Startups that focus on earnings from day one has a bright future ahead. More and more investors prefer a hardy cockroach rather than a fluffy unicorn.
2015 was the age of the unicorn. And no, I am not referring to the Chinese calendar, but to the increasing number of startups that, within a very short time, reached a valuation of more than 1 billion USD last year. The term unicorn is primarily used about companies within the tech and shared economy scene, e.g. Airbnb and Uber – those were the ones that investors loved last year
But now there seems to be an interesting shift. We have seen bankruptcies, high interest rates and overrated valuations running out of control before the companies started to make money, leading to more careful investors. Everything points to 2016 being the age of the cockroach.
Focus on earnings
While a unicorn is a beautiful and mythical creature, a cockroach is a hardy beast that is able to survive even a nuclear war. Unlike the unicorn, the cockroach is a company that is built up slowly and with an eye on sales and earnings from day one.
Cockroaches focus on expenses, unlike the unicorns who often burn off investor money rather quickly and thus have to look for more capital. At times to a lower valuation.
It is not a question of if, but rather when the funding for a unicorn runs out, while we see funding to a greater extent is given to cockroach companies.
Cockroach or unicorn?
I frequently stumble across the theory of the cockroaches in the American startup environment.
But can you use this theory even if you don’t belong to the American tech-startup world? Yes, most certainly. It makes sense to reflect on which investment profile you want to portray and thereby what type of investor you want to appeal to, if you are looking for capital.
Should it be short term or evergreen? Or more likely a 5-8 year time frame?
Even though I have a rather traumatized relationship to the real cockroach due to my 15 years of living in Asia, I would still prefer to be a cockroach over a unicorn.
Patience and smart money
At Sprout we are in regular contact with investors, but for us it is important to find one who has a mindset of a cockroach, which matches our mindset. We are in the process of building an international and sustainable growth business, and it is therefore important that a future investor:
1. Think sustainability and social impact as part of the strategy
2. Has patience and don’t expect exit within 2-3 years
3. Can provide smart money in the form of knowledge and network
Being a sustainable company, also financially, has from day one been the number one priority for me. That is why I implemented pre-payments on all orders the first year, so that I could build a reasonable cash flow and avoid expensive bank loans. The fact that we made money almost from day one has also made me able to bring in investors at a higher valuation.
Even though we are growing and doubling our turnover and earnings every year, we have focused a lot on both expenses and earnings. We are thinking long term, because we also want to be here in 20 years.
And like the cockroach – who can survive six weeks without food – we have to be able to survive the tough times with recession and unsuccessful investments, and still make it back to the top.