When looking to raise outside expansion funding, the safe path might not always be the optimal path. Think about growing aggressively. This will give you the greatest advantage.
The safe path might not be the optimal path. My partner, Kate, discussed earlier the business imperative around the need to grow aggressively in a competitive market. There’s also a financial or valuation dynamic that pushes you in the same direction. Let me explain what it is. If you manage your money carefully and grow at 30%, and you come to raise money a year from now, and your message is, “I’m growing at 30%, but if I invest more I can grow at 50%,” you’ll probably raise that capital. But you’ll get valued as a lower growth, 30% company, not a high growth 50% company. Contrast that with the other company that invests a little more aggressively, is growing at 60% and comes to market and says, “Next year, I plan to grow at 50.” It’s a lot easier for an investor to believe that that second company is going to grow at 50, than it can believe that the first one will. Valuation results will reflect that.
I’m encouraging you to grow aggressively, in part, because the business warrants it, and in part because that’s how to attract a high valuation. But what we’ve got to understand is there’s a risk that at the point in time when you need to raise capital and you’ve locked in this high burn, investors, which can be a very fickle group, might be nervous and you might struggle to raise money. How can you reconcile these issues? How can you grow aggressively without putting your company at jeopardy? What capital raising plan is the right one to adopt to navigate this issue?
The best way to manage this risk is to adopt a growth plan that front end loads the growth, and then calculate in advance that point in the future at which you can slow down the rate of growth, and still glide to either cash flow break even best case, or worst case, a dramatically extended runway on no existing cash. We call this pulling the ripcord, and we call it the ripcord rule. Understand when you can still pull the ripcord in the future and not put your company in jeopardy. Then, armed with that information, what we encourage our companies to do is aim to raise additional capital at or close to the period at which you’d have to pull the ripcord if you didn’t get that capital. What this usually means is you’re raising money a little earlier than you might otherwise do. But we believe the cost of doing that in terms of increased dilution, more share that you give away to new investor, is more than repaid because it allows you as a high growth company to invest aggressively while never putting your company at risk. This is good advice if you need to raise a million or ten million, but it’s not necessary to do it this way because for these kinds of sums, you can usually find one or two investors who will give you that kind of money. But as the sums get bigger, as you’re dealing with companies and opportunities that involve raising $10-, $50-, or $100 million we strongly almost insist on the ripcord rule. Make sure you know the last quarter at which you can still glide to profitability and then even at the expense of some extra dilution raise money before you pass that threshold.
If this works, you never actually end up “pulling the ripcord” because what happens is you constantly beat and raise. In other words, you outperform expectations, you raise more money, you reinvest that capital, and you grow more quickly. Stepping back, what we’re doing here is de-risking the risky plan rather than taking the safe plan. And that’s our theme across the entire discussion here. We encourage our companies to be aggressive and seize opportunities because the kind of opportunities we’re seeing right now aren’t going to wait, and aren’t going to come around again. But at the same time, it’s our role as board members to make sure that we do the risky thing in a safe way, and this is the kind of strategy around financing that will allow you as the CEO to sleep at night, knowing that you’re playing aggressively, knowing that you’re playing to win, but knowing that you haven’t put your company in jeopardy.