Leo Bloom: “Heh, heh, heh, amazing. It’s absolutely amazing. But under the right circumstances, a producer could make more money with a flop than he could with a hit.” – quote from the movie The Producers by Mel Brooks.
Some of you may recall this memorable line which was the premise of this classical movie. The plan was to raise a significant amount of money, find a play that would “flop” on opening night and keep the unused funds. An ingenious ploy; save for the fact that the play was a hit, more than 100% of the equity had been sold and the main characters ended up in prison.
So, let me begin by apologizing for the somewhat dour tone of this blog. I think of this line as I see pitches that seek to raise more and more capital with an apparent disregard for the spend or “burn rate,” with entrepreneurs chalking up their expenses to the investment needed to grow. Every entrepreneur I ever met believed they could grow faster with more dry powder. But the successful ones realized that just like one’s personal finances, at some point, you must “pay the piper” (face the music, come to Jesus, yada, yada, yada).
I would have thought we learned our collective lesson from the dot com boom / bust. Back then, despite substantial losses, valuations were sky high and investors began to focus on other “metrics” which soon took the place of the old reliable P & L. Just like the Cabbage Patch Kids, one day someone decided that these companies were in fact ugly, and shortly thereafter, most were trashed and entrepreneurs were sent home to live with their parents.
I want to be clear here; if you are running any type of business, you need a clear path to profitability. I saw a recent article with an entrepreneur calling out investors for just asking when the company would turn a profit, which the author interpreted as just stifling growth. How dare they? Well I ask, how dare you build a business model without such a pathway and put your stakeholders (especially employees) at risk with the hope that someone will be smitten with your traction or stickiness and rescue you with an acquisition deal? That’s not building a viable business; that’s the equivalent of legalized gambling.
Please do not get me wrong. I am not implying that one must be profitable to attract investors. If I believed that, I would not be so respectful of angels and VCs that make the early-stage ecosystem work. Thank goodness for them. But if you think investors do not believe that a sustainable business is nirvana, you just have not asked the right questions. That path to profitability must not only be clear but in sight.
The great entrepreneurs I know are better than that. They realize that this not a Max Bialystock shell game. They need to seek profitability and realize the clearer the path to this goal, the more likely it is their journey will be successful.