its short term ability to be a business – and by that I mean derive meaningful profit from its operations – but instead to attract enough attention so that it can raise more external capital and thus keep going on. Revenue later, in other words.

If that makes your stomach unsettled, you must know how to read a balance sheet.

There are stories of amazing, powerful success in which companies ignored making money to build their user experience. Indeed, some of the largest are just such. What isn’t told are the stories of the companies who tried, and failed, along the exact same lines. I can tell you a few such stories. Hell, I’ve participated in some. You can tell a few more. We have all seen the downcast eyes, the folks going back to their old jobs. The capital gone.

I don’t want to dwell on that any more than we must. Instead, I have something uplifting in mind. Against the grain, in the gut of the demon, there are companies focused on building growing, financially stable technology companies.

Henry Kim, CEO and founder of Sneakpeeq, runs just such a company. This isn’t to say that a visit to the Sneakpeeq office is an exercise in boredom; the company is closely aligned with the fashion world, meaning that its employees are well heeled, and its events properly catered from a liquid perspective.

Instead, Sneakpeeq appears to be, from the outside, a rather normal startup for San Francisco: the SOMA office, rows of high-end computers, facial hair, a slightly gamified user experience, and the use of technology to disrupt a market niche that long survived before the Internet, in this case upper end retail among boutique brands.

Under the hood, however, there is much more.

I recently sat down with Henry across the spartan Sneakpeeq conference table to talk about his company. As a fellow wonk, we diced through any number of key factors that surround his specific part of the retail world. However, to save you from reading through a few thousand words of notes, I’ve distilled Henry’s business process – though he never stated it as such, he merely described the operational side of his company – into a number of statements that highlight what we discussed before: the building of a real company as opposed to a mere startup.

In a very real sense a startup is simply a business that has decided to remain an adolescent for an extended period of time. To work.
Track revenue both incrementally, especially in comparison to your market

In October, Sneakpeeq was seeing revenues of $12 million on an annualized basis. Henry was content with this number, as it was a record, and that in his words, other “retailers were getting hammered.” In short, the company had a record month during a tough patch for the larger sales market that his firm operates in.

November was going to be all the better. And though TNW doesn’t have the proper December statistics, we suspect that Sneakpeeq performed strongly. All of this is the result of long planning, but what matters here is that the company is tracking its revenue growth both internally and externally; racing with itself, and the larger market as a whole.

This can explain both positive and negative swings; it’s always nice to tell your investors that you are ahead of projections, but if you only hit that mark on a month in which your market grew by an abnormal, and temporary percentage, you will want to know that before you hire more staff and stuff warehouses.

Know your metrics, and how to directly measure your key heartbeat – And we do not mean user growth, or daily active users

In discussions, Henry and I would define certain metrics, such as what counted as revenue. In that case, for the firm, gross bookings are called revenue, which Sneakpeeq takes a cut of. That could be called their gross profit, from which payment-processing fees are deducted to reach its net income and so forth.

That may sound pedantic, but if you can’t track the money through your firm, you may quickly find yourself in the position of The Industry Standard: explosively successful, and dead as can be.

We have more than enough classes on growth hacking, here in the Valley. What we could better use is a few master sessions on the nuts and bolts of corporate finance.

I return to my earlier point about chatting with executives: if you are in charge of a company’s health, its vital signs – by which I mean its financial indicators – should be comfortable ground.

The long way is the only way

I’ve promised to not go on for too long, so I’ll make a final point that Henry impressed upon me: success can be built in pieces, over time, but that you simply can’t do so without a clear focus on quality. This implies that if you are working to grow and build a firm over time, there are no corners that you can cut; a social startup growing at 1,000% percent a month can drop the ball, just as a company building long-term relationships with a product-buying userbase cannot.

Show me the Fail Whale twice in a day and I’m irked; accidentally leak my credit card information and we are done.

To wit, Henry on the issue, condensed by myself:

If you take shortcuts, you end up paying for them later on. You can take shortcuts, and grow and grow, but then you have to go back and play clean up. That or you can take a very long-term approach to the business, proving your model. Then, when you hit scale, you can even faster.

People mistake short-term growth as too positive. What if you hit scale and you are not optimized? Lay the proper foundation and you can grow faster down the road.

What is better than short-term growth? Growth at [the point of] maturity.

[Regarding new products] We don’t want it out there unless it is a good product. Are you building to make a real difference, or for buzz? Another way, are you building a real business?

The companies that are caught in the Series A slowdown are precisely the firms that did not follow Henry’s ideas. This is not to say that he came up with such ideas; anyone with passing knowledge of business could write you a similar list. Instead, the example of Henry matters as he is applying old school business idea to a company that has borrowed from the edge of technology. And it appears to be working.

We’ll check back in with the company in a few months to get new numbers on its revenue growth. What do you want to bet that they are strong?