In an uncertain economy, how you manage your cash is critical. From where we stand today, that’s likely to remain true for at least the next couple of years. Particularly in this environment, I think that one of the best ways to scale a company over successive capital raisings is through what I call “porpoising”. Put simply, it’s an ongoing cycle of continually managing towards breakeven, within the limits of your current cash.
You porpoise up towards breakeven, as a porpoise moves towards the water surface, reducing cash burn each month, before raising capital and diving back down again. You progressively reduce your monthly cash burn then, after delivering strong performance, raise capital again, invest in revenue growth, increase the burn rate and push out the next planned breakeven point. The process keeps the right balance between growth and sustainability for your company.
Within 12 months of breakeven … for ten years
At Aconex, after going through a challenging and uncertain period in the aftermath of September 11, 2001, we took a view that we might not always be able to raise capital when we needed it. Whatever happened, we did not want to be dependent on a capital raise to guarantee the future of the business, so we ensured that we always had a path to breakeven with whatever cash we had in the bank. We did not have to raise more to get to breakeven, rather all capital raised was for accelerating growth. That gave us the flexibility to choose when we raised funds and put us in a strong position to negotiate terms.
As a part of every capital raising, we had a clear two-year plan to get the company to breakeven with the cash we had on hand. We would execute on this plan then, as the business delivered and new growth opportunities opened up, we would raise new capital to accelerate the next wave of growth – investing in new overseas markets, new products, and increased sales and marketing. With this cycle we’d porpoise towards the breakeven point, complete a capital raise, dive down and porpoise back towards breakeven again.
The result was that for the first ten years of the company we were always within range of breakeven, but never actually got there. I remember one shareholder remarking (or possibly complaining) that Aconex had been 12 months from breakeven for the last ten years, which was true.
The one exception to this was in 2007/2008 when we broke our “porpoising” rule and almost destroyed the company. We were growing fast (100% year over year) but our costs were running hot. We had access to debt facilities and in our planning included the debt facility as part our available cash to get to breakeven. That was a big mistake and became a huge problem when we breached some covenants (including the debt / EBITDA covenant) due to costs being higher than expected. We were close to having the debt pulled by the bank, which would have put us out of business. Carrying a lot of stress personally, we hastily pulled together an equity capital raising to backfill the debt. I’ll write more on the dangers of debt for start-ups in a future post.
A bridge to nowhere …
One great benefit of “porpoising” is that you should never need to do a dreaded bridge round. I personally dislike bridge rounds as they just kick the capital raising can down the road. Aside from increasing the risk to your company (you never know what crisis is around the corner), it also means you end up doing two rounds rather than one. So, as a founder, you end up spending far too much of your time raising capital rather than working on the business, in which lies your largest value creation opportunity.
Some principles to consider, as you porpoise your way to breakeven:
Plan to get to breakeven with your current cash balance. It may be all you have. Avoid bridge rounds and treat your last round as your last round.
Don’t assume capital will be there when you need it.
Get to breakeven with cash to spare. You need a buffer as (trust me) something always goes wrong. Related to this – when you do raise capital always take more than you think you need.
Your burn rate should consistently decrease, particularly for a recurring revenue business like SaaS. Anything too lumpy in your burn model is probably an error - or else you have made heroic assumptions around revenue growth from one month to the next.
Balanced growth, operating discipline, optionality and reduced stress
Aside from ensuring you don’t blow up your business, using a “porpoising” cadence to grow ensures you:
Balance growth and sustainability, keeping cash burn at a manageable level.
Keep burn levels in proportion to revenue. I see some companies with burn well in excess of their revenue. Turning the ship to reach breakeven with this economic model is almost impossible if you hit hard times.
Develop accurate planning and build operating discipline, so as not to over-rely on future investors for success.
Manage cash so that you negotiate your next round from a position of strength and not from a desperate need for capital, retaining optionality to raise when the time is right not when you have to.
Reduce stress levels for both founders and staff.
This “porpoising” cycle was a key success factor for Aconex over its first ten years. For me personally, it removed the stress of frequent, ongoing capital raisings, and put us in a position to grow rapidly without putting the company at risk.