Does Capital efficiency matter? (or should you spend money like a drunken sailor on a warm summer night*)

This week Talkdesk was recognized by Forbes, Salesforce Capital, and Bessemer Ventures as one of the top 100 cloud companies for the second year in a row. The Cloud 100 is the definitive list of the 100 top private cloud companies (official language, I did not make it up…) and the judges used public and private data to compile it. This year’s list including amazing companies like Dropbox, GitHub, Evernote, Slack, Freshworks and many others (BTW, I did carefully select customers and partners for my example)

cloud100 (1)It is a great honor to be on the list, but there is one point that makes us at Talkdesk even prouder: of the entire list, Talkdesk raised the least amount of capital. 99 other companies raised more money than us, with a median of $175M raised. Some companies in the list raised up to $1.5B and at least 6 raised over $500M.

Talkdesk has a unique starting story. The founders raised a little angel investment and were able to break even during the first three years of the company existence, with an amount that most other startups spend on sign-in bonuses alone. While living on a minimum wage (and sometimes less) in a shared office space does not sound like too much fun, Tiago Paiva, Talkdesk’s CEO, remembers these days as the most fun, productive and focused time of his life.

Now, why does it even matter?

  • It is easy to raise money and hard to build a real business. Every business needs capital to grow, and we are no different. We sometimes need to borrow from the future to create it. At Talkdesk, we are trying to use this borrowed (or raised in this case) money to invest but not spend. We use it to hire engineers that can build our future products, we invest it in initiatives like Appconnect that create new opportunities for our customers and partners, but we will carefully try not to waste the money on presents needs. After all, we would not be able to borrow from the future forever, and the earlier a company builds this discipline, the better.
  • Raising less capital gives our customers a voice: think of a company that raised $100M, and has a revenue of $20M a year. Who has a greater influence on the company: the investors, that keep the company alive, or the customers that only contribute a fraction of the company overall capital? When customers fund the vast majority of the company activity, they are the ones influencing its decisions, rather than the investors. When you know that your future is in the hands of your customers, not your investors, you quickly learn whom you are going to listen to.
  • It makes your company more resistant. It has almost a decade since the 2008 recession and Sequoia slides of doom. Our economy is cyclical, and at some point in time, we will see a slowdown. Fiscally disciplined companies will need to make fewer adjustments and can weather the storm better, with fewer shocks to employees and customers.
  • It is better for our investors and employees: additional capital dilutes previous investors. If you invested at the beginning of Talkdesk and got say 5% of the company, every new investor that gets her own 10%, takes 10% away from your share. While some investors like to see significant funding events as a way to validate their decisions, the reality is that every round is dilutive and should happen when the company needs/wants the money and not as a way to show progress. Same is true when it comes to our employee that will see less dilution over their years with the company. Joining early can be great, but you do not want to see your grant diluted by 40%-50% during the life of the company.
  • It is hard to stop: often companies will use the “I can stop at any time” line. Let’s waste today when money is cheap, and when we need to show profitability, we will adapt. Many SaaS IPOs showed us how hard it is. The organization DNA is created with the notion of spending, and the muscles cannot operate without the extra cash. Saying that you can always stop spending is as hard as it is to stop drinking or smoking.

It is super hard to build a great company whether you raise much money or not. What SurveyMonkey, Dropbox, and other large raisers did is incredible and rare. It is even harder to do it while staying customer focused and disciplined, especially when there is so much capital looking for great companies in the market today.

There is no a “one right solution” here. Companies choose different strategies and have different needs. Some CEOs believe that spending more will allow them to scale faster and take on more initiatives and for many, it works. I just wanted to highlight the other option, that can be as successful.

* I have no data on drunken sailors spending habits and I am not affiliated with the sailors’ Association, its members or family members.

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Does Capital efficiency matter? (or should you spend money like a drunken sailor on a warm summer night*)

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