When we look at all the different cloud companies that are doing business and gaining more and more venture backing, I have always wondered what happened to the old fashioned attitude of making money as the focus. With all of the current buzz around innovation, I read this article and thought it was eye opening on the reality of business. I never will forget that old adage by EF Hutton -- "We make money the Old Fashioned Way, We Earn it". Especially in light of the Facebook story about Whatapp -- a 21 Billion dollar purchase that lost 232 Million dollars.
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Marc Andreessen, a prominent venture capitalist who sits on the boards of Facebook, eBay and Hewlett-Packard, recently startled the startup community by criticizing spending rates and warning of impending “vaporize”-ation if companies don’t start reshaping their habits. This message of “worry” is a change of pace from the investor who has previously gone on record refuting allegations of a tech bubble, but it’s a lesson I realized early in my career. Often there is a fundamental difference between companies operating on venture capital and those bootstrapping their way to success.
In short, companies that haven’t taken investment capital need to be laser-focused on growing revenue and managing cash, while those who have are often more focused on how to spend the money. It’s more than a funding model – it’s a mentality. “What new digital tool, marketing campaign, fancy office or cool (fill in the blank) should we invest in next?” is the question on the minds of many venture-backed startups, while “How are we going to make money today?” is the question driving bootstrapped executives. Of course, the investment model can work, but for every Google and Facebook, there are many others who try to use this approach and fail. In fact, a lecturer at Harvard Business School found that three out of fourventure-backed start-ups fail.
Stern Fisher, an angel investment network, estimates that only one third of well-known companies have taken venture capital. That means two-thirds of the brands you know by name have succeeded the old-fashioned way – earning money and investing it back into their companies to expand. Of course, as Stern Fisher is quick to point out, some of those companies are older than the venture capital market, but it proves that the traditional method of spending only the money you make works.
Working on the opposite ends of the earning vs. spending spectrum affects company priorities, mentality and culture. How often do you hear start up CEOs complain about all of the time and effort it takes to fundraise? Imagine if those early efforts were completely focused on building the business. To be successful, all companies, even those that are venture-backed, need to think like those that are bootstrapped: wake up focused on growth; go to bed thinking about revenue, and in between, work toward closing deal after deal."
Full Article posted below:
Funding Model Mentality Is Key to Driving Growth and Revenue
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