on building slow burn companies 🔥

A tough economy is a great time to build a slow burn company.

• This may be a side hustle…

• An open source project

• Or a slow burn startup 🔥

Slow burn companies may grow slowly, but can amass tremendous value, and sometimes without giving up much external equity.

Some of my faves: @mailchimp, @airtable, @github, @glossier

All of them took years to succeed, had small teams with outsized impact, and eventually dominated the space that they’re in. How do you build a slow burn company?  Some characteristics:

• Single, simple use case

• Small (often developer-led) team

• User acquisition is cheap, simple, self-service

• Margins sustain growth

• Strong community-driven support

Typically, a lot of VC value is driven by high growth and velocity: the difference between getting to $1M annual revenue in 1, 2 or 10 years is significant when you’re building with outside capital. (HT @dafrankel)

Slow burn companies are the exception.  If they raise at all, they may raise at the growth stage, sometimes many years in. 

Along the way, slow burn companies do not seem glamorous — at least not until they take over a segment you hadn’t thought about before and hit that unicorn milestone 🦄

I have been pitched by a number of companies recently that could aspire to become slow burn success stories. However, I find that not enough founders are thinking through how important it is to link your growth rate and your financing strategy.

Slow growth <-> slow burn

Fast growth <-> fast burn

These should match up, or you risk “hitting the wall” — raising early, spending a lot, and not being able to raise again.  Sadly, we are seeing a lot of those types of failures right now that the fast burn (“grow at any cost”) tide is going out.

In truth, slow burn company builders have some unique financing considerations.

• *Can you actually raise external money?*

• How much to raise?

• How to reduce valuation risk?

• How to maintain capital efficiency?

Can you raise external money?  What makes it tough to fundraise: slow burn companies often seem much less sexy when they’re young, paradoxically & precisely because they seem unambitous at the start, which might throw off an unimaginative investor. On the other hand: a fast burn company is hard to raise money for right now.  The capital intensity they require is a risk, and the revenue efficiency of these companies will most likely be low.

How much to raise? Staged capital is important, if you want to maintain founder ownership.  This means, raise as much as you need to get to your next round + proof points, under the assumption that your value will rise as you justify it with traction. What you’re also derisking is funding risk — it’s harder to raise if your progress and valuation get out of sync. More on that…

How to reduce valuation risk? Founders fall into the trap of sexy, high valuations, but in a tougher market valuation risk is elevated.  

• Can you grow revenue to justify a higher valuation than where you raised?

• Can you move from vision to metrics? Your first 1 (maybe 2) fundraising rounds are on vision. By series A, you’re raising on metrics.

• Does a downturn affect your potential acquirers’ cash position? A company that is downsizing is realistically, no longer an acquirer, at least not right now.

• Maybe more significantly, in an environment where everyone is growing more slowly, more companies *need* to be acquired, which favors the buyers, not the sellers.

How to maintain capital efficiency? Many of the highly regarded companies which were founded in the last recession were slow burn, but also *low burn,* meaning that they were capital efficient about their growth.

Founder Collective @fcollective

Periodic reminder that you can get to material ARR, in this case, $60M with little or no capital, via @alex: techcrunch.com/2020/01/15/clo… Want more examples of extreme capital efficiency? Here are 50+ to get you started:

medium.com50 Big Companies that Started with Little or No MoneyVC is a common denominator of the most successful tech startups, but it isn’t a prerequisite, especially at the early stage.

From one angle, slow growth necessitates low burn, because it’s oftentimes simply harder to raise external money.  But that doesn’t seem to be true right now. However, even if you can raise, it doesn’t necessarily mean you should spend.

In general, capital efficiency is important because it preserves more value for the founders.

• It forces you to be smarter

• Makes you less venture dependent

• It gives you more leverage on future valuations

• Creates better economic outcomes long-term

…my colleague @epaley has written extensively about this if you want to go deeper.

For slow burn companies, it can be hard to fundraise early on, but later the tide turns.  The capital efficiency which looks so unsexy at seed (not to us!) becomes a huge asset during growth stage fundraising. By this point, capital is purely an accelerant: if the company can get to the point where it can grow profitably, it can amass really significant scale while not being dependent on outside capital.

All of this is hypothetically possible *if* your slow burn company’s financing and spending strategy matches your growth rate.  Slow growth must be paired with low burn, or you squander your natural organic growth advantages. 

Some categories of slow burn companies you could play around with:

• Communities

• Open source projects

• Bottoms up markets 

• Low ticket SaaS

• Developer evangelized tools

...All of these categories are usually slow burn.

With any company, but slow burn companies especially, it always helps to build from first principles:

• Solve a real pain point

• Have unit & growth economics that work

• Build a dramatically, not just incrementally better product

• Surround yourself with the best people

And... remember to match your financing strategy to your growth trajectory.  Good luck building 🔥👊🏽