

Why You Need to Ring the Freaking Cash Register - muzz
http://www.bothsidesofthetable.com/2013/07/16/ring-the-freaking-cash-register

======
nemesisj
What's infuriating is that over here in Europe, the focus on making money
early on with a startup is considered the biggest drawback of the VC and
investment community.

"VCs are so risk adverse here, they expect you to get some revenue in the
FIRST COUPLE OF YEARS! Man, why can't we be more like the Valley?"

I've long said this is a feature, not a bug. It's refreshing to see this
article. Maybe some over here will take note.

~~~
mindcrime
Try East Coast (US) VC's and angels. "Risk averse" doesn't even start to
describe some of these folks. We have angel investors who want you to have
paying customers and then still want to do 6 months of "due diligence" before
making a _seed_ investment.

~~~
endersshadow
Had this happen to us in Texas. We had paying customers, and customers who
wanted to pay that couldn't afford us (needed to nail down pricing), but we
weren't profitable quite yet. Angels wanted nothing to do with us until we
were profitable, so that sucked.

~~~
aptwebapps
Why would you need angel investment if you were profitable? It seems like the
terminology has shifted a bit or something.

~~~
njharman
Same reason you raise any type of capital, growth.

~~~
aptwebapps
Yeah, but is it still angel investing?

~~~
endersshadow
Angel investing means that they buy equity but don't have input on decision-
making. VCs buy equity but _do_ have input on decision-making (usually sitting
on the board). I meant it in that context. If that terminology is different
between Texas and the Valley, then I'm not aware of it.

What do you think angel investing means?

~~~
aptwebapps
I'm not exactly an insider, but I took it to just mean early and small. The
idea being that you needed an 'angel' just to get started.

------
brador
Taking cash is _hard_ and leads to an anxiety response.

Selling means you're out there. You're putting your idea on the market and
hoping someone buys. If they buy, great. But if they don't, then it's back to
the 9-5 grind and the 'change the world' party is over. That's hard to digest
for many.

Like in 2000, startups are again becoming the middle income 'phd'. A way to
avoid having to face reality, even for just a few years.

Test early, Test often.

------
buro9
I am so glad Suster said this. Hell, I would have been glad if any of the most
visible VCs said this.

I get the sense that people really do believe that tech startups are actually
a different beast, that the basic rules do not apply, and that we really are
not building businesses as the rules just don't apply to tech startups... they
are different.

We should be calling bullshit on that. The core rule should be that revenue
should be higher than costs.

It seems so dumb to say, as it is obvious. So how did we end up in a place
where people will tell you with a straight face not to worry about revenue,
far better to grow (increase costs) and increase valuation.

As soon as you are in that game it seems that the goal has shifted to the next
funding round, the next inflated valuation, and not to have built a
sustainable and possibly high-growth business.

The exit should not be the end and your goal. It is the goal of the VC, and
your paths may be the same for a while, but before the VC you need to find the
right ingredients for a new business, and after VCs have exited you need to
have set your company on a path of sustainable growth.

Growth is important, but n times no revenue is still zero. Revenue should be
our most important metric, and growth should be second to that.

~~~
mgkimsal
"So how did we end up in a place where people will tell you with a straight
face not to worry about revenue, far better to grow (increase costs) and
increase valuation."

Because once you start taking money, that is your valuation, more or less.

You've got 10,000 users using your service, growing at, say 30% annually. Once
you start charging, say, $30/month, you've put hard numbers to things, and
there's a financial framework to work within. Until then, you can keep
projecting $x/year, because it could be anything.

~~~
hobs
I see how "playing the game" makes it seem that way, but projections are worth
about the same in my hand as a fart. If you have enough VC to keep going and
you want to be the next twitter, I wont say you shouldn't, but it seems common
sense that you would want to start making money so that you know, you start
making money.

~~~
mgkimsal
I completely agree, but 'making money' and 'increasing valuation' really
aren't the same ends at all.

~~~
hobs
Yeah, and maybe I want to say something along the lines of "your valuation
should be more closely tied to your actual ability to make money." I will
ponder it more, thanks for your comment.

------
JumpCrisscross
" _the trade-off between profits & growth_"

There is a financial metric I frequently calculate for private equity firms
called zero growth return which allows one to partially disentangle the
steady-state business's working capital requirements from investment. The
value in figuring it out is knowing, as a manager, how much capital you have
to "play" with for capital investment purposes, whether that be servers or
devs.

