Why You Shouldn't Raise Money

Nick Kozmin

Transcript

Alrighty. So in this video, I'm going to introduce what's called P dot, okay. Profit velocity, and a Y most of the time doesn't make sense to raise money and why raising money can actually hurt you. Okay. So first thing I'm going to do is reference the Microsoft origin story, where they raise approximately a million dollars, um, in 1981, and they were able to get profitable and scale up and they didn't even need the money. They just did it for, uh, relationships. It's kind of like an anomaly because you hear a lot of this raising money nonsense. But if you look at some of the most successful companies, they're profitable from the get go. And then we can contrast this to companies who raise tons of money, like hundreds of millions of dollars, and they don't have a product. They don't have a profitable unit case. They end up creating a lot of hype, but in the longterm, they don't really create any value. So I'd like to introduce this concept called P dot. Now what's p.is profit velocity, which is the profit per customer per unit of time.

So the first value that we need to solve for to determine the profit velocity is the price that the customer is paying it. Okay. The next thing is the cost to fulfill. So in software, it could be like 10% of the price and services. It could be 30% or even up to 50% of the price. So it's a cost to fulfill the cogs could cost of goods, sold cost to fulfill and realize the revenue. The third cost that we need to determine is the cost it takes to market. So how much does it cost to take an ice cold prospect down a marketing journey, and to a point where they're able to listen to a sales pitch, that last cost we need to calculate is the cost it takes to close. So how, how much does it cost to take that interested prospect and get them to sign a contract and make the sale is usually the sales commission.

That's the, the money. So the numerator is the money. The denominator is the time. So what time values do we need software, number one, we need to solve for the time it takes to fulfill or realize that revenue. So if it's a 90 day payment plan, or if it's a 365 day payment plan, it's month to month, we need to put those values in the denominator. We also need to put the time it takes to market in the denominators, the time it takes to take someone like high school prospect and turn them into an interested prospect, then we need to take the time it takes to sell. So how long does it take, this is usually the sales cycle length. How long does it take to take that interested prospect, turn them into a

Customer.

That's the denominator, the numerator is money. And so as a result, you'll get this profit per unit of time. And if we use a month, that number could be $500 per customer per month in profit could be 700. It could be a thousand and there's this magic number of around 700 that will allow a business to get profitable. Really, really usually between one to three months without raising money. Because, uh, if we integrate that over time and we assign an average of like four to five customers a month with a fixed cost of, uh, $6,000 a month, which is like the amount of money it takes to float a mortgage for like one person, um, you can get to cashflow positive within, you know, a couple months. So how long does it take to validate this P dot value? Well, it could take you one month.

They could take you 12 months to do that. It depends on your domain expertise. It depends on your skills, your engineering skills. It depends on if you have marketing or sales skills, if you not a price things properly, the best case scenario is that you can do in a few days, if you're just like a wizard. And if you are still learning a lot of this stuff, it could take you a year or two years or three years, et cetera. So that time really depends on the domain expertise and the skill level of the table. So raising money is necessary if the PD value is low relative to the fixed costs, um, and it could take you a lot of time to get to cashflow positive. So you might need to raise money as you are under water. So you can either use savings or you can use other people's money.

Now what's the problem with raising money? Well, we've seen, we have thousands of customers and we've seen this trend. If a founder or CEO raises too much money, all they end up doing is postponing or increasing the time it takes to get to that $700 Pete up value because there's less stress. So typically when someone's under stress, they can solve for that really, really quickly. It's kind of like gun to their head. They have to figure it out. And if they raise a lot of money, what ends up happening is they could go one to two years, just under moderate levels of stress and they never actually solve it. And then went two months before they run out of money, boom, they'd snap into gear and they solve for that positive P dot value. But the thing is they wasted two years, a bunch of money.

They diluted themselves and they could have got to that point way earlier if they just didn't raise money. So what are the steps that you can take to get to this positive PD value as fast as possible? First things first, you want to make sure you have the right information. Now this framework, this PDF framework is sales process IO, but it was influenced by the concept of Steve blank in his book, the four steps to the epiphany. But Steve doesn't give like hard benchmarks. Okay. And he doesn't make model. We just, we just went and used Steve's concepts and made this model. So if you use the model, if you want to use sales process sales model as a customer, you can do that. But if you use the model and you can determine the price you need to sell your product at, um, and you're gonna, you can determine the amount of money that you'll need if you need any.

Okay. So first our business is make sure you get the right information because without the right information, it's going to take you a lot longer. Now, the second thing that you can do is don't raise money. Don't feel tempted to raise money before there's that profitable unit case in. If it's not insight, you don't know if a customer is going to pay for something, you don't know. If the mechanism can be efficient and that you can create profit. You don't know if the customer's even accessible through any channel. There's still a lot of moving parts. There's still a lot of things you have to validate. So raising money before that profitable unit cases, insight is really dangerous because again, it's just going to postpone that time. It takes to get there. Then you'll end up wasting a lot of people's money and time. Now, the third thing that you can do is put up with the stress.

So as you're solving for this unit case, you're gonna experience a ton of stress. It's going to be tough. You're probably not going to be able to sleep. And so going into it just know that, okay, there's a few months where you're going to have to be under extreme load. So if you anticipate it, it's actually a lot easier to get through that period. So the next thing you can do is don't fall into the hype. Now, a lot of founders, what they do is they celebrate raising money. They spend a lot of their time running around and networking and try to raise money. And then when they do they celebrate, which doesn't make a lot of sense because that's not your money. It's not like they gave it to you. They gave it to you to build something. And the time spent raising money is time subtracted from building stuff.

