Are too many early stage CEO’s relaxed about losses?

We know that the number of early stage rounds are rapidly reducing – down from over 13,000 in 2014 to under 6,000 in 2017. At the same time private fundraising amounts are increasing as investors gravitate towards later rounds resulting in more headlines about mega-rounds.

Given this context it’s easy to forget that the milestones required for early stage institutional funding are as demanding as ever. I like this table that sums up part of the equation in terms of pure benchmark levels for different types of firms here, but the levels of themselves are not sufficient to provide any kind of assurance of success post seed capital, breakout growth is also essential with growth levels of at least 100% p.a critical until you reach about £5m of revenue for B2B businesses and considerably more for consumer companies, at which point the expectation tapers off a bit, or a lot, depending on whether you’re still pitching for venture funding or can appeal to the broader set of growth investors.

In the UK with the amendment of VCT rules there is pressure on a number of investment firms to put more money to work in pure growth (rather than buyout opportunities), however for growth investors profitability is important, not least because they don’t envisage a series of increasing rounds at spiralling valuations in the same way that venture investors do.

Given this context if you are a Company with less than £5m of revenue and are growing at less than 100% p.a. and you are making significant losses, your business may well not be sustainably fundable (ie have the ability to raise funding sufficient for 18 months runway). If you have sufficient runway to not require capital for some period of time there is no immediate threat, but that does not alter the issue, only the intensity. Competition can be a hard task-master that you are reminded of every day when looking to retain and grow your customer base and so the pressure to spend is intense, but the funding wall is unyielding and can’t be cajoled or reasoned with. Optimism is an essential quality for entrepreneurialism, but applying it to financing generally does not end well.

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© 2017 by Kevin Douglas.