A couple years ago, when startups were raising record sums and using it to lose money, there were those in the nonstartup founder community who tut-tutted about why it seemed like a bad idea.
“Slow down” was the common mental refrain. If you sell your products at a loss, how will you ever turn a profit? What if investors no longer want to fund growth at any cost? Is it really wise for a company this deeply in the red to spend on perks like in-house manicures and dog walking?
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Well, now we’ve been heard. The cycle has shifted. Rather than counting on a massive up round, startup types are opining about conserving runway. These days, it’s all about raising gross margins, cutting noncore expenses and positioning for long-term viability.
Conserving runway is boring
I supposed us fiscal scolds should be celebrating.
But no. Rather than validating, the more tight-fisted investment environment has made life for those who follow the startup world more boring. No ridiculously big rounds for pie-in-the-sky goals. No more valuations that only go up.
There’s also the conspicuous absence of a big consumer benefit of the startup boom: companies selling products and services at a loss to build market share. This strategy is what enabled things like sub-$15 crosstown Uber rides, gourmet meal delivery at fast-food prices, $2 scooter rides, and all those things that made startups buzzy.
Now that investor tolerance for staggering burn rates has subsided, things are not as fun. So perhaps it’s time to ask: Are calls for budgetary restraint misguided?
Yes, yes, of course the startup graveyard is littered with headstones of those with negative margins who plowed through their cash and flamed out. But plenty have graduated to massive market caps as well.
Among gig economy platforms, Airbnb, Uber and DoorDash have market capitalizations of $87 billion, $72 billion and $26 billion, respectively. Many of the most valuable American technology companies, including Amazon, Tesla and Salesforce 1, were longtime money-losers, even post-IPO, before they eventually turned profitable. It’s unlikely any of those companies would have reached such heights had they spent their formative years fixated on net income.
The case for losing more money
Besides, startups are supposed to have a rebel streak. The current fiscally restrained mindset makes me wonder: If you’re a startup founder or investor who’s parroting talking points of people like me who work middle-class jobs and sock away meager sums in 401Ks, perhaps you’ve strayed too far from your authentic calling.
After all, the whole point of the startup investment sphere is to stick it to the scolds who insisted these strategies would never work. Do what’s never been done before. Spend the competition into the ground. Scale, scale, scale.
Venture investors and founders who believed in this ideology a couple years ago, when everyone believed it, should believe even more fervently now, when almost no one does.
Moreover, this is the perfect time to spend the competition into the ground. Rivals don’t have the money to keep up, advertising is cheap, and you can snap up the talented people they’ve laid off.
And keep in mind: Startup lifespans are short. Either you grow into something big, you get acquired, or you close down. Why spend those few years when you’re setting out to change the world obsessing over a couple more months of runway?
Illustration: Dom Guzman
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