When should ambitious businesses spend their cash? (by Stan Laurent)
Cash burn can become crack cocaine for startups. Unfortunately, too many startups blow up because they spend the cash they have raised before they manage to build a sustainable business, rather than after.
Here at Highland Europe we think that capital efficiency is an underrated attribute in founders. We think that startups can be lean and still be ambitious.
Having spent 10 years at the coal face as CEO of Photobox, I think Highland Europe is right to care about capital efficiency because it’s often a proxy for the strength of the underlying business proposition and helps deliver better returns for both founders and investors.
One of Highland Europe’s recent high-profile exits was Matchesfashion.com, the fashion empire started in Wimbledon Village that grew to become one of Europe’s unicorns when it transformed itself into a global retailer, is a great example of capital efficiency.
Matchesfashion.com resisted the urge to go through constant fundraisings and still managed to grow into a global consumer business. All the team’s focus was on delivering an unparalleled experience to the right – profitable - customer segment.
In the long run, this meant that most of the growth was self-funded and the founders’ interest was not constantly diluted over time. When the time came to exit, Tom and Ruth Chapman had preserved their economic interest in the company.
Early stage funding should enable a company to achieve healthy customer economics. More significant fundraising – growth capital – should only come later. I strongly believe that if that is not the case, the only beneficiaries of that fundraising will be Google, Facebook and a few other advertising platforms (in the B2C space) or bloated sales teams (in the B2B world) - not founders, and not investors.
CEOs have two challenges to think about as they scale: customer economics and fixed costs to support the business. Fixed costs are an investment ahead of scale which absolutely must be right-sized given the medium-term business potential. Customer economics, meanwhile, are the oxygen for the business. With a good payback on marketing or sale spend, growth potential is limitless.
I love businesses that need money because they’re investing in profitable customers as much as I run away from those who “buy growth” with unprofitable customers.
GetYourGuide, the leading global platform for travel-related activities and entertainment, is another portfolio business that is scaling healthily. The travel site raised $75m recently from an expanded pool of investors. GetYourGuide’s ever increasing global coverage, product offering, and marketing sophistication is allowing the business to scale sustainably, which lends itself, in this case, to chunky fundraising.
There’s no wizadry about capital efficiency. If it sounds like basic business nous, that’s because in many ways it is. The “art” for investors like us and for entrepreneurs is keeping control of the basics in an environment that moves at near-warp speed. For startups, as we all know product adoption cycles are increasingly short, product or marketing improvements occur rapidly and there is always a real, or imagined, competitor snapping at your heals. All of this can have a material impact on the business fundamentals.
That’s the core of our ambition at Highland Europe: to help founders as they face these scaling challenges by surrounding them with the right experience in terms of team, board and trusted advisors.
We know that this translates into stronger customer economics, better capital efficiency, more control for founders, and – eventually – a better financial outcome for everyone.