TL:DR
- Growth without pathways to financial sustainability are no longer tenable (and tolerated).
- Startups need to work towards designing achievable business models that support greater financial independence.
- Greater financial independence will give entrepreneurs longer horizons and maneuverability to build stronger companies.
Earlier this year, Prince Harry and Princess Meghan announced they were “stepping back” from the royal family. One of their reasons is because they wanted to secure their own financial independence. Across the covers of pop culture publications and UK news outlets, the decision (and the subsequent happenings) shook the world.
They were not only distancing themselves from public money subsidized roles they had as royals, but wanted to create flexibility and dictate their own path forward which includes where they live, what they work on, who they are accountable for, and how they spend their time.
For the prince and princess, they wanted to decide their destiny and they knew the pathway to achieving this was securing financial independence.
Shifting Tides
Increasing uncertainty and scrutiny was a theme we highlighted at the start of last year, and throughout the year, we saw increasingly greater scrutiny of startups, their business models, and the rationale justifying their financial viability.
We had “untouchables” like WeWork get to the brink of an IPO only to find itself withdraw its bid to go public, get devalued, and layout staff. Less extreme events include companies such as Postmates pull back from IPO plans, and a slew of other startups who delayed potential scrutiny of their businesses.
Pressure from public markets
Companies such as Casper – which was losing $342 per mattress sold – went public but at third of their private market valuation.
Other unicorns from Peloton and Slack, have not fared much better as public companies. Part of the reason is new pressure about their financial performance, and defensibility of their business model they otherwise did not face as private companies.
Yet the challenge to even get to this stage (IPO) these days is unicorn status ($1 billion private market valuation or more). This creates an odd paradigm. To reach the level needed to go public, requires the capital and growth of a unicorn, but the type of business needed to reach that status may not be able to sustain the scrutiny of non-private investors and stakeholders.
This creates a direct challenge to the defensibility of the business from the value proposition to its business model.
Stress on business models
The pressure is not only on companies on the brink of an IPO. The start of this new year has seen even more companies finding themselves re-evaluating themselves as a business, and starting with cost-cutting to ease some of the financial burden of their business model and go-to-market strategy.
Unicorns such as Bird began reorganizing themselves. They laid off staff and pulled out of markets to rationalize their business operations. Bird competitor Lime also did their own round of cost cutting by laying off 14% of staff and pulling out of 12 markets.
But this business rationalization is not limited to scooter companies. 23andMe, Playful Studio, Oyo and countless more unicorns are also going down this path.
Simply put, many companies have been defending the capital they currently have because of uncertainty to access more capital in the private markets, but fundamentally their businesses are not built to make enough money to sustain itself. So these companies need to make the capital they do have go further than originally planned, and find ways for their business economics to work better for them in the short and long term.
Marketing expenses are increasingly getting unsustainable. Take Unicorn a scooter startup founded by Tile founder Nick Evans, who had to close down his company due to unsustainable acquisition costs. Evans states, “Unfortunately, the cost of the ads were just too expensive to build a sustainable business.” They not only closed the company, but did not have the capital to fulfill the 350 orders they did receive from customers for their scooters.
Popularity shouldn’t be confused for viability. And a core component of viability is, at minimum, a reason to believe there is pathway to financial independence and build a company that is building a business, not just a product.
Positioning For The Future: Financial Independence
With ever increasing visibility and scrutiny on startups, a growing theme we will hear is the need for, and decisions-made to help companies achieve financial independence.
Does this mean financial independence means profitability? Eventually.
Financial independence is a process and mindset, as much as an outcome. Being on a pathway to achieve financial independence is a function of the systems and processes created and put in place, led by a disciplined leadership team.
There is an intentional-ness to financial independence, because it is a goal for leadership teams to work towards. Pursuing financial independence also has significant implications on how the business operates including:
- How the business will make money;
- Expectations on growth (trajectory and speed); and
- Resource requirements to scale.
Ultimately, financial independence means companies have created a business model and path where it can still materially grow and create markets, but also achieve its own profits.
Financial independence enables companies to have a wider array of strategic and tactical options today and into the future. This includes the resources available to invest in the team, new business and product opportunities, and partnerships. This also involves the capital and investment that must be raised and secured.
In the end, when a company pursues financial independence they are looking to create scalable revenue and profitability engines that decrease the need to seek outside capital, and the expectations that come from external stakeholders.
It is important to note that financial independence and seeking external capital or investment can coexist. One example where both can be achieved is 1Password, a cloud-based password management platform.
1Password pursued financial independence since the very beginning. They built a self-sustaining business that was profitable, and remained profit for more than a decade. 1Password had 1 million users, and 50,000 customers paying for their enterprise solution (Enterprise Password Manager) including 25% of the Fortune 100.
They built an impressive track record, and after 14 years since its founding, 1Password decided to take outside investment ($200M). The decision was strategic and intentional – to help pursue specific growth programs and objectives.
Financial independence is not going to be top of mind for everyone. As stated earlier, this strategy is created and led from the top. This is true for young companies and mature growth companies alike.
What’s Next?
Achieving financial independence will be a core competency of startups in the new decade. Startups will be expected to demonstrate their business acumen more than they have in the last decade. For external stakeholders such as investors, startups building financial independence capabilities today will not only help increase growth efficiency, but will create a stronger portfolio of companies.
Where do we go from here?
To help companies evaluate what financial independence means for them, our next article will outline the core components to build a financial independence strategy map and how to navigate the process.
Is your company on the road to financial independence? How does your company think about financial independence? Let us know what you think!
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