To Grow Or To Live?

Questions every backed founder is asking themselves right now

Right now, the discourse in Silicon Valley is pretty confusing. Some investors are telling founders to get profitable and control their own destiny. Others are saying to keep the foot on the gas, as a profitable company often will not have the metrics to get to an exciting exit for all involved. In general, profitability is a good point for any company. The only reason that some investors are against it is because they played a major financial role in getting the company TO the point where it can be profitable. This infers that they think the founders should be doing everything they can to get the company to an exit to pay the investors for their risk. Can profitable companies exit? Of course! It’s just, in general, the chances of them being the home run multi billion dollar exits are much lower than if the founder kept the foot on the gas the whole time (even if 9/10 times, that ends in a crash & burn).

From the founder POV, they see the markets continuing to cool off, companies dying left and right, and just the general sentiment around building VC backed companies going in a downward spiral. If they have the ability to get to profitability, it’s hard to imagine they are going to put their own financial well being at risk and spend more than they make, just to make investors happy. Even though this is the exact thing they should candidly be doing, as they wouldn’t have been able to get to this point with the investors.

The issue here isn’t the founders or the investors; it’s the available tools to solve this problem. I think founders should have the right to do what they want with their company, while understanding the risk that the investors took and aiming to get them a return of some sort. Personally, I believe it should be easier to create liquidity in startups. Companies like acquire.com make it easier for buyers and sellers of businesses to meet each other. That’s one solution. But the truth is, why would a founder want to sell a high margin profitable company? Cash FLOW is king, and once obtained, it’s hard to give it up. In that scenario, the investors get completely screwed though.

One solution I’d like to see implemented is, if a company is growing, is having rounds of secondary sales where investors can sell at any point. Lets say I’m building a company and it’s growing 20% per month. Imagine if every year, I did a 409A valuation, and allowed investors to sell their equity at that point. They didn’t have to, if they thought the company would continue to grow. But every year, it gives the investors a chance at liquidity. Is this as lucrative as burning millions to get to a billion dollar exit or bust? To an investor, no. But it creates a viable alternative to the alphabet bingo VC backed founder strategy, while stilling offering the option of good financial upside.

I write this as one of these founders stuck in between my fiduciary responsibility, my own needs, and my own wants. I know SpaceX has done the strategy outlined above, but I’m no Elon Musk. Knowing that I could offer my investors a chance to sell on a yearly basis, rain or shine, would help give me clarity on what the right steps were to take in this very tricky market. Maybe this is possible right now, and all that’s stopping me is talking to my lawyer. Maybe there are many roadblocks getting to this outcome. Regardless, I think having this option for liquidity for companies of all sizes would do our industry a lot of good.