Startups

How NOT to Run a Billion-Dollar Company in 2016

This column is by Ryan Holmes, Founder, Hootsuite

When employees of Dropbox walked into their new San Francisco office this spring, they came face-to-face with a 5-foot-tall chrome statue of their mascot, a panda—rumoured to have cost the tech company $100,000. However, posted on the wall right next it was also an unexpected note. Here’s what it said:

“Pandas have meant many things to Dropboxers over the years, and the idea here was to commemorate the original … it wasn’t the right call. When it comes to building a healthy and sustainable business, every dollar counts. And while it’s okay for us to have nice things, it’s important to remember to ask ourselves, ‘Would I spend my own money this way?'”

The message was loud and clear: The panda was a mistake and would now serve as a glaring reminder of the dangers of excess. This new mentality went hand-in-hand with other recent company cutbacks, including the cancellation of a free employee shuttle and laundry services.

This sort of thing isn’t just happening at Dropbox. Across the tech industry, the trend away from decadence and toward greater financial responsibility is more widespread than ever. Money-conscious is the new cool. Economical and efficient is in. And the real unicorns are actually profitable.

My company is another prime example. Nearly a year ago, after talking with our board, investors and analysts we made a decision to move our company from high-growth and high cash-burning to lower (but still excellent) growth and cash neutral status. As a result, we made some very tough structural changes, including layoffs. Across the board, belts were tightened. This meant cutting down on business travel, reducing new hires and asking employees to take on more responsibility. I’m not going to gloss over it. It hurt.

But now we’re cash-flow positive and in a position to control our destiny. Here’s why the tech landscape has made such an abrupt about face and why actually making money is so important:

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It’s the economy, stupid.

Sure, back in the early 2010s, the biggest startups in the valley were all about growth numbers. More employees. More users. Market share growth. More eyeballs. During these boom times, new “unicorns”—companies valued at $1 billion or more—were being minted every few weeks.

But in recent years the investment landscape has tightened up. Analysts and investors have begun to look at many of these unicorns with a more critical eye. Business fundamentals like profitability are again being prioritized over growth for growth’s sake.

In an environment where the VC market has tightened up, companies’ balance sheets matter once again. The paper unicorns—companies that never should have been part of the club—are being devalued left and right. Meanwhile the true unicorns are restructuring to reflect the shifting climate. Making money matters, always has and always will, and it’s reassuring to see that rationality return to the market.

It puts you in the driver’s seat (and the customer benefits)

Macroeconomics aside, being cash-flow positive has a profound impact on how you’re able to run your company and serve your customers. Consider the story of Amazon CEO Jeff Bezos, who has long held the belief that positive cash flow is crucial to executing his customer-centric vision. In a letter addressed to shareholders way back in 2004, Bezos explicitly stated: “Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share.”

While this was originally met with some skepticism, Amazon’s soaring financial performance in recent years is shows that Bezos made precisely the right call. He ensured that his company had enough financial freedom to focus on improving the overall online retail experience for its customers. He played the long game brilliantly, rather than backing himself into a corner by bleeding cash. As a result, he didn’t have to deal with knee-jerk reactions (like simply raising prices) from jumpy shareholders or onerous terms from investors. He could concentrate on building the best service for his users. Being cash-positive gives my company those same freedoms. Instead of turning to investors for a lifeline—and being beholden to their expectations—we can build a product we’re proud of and that customers really love.

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It just feels right.

Finally, on a personal level, I’m relieved to be back in the black. Growing up, my mom was a savvy entrepreneur (and my mentor) who taught me that operating beyond your means is poor business strategy. Both my parents ingrained in me the importance of paying my bills and staying out of debt. Frugality is my comfort zone. And it’s the right place to be. Not to over-simplify, but cash-flow management is crucial to the survival of any venture, whether it’s your household or a multinational corporation. You’ve got to take in more than you spend … otherwise the house of cards inevitably crumbles.

And, contrary to perception, being financially responsible doesn’t have to mean restricting growth prospects. In fact, the cash-flow positive milestone has taken Hootsuite one small step closer to the goal of “decacorn”— becoming a $10 billion company. That’s one benchmark that’s exceedingly hard to reach if your business fundamentals aren’t in order.

For Dropbox as well, its efforts towards greater financial responsibility have worked in its favor. At a major industry event in June, CEO Drew Houston announced that the company reached cash-flow positive, In the same breath, he warned other startups to keep a close eye on costs in order to survive the current, tougher “post-unicorn” climate.

It sounds like Dropbox won’t be taking down that gleaming metal panda—now affectionately dubbed “Austerity Panda”—anytime soon.

This is a curated post. The statements, opinions and data contained in these publications are solely those of the individual authors and contributors and not of iamwire or its editor(s). This article was originally published by the author here.

Image Credit: Andrew Feinberg


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