Startup ‘camels’ prioritize sustainability by balancing growth with cash flow.
In Silicon Valley, the entire ecosystem is aligned around one thing: the cultivation of unicorns — startups valued over $1 billion. Unicorns were once a rare breed, but in recent years, the stable of billion-dollar thoroughbreds has grown to about 350 unicorns around the world.
In today’s world, unicorns represent more than a valuation. Rather, they represent a philosophy, an ethos and a process of building startups. When being a unicorn is the objective, very rapid growth is the method. The tools are abundant venture capital, a deep and ready talent pool and a supportive startup ecosystem. This approach has worked well in Silicon Valley for some time. But in the wake of failed IPOs, the pushback against tech models and the range of social ills plaguing the Valley, the approach is losing its luster. And for the 99 percent of entrepreneurs outside the valley, where capital is far less abundant, and context is night-and-day, the objective was never practical to begin with.
An alternative playbook is increasingly coming from what I call the frontier — those ecosystems operating outside Silicon Valley and other major centers like New York, London and Shanghai. At the frontier, the growth-at-all-costs model does not translate to the realities of the emerging startup ecosystems outside of Silicon Valley.
For these startups, camels are the more appropriate mascot. Camels adapt to multiple climates, survive without food or water for months, and when the time is right, can sprint rapidly for sustained periods of time. Unlike unicorns, camels are not imaginary creatures living in fictitious lands. They are real, resilient and can survive in the harshest places on Earth. While the metaphor may not be as flashy, these startup camels prioritize sustainability, and thus survival, from the get-go by balancing strong growth and cash flow.
Here are four key lessons to learn from these sturdy creatures:
In Silicon Valley, entrepreneurs are willing to subsidize their product because they have the capital and are judged based on the growth of their customer base, with less attention paid to costs or paths to profitability. Yet this approach can backfire.
Entrepreneurs working in tougher, less-developed markets don’t share Silicon Valley’s obsession with offering free or subsidized products in service of growth. They charge their customers for their products. Grubhub, a food delivery startup born in Chicago, took an opposite path as its more profligate Silicon Valley peers and today is a multibillion-dollar publicly traded company. As Mike Evans, a co-founder, explained the dynamic succinctly to me: “I am building a business, not a hobby. Businesses make revenues, and hobbies don’t.”
Camels understand that a product’s price is not a barrier to adoption, but rather that it reflects its quality and positioning in the market. In emerging markets, incumbent solutions are either nonexistent or so dysfunctional that customers are willing to pay — often even a premium — for reliable, safe and efficient products. Despite lower incomes, customers are not looking for free products. To draw customers, innovators have to offer a solution worth paying for, and they will be rewarded if they do.
The best innovators at the frontier manage costs through the life cycle of their companies and do so to better sync with their growth curve. New hires need to be justified by increases in revenue and operations. Investments in marketing need to be scaled at an appropriate pace. Spending levels are modulated so that the business doesn’t go too far down the cost curve hole. As Jason Fried, founder of Basecamp, a successful Chicago-based company, explained it to me, “There are few excuses to not be profitable as a startup. A big part of this is managing your cost structure. Yet managing costs is not something you hear enough about. If you are not managing costs, you’re not building a business. You are building a financial instrument, which is not healthy.”
It also helps that Frontier Innovators often enjoy an important cost advantage. For startups, the largest cost is people, particularly in the early days. The current cost of hiring a software developer in Silicon Valley is double Toronto’s average salary, seven times São Paulo’s, and eight times Nairobi’s. Rent and other operational costs are also much cheaper in these latter cities.
The combination of leveraging this cost advantage and managing spending levels means that for a similar investment, a startup in a lower-cost area has a longer runway. This gives them more time to grow revenues and build sustainability, and it increases their resilience to shocks.
Raise only the money you need
Venture capital is a powerful tool (full disclosure: I am a venture capitalist). However, it doesn’t work for every type of entrepreneur, and not every company needs venture capital. Nor is venture capital the right tool at every round, and some startups are leveraging alternative tools, including revenue sharing models, instead.
Even when camels raise venture capital, they raise appropriate amounts for specific purposes. As a result, entrepreneurs can maintain a greater control of the business and have a larger share of the pie at exit. Qualtrics, for example, was founded in 2002 in a Utah basement as an online research company. To fund growth, the founders used the company’s profits. While many venture capitalists approached them, they declined investments as the company scaled. They did eventually raise venture capital a decade later, but they did it on their terms when they were already a multibillion-dollar company.
Of course, this is not meant to suggest entrepreneurs should avoid venture capital. Indeed, the vast majority of camels depend on outside investment. However, camels are afforded the luxury of choosing whether, from whom and on what terms to raise capital.
Take a long-term view.
Founders at the Frontier understand that building a company is not a short-term endeavor, and in fact, some of the biggest breakthroughs for companies occur later in their life cycle. Survival is the number 1 strategy. This gives time to evolve the business model, find a product that resonates with customers and develop a machine that can deliver at scale. There may be competition. The race is not always about who gets to market first. It is about who survives the longest.
A longer-term outlook decreases the trade-off between growth and risk and allows for resilience. As Mike Evans of Grubhub notes, “It took us 10 years to IPO. We could have shrunk that to eight by prioritizing growth over profitability. But we would have increased risk by seven times. We chose sustainability.” Grubhub took longer than it otherwise could have to get to an exit but did so with higher resilience; the company was able to absorb risks and challenges along the way.
Of course, building a sustainable business does not mean that frontier innovators avoid growth. However, their scaling trajectory may not have the same do-or-die exponential growth curve to which Silicon Valley startups aspire. The cash curve does not dip as deeply, and camels mitigate what some call the “valley of death” where companies reach the most negative point of their cash flow. Instead, with a balanced growth strategy, camels grow in controlled spurts, choosing to accelerate and invest in growth when the opportunity calls for it. The key distinction here is that camels preserve the option to modulate growth and head back to a sustainable business if needed.
Camels of course still grow at impressive rates when the time is right, but at the same time are strategically managed to last longer and withstand market shocks. By adapting to their harsh environment, they have steeled themselves for tough times, and Silicon Valley startups can learn from their strategic approach. The world needs more camels.
Credit: Entrepreneur – Click here to view the article.
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