~~~
mindcrime
I was not familiar with the term "zero growth return" until I saw you use it
here, and some Googling led me to this book:

[http://www.amazon.com/Valuation-Measuring-Managing-
Companies...](http://www.amazon.com/Valuation-Measuring-Managing-Companies-
Finance/dp/0470424656/ref=sr_1_1?s=books&ie=UTF8&qid=1374071260&sr=1-1&keywords=valuation)

Just out of curiosity... would you think that the kind of material on
valuations contained in this text (or similar ones) would be of value to
startup founders, especially vis-a-vis negotiating with investors? Or is it
all stuff that doesn't come into play until later, when you're dealing with
private equity or trading on Wall Street exchanges?

~~~
JumpCrisscross
I remember tearing that book out of the box from Amazon and cramming from it
for an internship interview as a college freshman, hoping the interviewer
would think me at least a junior (it worked). Recommend it for the interested.

That text is not for start-ups - it too precise to be tuned to no track
record. I believe start-up founders should focus on understanding their
waterfall, revenue models, and the intersection: cash burn projections. Less
for negotiating with investors than for guiding decisions.

~~~
mindcrime
Thanks. It sounds interesting, I may pick up a copy sometime, just to help
round out my knowledge of areas that I'm less than strong in. As a developer,
I'm admittedly kinda weak on the financials / accounting / valuation stuff. I
feel like I need to go take an accounting class or two. Guess I should look
and see if there's anything good on Coursera...

------
filip01
It's bizarre that this type of essential advice is news to so many founders
(including me). It's understandable from the VCs perspective though. Since
they're mostly in it for huge exits it's rational for them to prefer companies
with zero revenue, but good traction, over profitable (or close to profitable)
companies with the same traction. Simply because the close to profitable
company will have much more leverage than the zero-revenue one. In fact, a
zero-revenue company who has been aiming at a VC Series A will often be forced
to accept the term sheet at one or another VC whereas the profitable or close
to profitable always can downsize, get a loan etc if they're not comfortable
with the terms they can get at a VC. All this is because profitability isn't
to the VC that much of a hint of long-term mega success as some growth metrics
might be.

Related to this, it's a shame that the VC terms are often not well understood
among first-time founders. If they were, I'm sure more people would try the
revenue-route.

For a founder, it all boils down to how much this possible revenue will harm
overall growth. In some cases (Instagram etc) it really does. In most other
cases, it does not (or very little). But the zero-revenue route is easy to
decide on since it's less work. "Yeah, let's take sales and all that later on"
is easy to say especially when endorsed by the VC industry.

------
kephra
I might want to add this advise to coders also: You fix some bug in some free
software, to help some other company. Write them a small invoice, don't be shy
of asking for money. You win a customer. Coders like me are cursed by infinite
ideas, vs limited time. My approach is to wait till more then one possible
customer for the idea exists, and the first one offers enough money to pay the
prototype. Its then just a question to ask the others to pay a similar price
to get into production break even. And any future sale is nearly passive
income from old software and maintenance contracts.

Ring the freaking cash register is even more important for lifestyle business,
even if it feels as if every customer is your good old friend.

------
ry0ohki
The thing that is killing me the most is all of these free companies have
changed consumers expectations. While there used to be narry a complaint about
paying $49.99 for software at CompUSA, people write me ANGRY emails that I had
a nerve to charge anything for a premium version of my software (which costs
$29.99 per year), and I still offer a free version! Try charging $.99 cents in
the app store and wait for all the furious reviews.

~~~
megrimlock
If my reading of patio11's business of software stance is accurate, I believe
he'd say these irate emails are actually helpful signals to you that these
people are not a market you want to bother serving! Because they have so
little invested in understanding your product and making the most of it, they
need to compensate with volume and vitriol. It's better to focus on people who
more strongly need and want what you are selling and are willing to signal
that with $$.

------
pbiggar
Is this still that big a problem? From my vantage point, everyone is ringing
the cash register. B2B and B2D is huge right now (in SF at least), and all but
the most naive of entrepreneurs (that I meet, but I do meet a lot of
entrepreneurs) have a B2B focus, with enterprise on the mind.

How many people are still making go-big-or-go-home consumer/social/mobile
startups?

