We work with a number of technology startups, many of which are backed by some of the biggest VC firms in the country. The technology space is wildly competitive and the pressure for success that comes with VC money is absolutely tremendous.

Fifteen years ago, venture capital firms mainly concentrated on their investments to gain market share. They put a lot of effort into sales and marketing, while paying much less attention to income-statement results. The common belief was that running at a loss was fine, as securing the next round of funding was easy if the performance looked promising. High IPO valuations were based on crazy earnings multiples, creating the illusion of a pot of gold that seemed just within reach.

Fast-forward to today and the mindset has (rightfully) evolved. Nowadays, trajectory is still incredibly important but burn rate and operational plans are highly important in VC decisons. More importantly, money today often comes with hooks that can be tremendously onerous for entreprenuers who need to pursue subsequent funding rounds.

For entrepreneurs and tech companies, it’s important to be smart from the start about key operational strategies. Large organizations that are created without a clear plan often end up holding back the company. They can be costly and slow to change, and young companies (especially in tech) are judged on their ability to be quick and flexible.

Even more importantly, the operational design plays a key role in valuation when it comes to funding

  • Less Burn = less requirement for funding = greater Entreprenuer Equity
  • Stronger P&L = Higher Multiple = Less Dilution (for same $$) = greater Enterprenuer Equity
  • Less Burn = Less need for subsequent funding = Less Dilution = greater Entreprenuer Equity

Finally,

  • Stronger P&L = favorable VC terms = easier liquidity = greater Enterprenuer Equity

There are lots of strategies for operational efficiency. Outsourcing allows you eliminate fixed-cost burden of staffing and oftentimes can be an almost completely variable model. As conditions and direction change having the agility to quickly adapt is invaluable. Outsourcing can improve both balance sheet and income-statement performance, all of which are critical regardless of funding stage or equity partners.

Most critically, outsourcing can put wealth directly into the pockets of technology Entreprenuers in the form of:

  • Better cash flow (or less cash burn
  • Increased multiples
  • Greater equity retention / less dilution –through funding and employee stock distrubutions
  • Easier paths to liquidity