Two Reasons Why Your Profitable Startup Could Use an Investment - Netokracija CEE

Two Reasons Why Your Profitable Startup Could Use an Investment

My company is already profitable. Why would I need an investment?

Do not underestimate how much it will cost to expand your business.

Over the years at Credo Ventures I have seen plenty of startups across all stages ask something along the lines of: we are already break even, why would we need an investment?

I have a lot of respect for all the founders who are well aware of the pros and cons of taking an outside investment, and choose to bootstrap. It is a lifestyle decision. But the majority of founders I talk to who are against taking an investment are simply misinformed. They might base their decision on misguided notions of what it means to take a venture capital investment (the investors will take control over my firm!) or they underestimate how vital growth is to the survival of their business.

The goal of this post is not to dispel all the myths of venture capital investing, even though I will say that VCs are not out there to steal your firm. The focus of this post is on growth, the risks of not growing fast enough, and the underestimation of how much such growth can cost.

Grow fast(er)

One of the key reasons to take an outside investment comes back to the distinction between a startup and an SMB. A startup is a unique kind of company because of its commitment to grow as fast as possible, ideally exponentially.

I see a lot of companies — especially once they have generated some revenue, say between USD 2-20MM annually — that implicitly give up on the commitment to grow. They will say something along the lines of: well, I will just open that sales office in the new market once I generate enough cash for it.

This conservatism is especially hard to watch in technology startups, where companies seem to be moving on hyperdrive. By the time you have enough cash to open that sales office, your competitors will have already signed first customers on that market, or your product might have lost its appeal of uniqueness.

Even worse, if your competitors start to outgrow your startup, you might quickly find out that they are expanding into your own territory with scale and resources that you can’t possibly match. The unintended consequence of not growing as fast as possible can therefore be the stagnation or even decline of your business. Sure, you will most likely still afford that luxurious car every other year and a nice house, but is that really why you started your own business?

The issue of dwindling ambition to grow superfast as the company gets bigger is especially true in Europe. It seems like a lot of entrepreneurs get the feeling that once they hit 5, 10 or 20 MM in revenue they have “made it”. This mindset just shows the extent to which such companies lack the perspective on real growth, especially when compared to startups in Silicon Valley.

To all the 5-50MM revenue startups that think they have made it big already: on the West Coast, you are just a mid-tier startup that would be looking for a Series B or C to fund its expansion. Compare yourself to someone who is really making it big. Take Uber: founded in 2009, raised USD 300 MM to date and is rumored to have booked over USD 200 MM in revenue in 2013 – in its 4th year of operations. Now that’s startup-like growth.

Do your math right

Compared to CEOs of companies with revenues in the millions, founders of earlier-stage startups tend to commit a different kind of mistake: they underestimate how much it will cost to expand their business.

Let’s use the example from above: you want to open a new sales office — in London. It is not unusual for an entrepreneur’s plan for the expansion to be something along the lines of: I make 50-100k a month in revenue, so I can devote 10-20k to open the office and hire a sales guy. As the revenue starts rolling in from first clients, I will hire additional sales people.

Now some quick math: a good quality sales guy will cost you 8-15k USD a month base. Let’s say you have a nine-month sales cycle, so you need 70-135k for that one sales guy before any revenue starts rolling in. If you are expanding for any other reason besides bragging in front of your friends over a beer that you have an office in London, you will need 3-5 guys to generate some real traction. And you need to pay the office costs, probably hire an office manager, hire accountants, etc. And if you are really serious, you are going to support your sales team with a smart marketing spend, perhaps an account manager as well.

All of a sudden, you are looking at an investment of around a million dollars, and that’s just so you can have a presence. Becoming one of the market leaders is a totally different ballgame. And that’s just London. Now imagine you want to expand further, say the U.S.

The point of this post is not to claim that every company now should take a VC investment or will otherwise be run over by competition or stuck in its home market. But to those who truly want to grow as fast as possible, I would argue that it is almost impossible without an external investment. Heck, even the kings of viral growth at WhatsApp took one.

Leave a Reply

Your email address will not be published.

Popular

Tech

Croatian airt has an API that will enable all developers to use AI without a hitch

Croatian AI startup airt that applied for a global patent protection of their algorithm in July, surprised us with another news at the Infobip Shift conference – their platform can now be used and implemented by developers as well.

Internet marketing

Developer in a marketing hell (based on a true story)

After half a year of ups and downs, mysteries and HEUREKA moments trying to understand what 'ad groups' are and what do 'keywords' have to do with ads, I am finally confident enough to say that I know what a complete ad group should look like. At last, I pull the trigger that creates 20,000 ad groups with keywords in one hour.

Startups

SofaScore’s CTO: From student to expert who scaled a solution for 20 million users

You will not learn how to handle 20 million users at any college and few developers have the opportunity to do so. For SofaScore's CTO Josip Stuhli, who does just that every day, the first and biggest challenge was optimizing their own "machinery" to work better than Amazon's cloud.

What you missed

Startups

Mate Knezović: How I convinced my mother and my clients that agrotech is the future

From a software user, he became an investor, and from an investor – a manager. Today, Mate Knezović is the COO of agricultural production management software AGRIVI. But it’s easy to win over the younger generations with technology, what about the older ones – have circumstances changed in the last couple of years?

Careers

She’s a technical writer at Infobip, and her hobby is learning about emergency medicine

Writing technical documentation, researching medicine, and the pandemic caused by the coronavirus, might not sound... related, but Infobip's Sara Tilly has been combining them successfully for a long time. How does this approach to learning help her in her current job?

Startups

Travel companies need to free up time for customer-centric activities – through digitalization

Are travel companies aware of the need to change and why this time it is imperative, how should they plan their digital transformation and what benefits should they expect from it? We sought answers from Iva Vodopija, Head of Sales Operations at Lemax, a travel Software-as-a-Service company from Croatia.

Tech

Croatian airt has an API that will enable all developers to use AI without a hitch

Croatian AI startup airt that applied for a global patent protection of their algorithm in July, surprised us with another news at the Infobip Shift conference – their platform can now be used and implemented by developers as well.

Startups

What can international teams gain from Croatia’s first AI incubator?

In February of this year, Croatia got its first incubator for ventures working with AI, machine learning and data analytics. Sixteen startups already joined!

Startups

A day in the life of a Game Designer at Nanobit

What does a game designer actually do and how does that tie in with the world of mobile games? Allow me to explain.