~~~
patio11
YMMV, but I know a few companies, many in mobile-but-not-games, who have
X00,000 or Y million MAUs/downloads/etc and are afraid of cursing that by
monetizing. A couple are in your neck of the woods.

No points for predicting my advice to those of them who have asked for it.

------
klausjensen
I snickered at "This is certainly one Path you can take if you have the right
background." Note Path with a capital P.

Burn.

------
smoyer
"As an investor that’s a no brainer. Hmm. Let’s see. Should I write off my
$2.5 million or put in 16% more ($400k) to see if we can get to break even and
maybe find more money and/or find our magic growth curve?"

That's the "sunk cost fallacy"
([http://en.wikipedia.org/wiki/Sunk_costs#Loss_aversion_and_th...](http://en.wikipedia.org/wiki/Sunk_costs#Loss_aversion_and_the_sunk_cost_fallacy)).
The $2.5M is already gone and so the ROI should be evaluated on whether the
outcome is better worth putting in the $400K (while also looking at the
opportunity cost).

~~~
LanceH
In the context of that point in the article I think he was just framing that
16% as easily being in the range of the previous investors. He was noting how
that $400k would have some legs when augmented with sales and another $2.5+
million round wouldn't be needed.

------
t0
> if we monetize too early we will scare away our nascent marketplace and not
> grow as fast

What about slight, unobtrusive monetization? You don't have to put up a
paywall, focus completely on revenue, and ruin your entire site. Add in a tiny
premium feature that a small number of users will buy to pay the bills.

~~~
antr
Can you share any good examples who use this approach?

~~~
pekk
Sounds like Reddit would be an example (though someone else would have to
mention how well it's working for them).

------
badclient
We've been focused from early on about figuring out a repeatable sales model
and though it has been a grind, we are now at a point where we are closing
sales consistently week to week. We have 25 customers, all acquired via this
repeatable sales model.

In our meetings with seed stage investors, we're repeatedly compared to
PORTFOLIO_COMPANY_X that may have 3-4x _free_ users, often acquired after the
funding.

The other disappointing thing is that most blog coverage regarding traction is
often very misleading. You get the real story when you actually talk to the
founders. For example, one of the companies that we really revere apparently
over $20,000 in sales before they built a product according to the blogs. Then
we found out that all of that $20,000 was _commitments_ from the founder's
_existing_ rolodex, not via a repeatable sales model. In our eyes, that is an
important detail to know; but for the blogs and the mainstream, not so much.

I've made this point before on a Suster post and I will say it again:
entrepreneurs for the most part look at the market and adjust. If the VCs keep
preferring 4 free users to one paid even in enterprise, they'll keep getting
more of that.

That said, I really really dig Mark's example conversations in this post where
he clearly admits that the VC and the entrepreneur's interest may not always
align on this topic.

------
sneak
Dear writers: please stop mincing oaths and just write "fucking". Not
"freaking", not "f*%$ing", not "fscking".

It's not any less classy to write "fucking" than "freaking", and the latter
just makes you sound like a jackass.

Write what you mean.

~~~
noarchy
I hear "freaking" often enough in spoken English that I don't think anything
of seeing it in written form. I can't say that I've heard "fscking" said
aloud, which almost surprises me, but I bet some folks here have.

Ref:
[https://en.wiktionary.org/wiki/fsck](https://en.wiktionary.org/wiki/fsck)

~~~
njharman
I say "Eff Sucking". I'm unsure if I go it from "this fucking sucks" or fsck

~~~
sneak
"Eff ess checking"

------
devindotcom
Are you managing a business or are you starting something? If you're managing
a business, ring the cash register and we'll all thank you for getting a jump
on the inevitable. If you think you're starting something, roll the dice. The
manager will cash out shortly.

From another comment: "Growth is important, but n times no revenue is still
zero. Revenue should be our most important metric, and growth should be second
to that."

If your goal is revenue, and you have no revenue, you've done something wrong.
But not everyone's goal is revenue. If it were, the open source community
would be a graveyard of used-up ideas and remixes.

Revenue is great for companies, but useless for tools. Tools don't need
revenue, and if you're building tools, don't try to get paid. People buy
hammers, but the inventor of the hammer isn't getting rich. Doesn't mean
people don't want hammers.

