MARTIN OMANDER: Hey, my name is Martin Omander.
And I'm here with you for Google Root Access, the show
on Google Developers Live about startups.
And I'm joined today by Don Dodge, long-time investor and
startup advocate.
Don, we did a show a couple of weeks ago about, how do
venture capitalists think?
And we got a question--
so you talked about revenue is important.
You have to show revenue to your investors.
And we got a viewer writing in and saying, but is revenue
really that important?
It took five years for Google to start getting revenues.
DON DODGE: Yeah, that's a good question.
It really depends on the investment climate at the time
that you're starting your company.
And over the past 20 years, I've seen the climate change
from being able to raise money on just a business plan or a
PowerPoint presentation to swinging to where you had to
have users and growth and initial revenue and your
revenue model proved out.
So it depends on the investment
climate at the time.
Now in the case of Google, Google started in 1997, I
think, something like that-- '97, '98--
and didn't generate revenue until sometime in 2000 or a
little later.
In that time period, that was an acceptable thing to do.
However, in any time frame, you have to demonstrate
innovation, growth, maybe even hypergrowth, with a path
towards profitability, with a idea of what your revenue
model will be.
And depending on the time frame, you either have to
prove that out or just have it as an idea, and
people will fund it.
In the case of Google, there was
tremendous innovation happening.
And they understood that eventually they would be able
to monetize the audience.
And of course, it worked out very well.
Today the pendulum has swung.
And I see at Y Combinator and TechStars, companies working
on much smaller ideas that generate revenue quickly.
They're more business-to-business type
ideas than the sort of consumer or social-oriented
ideas that take much longer to get to profit.
So it all depends on the investment climate in which
you're starting.
MARTIN OMANDER: So you have to balance cash flow against
innovation and sort of strike the right balance.
Is that the way to think about it?
DON DODGE: Right.
So on an earlier show, we had Alex Moore, from Baydin, on.
And he went to cash flow break even
directly from angel money.
So he was able to raise a little bit of angel money that
gave him 12 months or 18 months of runway and move
immediately to a revenue model that got him to cash flow
break even.
And he never did raise money from VCs.
So if you have the type of product that can do that, then
you probably should.
But you need to recognize early on, is this a
hypergrowth, viral kind of product, or is it a steady
growth kind of profitable product?
And then you need to adjust your business model, your
growth plans, and how you attract investors accordingly.
So you need to really understand what kind of a
product and what kind of company you're building.
Match that up with the investors who care about that.
MARTIN OMANDER: Hm, I see.
And on that note, matching up with the investors--
investors, I guess, are different in different parts
of the world.
What if you're a startup outside Silicon Valley, where
the VC environment is very different.
Should you then focus on innovation or cash flow or
something else?
DON DODGE: Well, that's a good question.
So it depends on the timing and investment climate.
And those climates can be different.
For example, the investment climate in Silicon Valley, the
answer to that question is obvious.
You focus on hypergrowth and build users and customers as
quickly as possible, and that will attract more investment.
And the idea is that eventually, you can flip the
switch and monetize that audience.
So that's been the sort of operating model in Silicon
Valley for a long time.
In other parts of the world, investors are more
conservative, and they want to see the more--
like the Baydin model, where you bootstrap building the
product, you get your initial customers, you get to cash
flow break even, you prove out your model, and then they'll
give you investment capital to expand that growth.
So the risk is much lower, but the returns are also lower.
So investors that have that kind of mentality want to see
that business model proven out, initial customers, and
then they'll give you money.
So I guess you have to balance a couple of things.
You have to balance, what is the investment climate like?
What is the timing like?
And then, if you're in different parts of the world
where the investors are more conservative, then you have to
take a more steady growth kind of approach and prove out the
model and innovate at the speed at which you can
generate profit.
So it's profit-driven innovation rather than
innovation driving the growth and profit.
MARTIN OMANDER: And learning how the investors where you
are, learning how they think, that requires networking,
hanging out with them long before you actually go and ask
them for money, I assume.
DON DODGE: Absolutely.
So it works both ways.
Taking the Silicon Valley hypergrowth, fast-growth
approach with investors in other parts of the world is
probably not going to work.
And taking the slow growth kind of less-risk ideas is not
going to work with Silicon Valley VCs, because they want
to see $100 billion companies, and they want to see 10 to 20
times their money.
You're not going to get that from a more
conservative approach.
So you have to balance the type of business you have and
the investment climate that you're in and sort of set up
your business model and growth plans accordingly.
MARTIN OMANDER: Great.
Thank you very much, Don.
DON DODGE: Thank you.
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