(Originally Published by the Ottawa Business Journal)
When I was running my first startup out of university, I was uncertain of so many things.
As a young entrepreneur, I was trying to find the formula for success and looked to others for guidance.
In retrospect, that was a mistake.
The truth is, a one-size-fits-all formula won’t guarantee success. Each startup has its challenges, market dynamics and unknowns, and you have to adapt to maximize the impact of your business.
Here are some of the recommendations I received as a young entrepreneur that I’ve learned to ignore when managing a startup.
More Funding = More Success
Not long after founding Tungle – a social calendar application – in 2006, a competitor named TimeBridge popped up in Silicon Valley that had raised more than US$10 million in funding.
I was told we’d never catch up to them, that its level of funding dwarfed our comparatively puny US$1 million in seed funding. TimeBridge supposedly had the capital to build a better product and create a bigger market.
Well, history told a different story. TimeBridge faded away, while Tungle ended up being acquired by BlackBerry in 2011, giving an excellent return to its investors.
What people fail to understand is that raising capital is a double-edged sword. Yes, you have more capital to spend, but you also need to drive immediate results. Investors want to see a 10x return on their investment, and that pushes them to provoke founders to take on greater risks than the business should take. When a startup fails to deliver, VCs won’t follow on a subsequent round, and you’re left with an unsustainable company and valuation, leading to a loss of board confidence, founder exits, recapitalizations and/or heavily discounted exits that ultimately affect the life of a company.
“A good growth rate is important, but it needs to be achieved through strong business fundamentals, not at any cost.”
You Gotta Spend (Lots Of) Money to Make Money
People often point to Shopify as a company that spends more than they earn to maintain a good growth rate. But what few people know is that before raising any institutional capital, Shopify was profitable. The company built its foundation on strong business principles.
The industry expectation of an early-stage startup is that it needs to grow its revenue by a minimum of 2x every year. A good growth rate is important, but it needs to be achieved through strong business fundamentals, not at any cost.
A company I invested in a few years ago raised more than US$15 million from a leading investment firm south of the border. To show strong growth, they spent heavily in sales and marketing, hired some of the top PR firms in the world.
Of course, with that level of spending, its customer base increased. But the fundamentals just weren’t there. Product market fit was never reached, and the churn rate was high.
The expectation was that over time, the company would be able to address these issues and increase the lifetime value of a customer and reduce its customer acquisition cost. That never happened, and not too long ago, the startup closed down.
Adding more fuel to the fire, and spending your capital on flashy startup perks only makes sense once you’re stable. Until then, stick with letting your team members bring their cute pets to work.
“Rather than raise big rounds or upgrade to fancy offices, we’ve slowly built a long-lasting business by operating purposefully.”
Follow the Unicorns, Not the Donkeys
Often, we get advice based on the most recent success story, and we – as entrepreneurs – try to mimic their success in an attempt to create our own.
Take Foko Retail, for example – a company founded in 2013 that I initially invested in before joining as CEO. It was established on the premise that consumer behaviors eventually get adopted by the enterprise world.
Truthfully, in the earlier days of our company, we tried to mimic Yammer’s go-to-market by being a horizontal service that catered to all kinds of different industries.
That didn’t work for us. We realized we had to reevaluate our solution. Three years ago, we pivoted to focus on the retail industry.
Store managers were communicating with their head offices visually, sharing photos of in-store displays and promotions to verify compliance, but had no way of doing so privately and securely without using multiple platforms to get the job done. It was a huge time suck in an industry begging for disruption.
So, we went back to the drawing board and redesigned our product based on their use case, building new features that solved their core problems.
By forging a distinct path instead of taking a one-size-fits-all approach, we now have more than 60 different industry-leading retailers and brands – like Club Monaco, Converse, Victoria’s Secret, Diesel, and Hermès – using our platform. We have a good growth rate based on solid business fundamentals, and it shows. Rather than raise big rounds or upgrade to fancy offices, we’ve slowly built a long-lasting business by operating purposefully.
We may not have onsite acupuncture, an indoor slide, or daily catered meals, but I like to think we offer something better: escalating growth and a stable foundation to sustain it.
Marc Gingras is a Canadian entrepreneur, angel investor and CEO of Gatineau-based Foko Retail. To become a part of the Foko Retail team, check out our careers page.