Kate Mitchell explains how startup funding has flipped: early product development now costs less, but scaling through sales and marketing demands massive capital. She uses Omniture, ExactTarget, and Box as examples of companies that proved product-market fit cheaply before spending big to own their categories.
Chapters
I think the thing that we've learned a lot that applies to you all thinking about building companies now is how different financing companies, startups is than it was 20 years ago. It used to be you'd spend a lot of money to build the technology, pay a lot of IP and then your goal was to get to cash flow breakeven. That was the passion over time. So a lot of money went in initially and then you'd get to the point where you'd get more revenue and ultimately pass over over into cash flow profitability. Well, we kind of have turned that on our heads because it is so much cheaper, particularly in the tech space, particularly in software, to build the technology. That can be done with really sometimes very little capital. The initial testing of sales and marketing where we come in also doesn't take a lot of capital. You know, you do a lot online, a lot is done self-serve, premium, converting people from premium, et cetera. It doesn't take a lot of capital. What really takes a lot of capital is that later stage scaling. So what we do is just at the point where we think we can land the plane, we know that we can sell this thing of cash— efficiently, we can— it's capital efficient, it can get to cash flow positive, that's when we start burning lots of cash. It's actually from a risk point of view a relatively low risk stage. We're burning sales and marketing dollars which you can turn on and off and we calibrate sales efficiency within our companies and it goes deeper than gap and I'm happy to talk a little bit more about that later. But we calibrate this, it's like watching a dashboard, when we think it's doing well, we really start burning because we really want to make this company number 1, 2, or 3 in its sector because that's again how you build a big company. They're rare. We've been lucky to be in Omniture. It was sold a couple of years ago to Adobe for $1.8 billion. Company ExactTarget went public on the New York Stock Exchange the day the JOBS Act was passed in Congress and that $1.5 billion outcome. A lot of you may know companies like Box in the Valley now, a really high-growth company. They all followed a very similar a similar path, proving it out early on modest amounts of capital and then really working to become dominant in your sector burning a lot more capital. So it almost takes that whole equation. Ultimately, obviously, once you go public, you need to converge on cash flow breakeven, but you do that a lot later. But again, it's a very different risk profile and even as an entrepreneur, again, you're raising money later when you're doing it at higher values and you're doing it— again, there is innovation even what we do. Trevor Loy, I think, is teaching right now a class class on this topic. But again, you're doing it when it's a very different risk profile. So it's something we have gotten a lot more conviction even over the last couple of funds.
