A short runway may be the key to success for your startup
I haven’t blogged much over the last 10 years about LexBlog and my thoughts on starting a business. Getting questions on the subject from time to time and reflecting upon a Fred Wilson (@fredwilson) post this morning, I thought now a good time to do so.
I have been a regular reader of Fred Wilson’s blog, A VC, as in venture capital, for years. Fred, who is a partner at Union Square Ventures in New York City, brings some of the best down to earth business insight for start ups and emerging growth companies, day after day.
When a Seattle audience member questioned Fred years ago about why Twitter, a company Fred made a small investment in, was not investing in building a business development team, Fred had a great answer.
Is it wiser to invest in technology to keep Twitter up on the net or to prove that Twitter can not make much money yet so as to decrease the company’s valuation by hiring a business development team? Years later Twitter has attracted all the funding it has needed and is on its way to a $10 Billion plus IPO.
This morning, Fred shared a startup business philosophy that has guided my team and I in getting LexBlog off the ground. The less money needed the greater the chances for success.
As Fred explains, startups tend to be focused on creating as long a runway as possible. Runway is the amount of time you have until you run out of cash. In other words, until you can get your business profitable and self sustaining.
And yet, if you wanted to make your runway as long as possible you would raise as much cash as you could and/or you would keep your expenses as low as possible. I have seen teams do both and you know what? Neither works too well.
The fact is that the amount of money startups raise in their seed and Series A rounds is inversely corrolated with success. Yes, I mean that. Less money raised leads to more success. That is the data I stare at all the time. It makes little sense at face value but it is true based on more than two decades of experience in the startup world.
LexBlog did not have a terribly long runway. It was self funded by wife, Jill, and I, out of savings — of which we did not have a ton.
I followed the wisdom of Guy Kawaski (@guykawasaki) , another VC. Develop something fast and see if people will take money out of their pocket and put it in yours. Then, and only then, will you know if you’ve created something of value. Plus customers, now vested in your success, will give you the advice needed to improve your offering.
Getting somewhere fast, as Fred says, is the key, not trying to raise money to increase the length of your runway.
If you can get the plane to take off, the length of the runway matters less. If you can’t, there is no runway long enough for you.
I didn’t try to grow LexBlog fast as far as the number of clients. I wanted to deliver a quality solution and service. Heck, we only had 7 blogs at the end of year one. However I wanted some clients asap after coming up the concept of a professional turnkey blog solution.
It was that “seed money” from those early clients that allowed us to get to 67 blogs in year two and double the number year over year for a number of years. I also leveraged that seed money by hiring only one person “ahead of our cash flow.” Only after breaking even again after the hiring (revenues exceed expenses) would I consider hiring another employee.
After a year or two the cash I needed for hiring and other expenses came from a line of credit from a bank. Demonstrating that LexBlog could support the payments on a line of credit through the revenue we were generating allowed me to get that line — plus of course that second mortgage on the house.
LexBlog is well beyond my startup funding philosophy today. But this practice of get to profitably fast and to rely on clients for funding like any good business does was key to getting us to where we are today – great clients, strong team, and growing company.
I’m no business generous. Just ask my LexBlog team members who have much more business experience than I. And each business’ needs are different.
The short runway, by necessity, just happened to work for me. Per Fred, it looks like it’s worked for many others.