What does it mean to run a disciplined startup in an undisciplined market?
A famous quote (often credited to Buffett) comes to mind:
“In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.”
Today’s market for startup financing is operating like a voting machine. Why is that?
There’s been a massive increase in capital (votes), a slower increase in the number of quality startups (things to vote on). Hence, a relative scarcity – where everyone wants to invest in (vote on) a few things.
As a result, valuations have far exceeded fundamentals. Prices go way, startups get more for less, and everything works well for startups and TVPI until it doesn’t.
In the end, inevitably, the same holds true in capital markets as it does in the Bible:
“What has been will be again, and what has been done will be done again;
There is nothing new under the sun.”
Eventually, without exception, startups that succeed become public companies, and public companies are always valued by earnings – at least over the long term.
Whether it’s 5 months from now, or 5 years from now, public market valuations will adjust, and private markets will follow.
This is not to say there aren’t many amazing businesses being built today – many of which will become large, long-term sustainably profitable public companies.
It’s just that most startups aren’t being held to the same level of financial care as they would be when markets were a bit closer to being a weighing machine rather than a voting machine.
In short, the market today is deeply undisciplined.
So what is a disciplined startup to do?
First, if you can raise more capital at the same (or even less) dilution – it would be obvious and wise to do that. If you’re executing well, you’ll be able to grow faster, higher more competitively, and build more of a runway cushion.
However, herein lies the rub – when you’re sitting on a pile of cash that’s many times as large as you’d have in a more disciplined market, you’ll need to hold *yourself* to a more disciplined standard – even when investors aren’t (currently) doing that.
Specifically, what does that mean? A few things come to mind.
- Track profitability metrics carefully, and keep making progress toward your goals.
- Measure and improve things like LTV/CAC, including fully-loaded CAC. Be conservative (e.g. typically means capping LTV to 3-5 years, for many businesses)
- Don’t settle for a long (usually 6+ month) breakeven period, even if investors aren’t demanding it.
- Track your gross margins, and if you’re a software company, keep making steady progress toward the land of 85%+ gross margins. You’ll be rewarded when you go public.
- If you’re SaaS, don’t settle for aspiring for less (as a long term target) than 120% net revenue retention
- Be thoughtful about acquisition spending, and keep leaning heavily into smart acquisition techniques – whether it’s a creative (non paid) growth look, product-lead growth, partnerships, referrals, etc. Keep honing your special sauce in this area.
- Heed your runway, and don’t assume investors will always be there. Markets will change, and many investors behave like fair-weather fans. Write down a real plan B, that gives you the option to extend your runway by 6+ months if you need it (the better your unit economics, the more wiggle room you’ll have).
In short – a disciplined startup makes the most of the market, but also treats that extra capital as precious and scarce as it would in a bearish market. This effort absolutely has to be supported from the top down – from the CEO, head of finance, those controlling the engineering and marketing purse strings. Do this even when your board doesn’t demand it.
Demand more discipline even when others don’t.
Plan for a change in seasons when the days are long and the weather is good.
A disciplined startup plans for the long-term, and builds a foundation that can survive any weather.