Chapter 1: The Importance of Capital Allocation

What is the primary objective of a startup’s spending? If I were to pose this question to a diverse group of founders and investors, I suspect I would receive a range of answers. Some might exclaim terms like "revenue," "customers," "team," or even "profitability." Others could offer metrics such as "LTV:CAC ratio" or "a burn multiple of 1.0 or better." While these responses hold merit depending on the company’s stage and focus, one critical outcome often overlooked is the drive to enhance enterprise value. Startups invest a dollar with the aim of generating more than a dollar in company value. If this process is executed efficiently and consistently, everyone benefits. Conversely, failing to achieve this indicates that any positive outcomes may be more reliant on luck rather than strategic execution.

As the market began to decline in 2022, there was a swift pivot towards merely surviving, emphasizing the need for sufficient capital to weather economic downturns. Strategies included cutting burn rates, securing additional funding, and adjusting pricing — various levers were available. Now, a year later, while we are still navigating a downturn, there is an emerging belief that the macroeconomic landscape is stabilizing, despite ongoing startup closures. This shift calls for more tailored advice rather than sweeping generalizations about the entire ecosystem. Imagine a fleet of ships emerging from a storm, each requiring different assessments: some needing repairs, others being abandoned, and a few gaining speed.

Previously, I pointed out that David Sacks’s notion of being 'default alive' is not a sustainable long-term strategy. In 2023, I am particularly concerned about startups adopting this mindset, especially those with an abundance of cash but lacking a clear vision. A telling sign of such companies is their investor updates that prioritize cash reserves and months until depletion as their main key performance indicators (KPIs).

If you interpret my statement as a dismissal of burn rates or an indication that I believe founders should spend freely to facilitate growth, that’s a misunderstanding. I am very much invested in both aspects. My primary concern is that you are executing a well-defined strategic plan right now. Ideally, this leads you toward a significant funding milestone or profitability. At the very least, it should enhance your optionality and enterprise value. I have several companies currently navigating this path; while we can’t yet determine if their strategies will secure the next funding round, we collectively believe that utilizing some of their cash reserves in the upcoming quarters can help them achieve customer and revenue goals, ultimately elevating their enterprise value. For example, hitting benchmarks like 100+ customers and $5 million+ ARR could make them a more attractive acquisition target than they are today. Thus, investing $3 million from cash reserves to reach these targets is a worthwhile venture for both common and preferred shareholders.

In contrast, if your company possesses more cash than a strategic direction, or more capital than operational momentum, your investors are likely already discussing a plan for winding down operations or will soon initiate that conversation. There is no viable reason for a company to persist merely on the hope that something extraordinary will occur. Such an approach wastes the time of your team, leadership, and investors. My responsibility is to reallocate that capital to opportunities that can yield returns, perhaps even in your future ventures when the time is right.

There are indeed equitable and respectful methods to navigate these circumstances, which warrant further discussion in another article. For now, the sooner you align your team and investors behind a strategy of "spend X to generate greater than X," the more likely you are to create outcomes that honor your dedication and efforts as a founder. This should always be our mutual goal. If there’s a lack of consensus about capital allocation, do not assume it will remain untouched in your accounts.

Chapter 2: The Strategic Shift Needed