Who Moved My Goalposts?

In 1998, Spencer Johnson wrote what became the go-to book for change in your professional life — “Who Moved My Cheese?” It’s a motivational tale written in the style of Aesop’s fables with a parable in each chapter.

Sixteen years of being a venture capitalist has taught me to embrace and adapt to change, but I have also learned that some principles are timeless. Knowing which core principles are eternal and being steadfast to them is the key to surviving the cyclical nature of our business.

In my first few years in the VC business, I learned the following truths:

• The only valuation that matters is the exit valuation.
• Raising capital is like handing an entrepreneur a rope — they can use it to climb out of the hole but also to hang themselves. The longer the rope, the greater the risk of hanging from it.
• Companies can die as much from indigestion as they can from starvation.
• Financings are not achievements, but rather means to achievements.
• Success is getting maximum revenues from customers with minimum investment from investors.

For the last five years, venture-backed startups have believed that these principles have changed. They believed the goalposts have moved. Raising capital at high valuations seemed to be the goal. Trumpeting valuation milestones was deemed more important than unit economics, sustainable growth or in some cases ethical behavior.

The next few quarters are going to be painful for some companies but the best way forward is to rediscover the mantra of capital efficiency. One example I am very fond of is the case of Palo Alto Networks (“PANW”). Palo Alto raised a total of $65 million in three rounds before going public. When they filed a S-1 in 2012, they had over $82 million in their balance sheet.

Let this sink in.

They had more money in their balance sheet than the capital they raised before filing to go public.

Raising a lot of capital in the private markets is not a sign of strength, but rather an admission that you have not found a way to be operationally cash flow-positive. Lest you think this path means slow growth,  Palo Alto grew its revenues from $71,000 in 2007 to $118 million in 2011—zero to $100 million in four years while generating cash in the last year.

The goalposts have not changed. We have. We need to fix this.