Revenue should be the most important metric for people who want to make money.
That's inarguable. Are you one of those people? There's nothing wrong with it,
but that doesn't make it a meaningless question. Answer truthfully, and your
path (lower-case p) is illuminated.

~~~
josephlord
> Revenue should be the most important metric for people who want to make
> money. That's inarguable.

Revenue is a good start but at some point you need to consider profit. And
yes, I have been in a room where someone proposed making up the per-unit loss
through greater volume (on physical goods).

~~~
a-priori
I hope, for their sake, that they were banking on some sort of economy of
scale where increasing volume would decrease per-unit costs and therefore
negate the per-unit loss...

~~~
josephlord
They may have been hoping that the economies of scale could work but they were
arguing with people who knew they wouldn't. There may have been a language gap
though I don't think that was all of the problem.

------
tommo123
I can't find the link but wasn't there an article, either by Ycombinator or
about Ycombinator, that directly contradicted this article. The gist of it was
that a VC firm isn't really looking for already-profitable companies that can
assure a nickle-and-dime cut of steadily-increasing revenue. The idea is to
invest in 10 companies with a high-risk margin, and the one company that
(statistically) takes off will earn such incredible revenue, magnitudes
greater than any reliable and stable business could hope to earn, and that
will pay for the investment lost on the other 9 which, being high risk, will
not make a return. The underlying philosophy was that if it seems like a
stable, reasonable business idea, then anybody and everybody could have, and
would have, thought of it already, and the potential for fantastic growth is
just simply not there. They'd rather pay for someone's quirky, crazy startup
on the 1/10 or 1/20 chance that it will take off, as the return from that will
be so great that it can pay for itself, pay for the other failed high-risk
investments, and then keep on paying.

~~~
josephlord
I don't see the contradition between the articles. It says why VC's do OK when
startups go for the big time but that it isn't always in the companies
interest.

I think it should also depend on whether you have genuine (low acquisition
cost) exponential growth. If you can show that growth I think funding should
be possible without revenue and riding the growth might be worthwhile but if
not you really need to be about alternative approaches.

------
ronilan
> This is certainly one Path you can take if you have the right background.

See that capitalization? freudian? sarcasm? dog whistling? :)

------
rsync
You can choose to write eloquently, without swear words.

Or, you can go full bore and write titles and content with actual swear words.
You can write "Fuck".

Or you can go a third route, and use the word "freaking", "frigging", etc.,
and make yourself sound like a tool.

Don't do that.

------
mindcrime
I'm all for "ringing the cash register" personally. I've said my bit on this
before[1], but I'll just re-iterate my position... I'd rather build a business
that's designed to actually make money, by selling a product to people for
money. BUT... I don't see any conflict between that and a desire go "get big".
I see no reason you can't "go big" the old fashioned way... steady,
sustainable growth over a period of time. I mean, neither IBM nor Wal-Mart
started out as huge megacorps, keep that in mind.

[1]: [http://www.fogbeam.blogspot.com/2013/03/the-point-of-
startup...](http://www.fogbeam.blogspot.com/2013/03/the-point-of-startup-is-
to-make-money.html)

------
erikb
What people often don't see is the loads of money that flow around in a
bubble. Yes, maybe Startup Community is a bubble right now. But still there is
a lot of money. And still a lot of people get rich by playing these
"unrealistic" rules. The bubble isn't bad until the last moment and for those
guys who don't see it coming. In my eyes, the solution is not playing a
completely different game, but playing better.

------
zackmiller84
Key metric appears to be that 99.99% of startups will not be the former FB,
Stanford Grads, Suster is talking about so, there's a higher probability that
they will succeed if they actually make money. No? If someone isn't willing to
pay for your startup, are they really a quality user?

------
chiph
A former boss put it as: "We are not the Red Cross. We are here to make
money."

------
Touchality
We agree that's why we created Bellhopr, a new start up that will literally
play a cash register bell sound for your team anytime you have a new customer
or sale.

It only takes one line of JavaScript to make work, and for the price of a
coffee you too can "Ring the Freaking Cash Register".

[http://bellhopr.com/](http://bellhopr.com/)

~~~
thoughtpalette
A+ for actually building something that shipped, but in my opinion that idea
seems really stupid. Most companies have the developer capacity to build an
idea like this quickly, even for the arguably little provided return it
offers.

