Cash Flow Break Even When?
Angel to Exit is in its 4th operating year, and I am glad to say we are now, officially, for the moment, cash flow break even (or better). Of course in a sense we have been cash flow break even since day 1 - if you ignore all the investment of time and effort and you ignore all the costs being covered by the founder.
If we did proper accounting for all of the time and effort of all of the people involved in most startups, we would find pretty much the same thing. You put in time and effort and you feel (and are) underpaid. But you keep going and going till you either give up or succeed.
And what is success?
There are many successes in businesses. Depending on the business, you should be measuring different things of course. I think the way to feel good about yourself (which is likely required to keep going for years) are metrics based on what you can achieve - the little things. Here are the ones I used for A2E that kept me going:
First sale (someone paid for something).
10th sale (a repeatable process for selling things and the ability to measure the sales sieve)
First client (a recurring relationship over months under a contract)
First deliverable completed (took about 6 months after the first client to finish internal diligence)
10th client (a repeatable process for closing desirable deals and the ability to measure performance)
Pay all workers amounts worthy of their time (except the CEO)
First contract completed (took about 1.5 years)
10th contract completed (took about 2.5 years and able to measure the business except for the equity outcomes)
Cash flow break even (paid all past due and current bills with predictable positive future cash flow - took 3.5 years)
6 months runway and growing (we just got there)
Start taking cash out (we will see... or increasing growth rate by spending it to grow)
Start paying the CEO on a regular basis (less than what they deserve)
I don't want to go into future paths for A2E here, but I do want to comment that this is about what I have come to expect for time frames for companies like A2E.
Companies like what?
Different companies are different. Companies that have complex sales processes like A2E and involve multi-year recurring revenue contracts take time to build up, involve lots of tuning to get things working for different audiences, and so forth. A retail toy store will be very different.
And yet, we seem to find that most businesses take years to get working right.
I hear stories of startups that went from nothing to millions in days, weeks, months. But I have never seen one. Producing millions of dollars of value just seems to take time. I don't claim this is inevitable. I just observe that it is true.
Yet another story
I know lots of folks who are in businesses of various sorts. They build them over years, spending lots of their time, identifying challenges, starting with a few customers, adapting to the real needs and operational issues, fixing things, improving things, and on and on. And after 3-4 years, they have viable businesses that can start to pay them. They grow it over the next few years and it becomes a cash cow, eventually hiring people to do most of the work and basically supervising the running of the business without day-to-day operational responsibility. It scales, runs, generates enough money to live well and possibly retire, and they look for what to do next.
On the other hand, I run into lots of folks who have good ideas, develop technologies, and are given great opportunities to grow, but many of them fail because they just don't get it. Whatever it is...
Earlier today I was speaking to a business person who spent the last 6 years building up a business, and it looks like in the next 3-4 years he will be wealthy as a result. He has a large market involving renters, and with his hundreds of thousands of clients, thought it might be a good idea to sell hydroponic gardening systems to those renters. Now I know several startups in this arena that I have talked to over the last several years. Several of them have small hydroponic gardening system solutions That are good for apartments, are scalable businesses, if they know how to run them - which they don't and don't want help to do.
So this entrepreneur who has and continues to build his business over years seeks out and meets these hydroponic startups, and offers them a path to a large market for apartment dwellers taking a percentage of revenue for his marketplace, and they (all) say "no". I'm sure they all have their reasons, but I am just as sure that we could negotiate a successful path forward to bring these or similar products to the large market and make more money for all, allowing the smaller companies to leverage the larger audience to grow faster.
Why does it take 5 years?
So for these small companies, they lost an opportunity to grow quickly. And they will... Again and again. Because it takes time to recognize, if you ever do, the reasons you didn't get there sooner.
And they are not the only ones. I have foolishly turned down great opportunities because of my lack of understanding of the implications, my short sightedness, my personality flaws, and plenty of other reasons.
I do not claim that you or I should be perfect. In fact, I am reasonably certain that neither you nor I will ever be. And that's why it takes 5 years. Or more.
It takes 5 years because we don't know how to do everything that needs to be done yet. We have to learn. Perhaps good advisors can reduce the learning curve and help prevent mistakes, but unless you are doing the same thing someone else did or the same thing you just did, there will be things you don't know and that take time to figure out.
You won't know the real numbers for the sales sieve until you run it for a while, and you will be improving it forever.
If you go to a large market too soon and are not well adapted to it you will end up spoiling the market for yourself and possibly others.
The initial numbers ultimately become the basis for measurement and adaptation. You can lose a lot quickly if the numbers are too far off and you don't figure it out soon enough.
The numbers are always off, and adapting the business to get feasible numbers takes time. Many companies never do it and end up failing because of this.
You won't know your actual costs until you actually incur them, and even with a lot of experience, you miss things and get the numbers off by a bit here and there.
If your costs are too low, you can usually live with it, but it also means you are either missing something that will come and get you when you scale, or your competition will ultimately come along and beat you on price.
If your costs are too high, you can lose a lot quickly. And as you scale you will lose more in less time. It's really important to control costs and this generally takes time to get right to where your costs are low enough and what you do is good enough.
As soon as your costs are tuned, you will have to retune them for changing conditions. As a result, you should be prepared for the major shifts that happen over time, especially in the transition from the first sale to the first 10 to the first 100 and up.
The external business situation is not static, has not been so in my lifetime, and likely will not be so for some time to come.
Right now is the right time to start a business one of my good friends is considering starting. But he is hesitating. There is perhaps 6-12 months of leeway in getting it going at this point. 24 months if you have a lot of money to put into it. His particular business is changing and soon will change rapidly. Once in it you can adapt, but before long, the barriers to entry will be too great, because those in the business will intentionally create them. The market is too large for anyone to take immediately, so it will be a 3-5 year struggle to gain share and mature the market. It could be 10 years... And the market will change over that time frame.
Starting too late with too little resources is often a death blow - over the 3-5 year time frame it takes before you are truly screwed. The folks that started at the right time will be peaking when the buyers are buying and the great exits can happen. The folks that started too late or grew too slowly will be left without buyers, with too small a share, and will mostly, eventually, shrink and then collapse. But they can be good lifestyle businesses for quite some time.
Too early is also not a good thing. When you start too early you have the lead, but you also have the potential requirement to educate the market. As you educate, others will spring up and leverage your hard work for their benefit. Which brings us to brand and market presence - one of the best ways to make all that education of the marketplace pay off.
Reputation, market presence, the value of your brand, etc. all change with time and the way the world around you works. Building brand and reputation takes time, because it really comes from other people, and if it is to last, so must the impressions they have of you.
Ten years ago, social media marketing was completely different than it is now. You need to adapt if only because the world is changing around you. I have more or less the same brand for one of my businesses, and porting it to social media was pretty direct. But you have to get there and get established. The first 10,000 Linked-In connections were the hardest...
Many startups imagine that if you build it they will come. They say things like "I will advertise and sell over the Internet" and imagine that this makes it more or less free, easy, and obvious. It's none of these, and it takes time to figure out how to do it well for each business.
There are lots of ways to build a reputation over time, and lots of ways to lose it all at once. Years of effort can be destroyed in minutes. And there tend to be small destructions over time unless well handled.
Customers take time and have different buying cycles. To create those systematic buying cycles takes time. Understanding them and tuning to them also takes time, more time for longer cycles.
It takes time. There are good reasons for this. Expect it.
Copyright(c) Fred Cohen, 2019 - All Rights Reserved