Investor optics: don’t let the tail wag the dog

Earlier this week a friend was asking me whether her fundraising chances would be improved if she started generating revenues. She’s a natural salesperson and she’s wondering if having small revenues would make it harder for her to sell a big growth story than if she has no revenues at all. When we unpicked it, the logic behind the question is that if there is a small amount of revenue, maybe with small month on month increases, then projections of much larger month on month increases going forward might look less credible than if there were no revenues at all.

In short, she was wondering if she was in danger of letting numbers get in the way of a good story.

Firstly, note that this is backwards thinking. Letting investor optics determine strategy rarely works out well. I get that fundraising is a nerve-wracking process, that investors can be unpredictable and irrational and how that makes optics important. But delaying monetisation to optimise for fundraising almost always falls into the category of letting the tail wag the dog. I say almost always because the caveat (and this applies to all fundraising advice, and isn’t said enough) is that fundraising success often comes down to just one new person falling in love with your idea, and that generalisations like the one I’m making here might apply to the majority of investors, but they will never apply to all of them.

Then the second thing to say is that projections which involve a step change are always harder to believe than projections which are based on an extrapolation of existing trends. That’s not surprising when you think about it, because in the step change case you have to believe that something new will happen whereas in the extrapolation case you only have to believe that things will continue as they are. That’s why companies that have been stuck in a rut of low or no growth often find it hard to raise cash, even when it’s reasonable to argue that a low level of investment is the reason growth has been lacklustre. I’ve heard many founders in this situation say that it’s very unfair when companies that are similar to their’s, but newer, find it much easier to get investors excited, even though they’ve often got less experience. Hopefully this explains why.

Returning to the case in hand – if there are small revenues and small increases, an extrapolation of existing trends won’t look very exciting. However, the same can be said for if there are no revenues at all. So in both these scenarios, my friend will be asking investors to believe in a step change. Following the logic through it makes sense for her to start monetising as soon as possible because that gives the chance that revenues will grow fast, the step change will have happened, and the fundraising will be easy.

Happily, this brings us away from investor optics determining strategy and back to doing the right thing 🙂

In fact, this is so obviously the right thing to do, that the only reason you wouldn’t is if you didn’t really believe in your plan.

And if you don’t believe in your plan, then you have bigger problems, and delaying monetisation in the hope of making fundraising easier is still unlikely to be the right solution.