Booking the Wins

Fundamentals. First Principles. Basics. Whatever you want to call them. If you have read any of our prior notes, you know that when working with a founder or a growing team, we spend a great deal of time stripping the business down to the basics - unit economics, revenue model, client personas, product market fit, client value, cash utilization, market sizing, etc. We spend a lot of time on these pillars in order to clearly articulate what one must believe to see this idea becoming a “good business”.

This begs the question - what is a “good business”? Is it a unicorn? A cash cow? An amazing strategic target for a larger company? A growing business that has loyal and dedicated clients that want to do more of their business with the company? The answer is never clear in the beginning of the journey; so the only thing we can do is focus on the foundational elements of a business and build as robust of a model as we can with the resources available to us.

But we operate today in a resource constrained environment. Venture checks are harder to get. Graduation rates from seed to A to B are at all time lows. Only 9% of companies that raised their Series A in Q3 of 2022 have made it to Series B in 2 years (vs 25% that did so for the Series As of Q3 2018). But the best entrepreneurs adapt to the environment.

In our last quarterly letter, we touched on the flood of early stage capital into the AI space. We posed the following question in the letter: “Given the ease of creating an AI product, are we likely to see a repeat of what we saw in the dot com boom - too many look-alike businesses that are indistinguishable from each other in terms of functionality and price?” We’re seeing this sooner than we expected. Demo fatigue. Sales fatigue. And checks, but more selectively written. The trend seems to be towards smaller, hyper-client focused companies, and more profitable earlier in the life cycle. Is it logical to think that smaller teams dominate - with a large part of the finance function being fractional? We think so. “Move fast and break things” is now “move fast and break even”.

On this topic, we recently worked with an AI company that navigated the new reality very successfully. Facing a tough fundraising environment, they decided to move towards maximizing revenue quickly. Exhausted from the grind of raising venture capital, the team doubled down on business development, spending time with prospective clients, rather than investors. The change in focus worked. A large strategic partner saw the value of the company’s product, wrote a mutli-year revenue contract, with contingencies that allowed the company to continue to build and attract other clients. The revenue visibility has allowed the company time and resources to level the product up further, hire critical personnel, and continue to grow.

Not every company will need to navigate this path. There are unicorns still out there, few by nature, and focused deeper in the tech stack, not the end user. The bulk of our focus is smaller companies, lean and maniacally focused on results and managing resources. This fits the fractional model we deliver.

Start-ups are an inner game that challenges founders and their teams. The psychological toll is enormous. Recently, our friends at Deciens published a piece on the topic of psychological runway. The long journey that goes building any “good business” can be ten years or more and the temptation for external validation is all around us in today’s dopamine addicted society. Internal wins and validation matters more; after all this is an ultramarathon, punctuated by a series of 10k relays.

As advisors we need to reflect on these challenges and support our founders and their management teams. We need to provide the fundamental financial infrastructure critical to building a “good business” and at the same time, support our founders in the important things that can not always be measured. Focusing on internal validation, and booking the wins that matter to clients, team members, and other stakeholders, is where our support and focus lead us. To us at Scalepoint Advisors, this is just “good business”.