Now, the next thing that you can do is anticipate that it could take you 12 months to solve for this profitable unit case. All right? So, um, you need, you don't want to run out of cash. Okay? During that 12 month period, if you run out of cash while you're running your experiment, you could get a false negative and you end up just wasting your time and money put in up until that point of failure. So what you want to do is you want to anticipate that it could take you 12 months to do it. And in the meantime, instead of raising money to float or pay your bills or whatever, you should just work a, another job, do a service, do consulting, do something in the same dimension as your, the, the product that you're building. So you can recycle some of the learnings and reference points, but I wouldn't raise money before that profitable unit cases, insights, once it's profitable and it replaces the income, that's when you can go full time.

And, uh, then if you wanted to scale up really fast, then you can start thinking about raising money. Now there's a lot of steps to solving for this peat out value. Like I said, there's got to sell for the price you gotta solve for the cost of sale cost to market cost, to fill the time to sell the time to market time, to fulfill and realize the revenue. There's a lot of moving parts. If you need help with some of these things, maybe you have a few of those skills, but you don't have all of them. Or you just want to get to that peak, that positive $700 plus PD value as fast as possible. Then you'd be a great candidate for sales process sale and getting our help because we can, uh, we have a whole framework and we have a series of steps that can help you through that process.

If you already have a great profit per customer per unit of time, then what you want to do is you want to scale that up with a marketing channel. Usually it's like paid advertising or a outbound sales team. So if you already have that great P dot value, then we need to duplicate it. We want to move fast. And that you'll be a great candidate for our second solution, which is that scale where we help you install the funnels. We help you install the sales team, the commission sales team, and you can go on a complete tear. Okay. So I know that was a lot of information. Hopefully that was useful. If you want to speak to someone on our team about this, we can show you the models. We can show you how we derive this stuff. Um, just book a call with me or one of my team members. And, uh, we will, uh, receive in the next video.

 

That's the, the money. So the numerator is the money. The denominator is the time. So what time values do we need software, number one, we need to solve for the time it takes to fulfill or realize that revenue. So if it's a 90 day payment plan, or if it's a 365 day payment plan, it's month to month, we need to put those values in the denominator. We also need to put the time it takes to market in the denominators, the time it takes to take someone like high school prospect and turn them into an interested prospect, then we need to take the time it takes to sell. So how long does it take, this is usually the sales cycle length. How long does it take to take that interested prospect, turn them into a Customer. That's the denominator, the numerator is money. And so as a result, you'll get this profit per unit of time. And if we use a month, that number could be $500 per customer per month in profit could be 700. It could be a thousand and there's this magic number of around 700 that will allow a business to get profitable. Really, really usually between one to three months without raising money. Because, uh, if we integrate that over time and we assign an average of like four to five customers a month with a fixed cost of, uh, $6,000 a month, which is like the amount of money it takes to float a mortgage for like one person, um, you can get to cashflow positive within, you know, a couple months. So how long does it take to validate this P dot value? Well, it could take you one month. They could take you 12 months to do that. It depends on your domain expertise. It depends on your skills, your engineering skills. It depends on if you have marketing or sales skills, if you not a price things properly, the best case scenario is that you can do in a few days, if you're just like a wizard. And if you are still learning a lot of this stuff, it could take you a year or two years or three years, et cetera. So that time really depends on the domain expertise and the skill level of the table. So raising money is necessary if the PD value is low relative to the fixed costs, um, and it could take you a lot of time to get to cashflow positive. So you might need to raise money as you are under water. So you can either use savings or you can use other people's money. Now what's the problem with raising money? Well, we've seen, we have thousands of customers and we've seen this trend. If a founder or CEO raises too much money, all they end up doing is postponing or increasing the time it takes to get to that $700 Pete up value because there's less stress. So typically when someone's under stress, they can solve for that really, really quickly. It's kind of like gun to their head. They have to figure it out. And if they raise a lot of money, what ends up happening is they could go one to two years, just under moderate levels of stress and they never actually solve it. And then went two months before they run out of money, boom, they'd snap into gear and they solve for that positive P dot value. But the thing is they wasted two years, a bunch of money. They diluted themselves and they could have got to that point way earlier if they just didn't raise money. So what are the steps that you can take to get to this positive PD value as fast as possible? First things first, you want to make sure you have the right information. Now this framework, this PDF framework is sales process IO, but it was influenced by the concept of Steve blank in his book, the four steps to the epiphany. But Steve doesn't give like hard benchmarks. Okay. And he doesn't make model. We just, we just went and used Steve's concepts and made this model. So if you use the model, if you want to use sales process sales model as a customer, you can do that. But if you use the model and you can determine the price you need to sell your product at, um, and you're gonna, you can determine the amount of money that you'll need if you need any. Okay. So first our business is make sure you get the right information because without the right information, it's going to take you a lot longer. Now, the second thing that you can do is don't raise money. Don't feel tempted to raise money before there's that profitable unit case in. If it's not insight, you don't know if a customer is going to pay for something, you don't know. If the mechanism can be efficient and that you can create profit. You don't know if the customer's even accessible through any channel. There's still a lot of moving parts. There's still a lot of things you have to validate. So raising money before that profitable unit cases, insight is really dangerous because again, it's just going to postpone that time. It takes to get there. Then you'll end up wasting a lot of people's money and time. Now, the third thing that you can do is put up with the stress. So as you're solving for this unit case, you're gonna experience a ton of stress. It's going to be tough. You're probably not going to be able to sleep. And so going into it just know that, okay, there's a few months where you're going to have to be under extreme load. So if you anticipate it, it's actually a lot easier to get through that period. So the next thing you can do is don't fall into the hype. Now, a lot of founders, what they do is they celebrate raising money. They spend a lot of their time running around and networking and try to raise money. And then when they do they celebrate, which doesn't make a lot of sense because that's not your money. It's not like they gave it to you. They gave it to you to build something. And the time spent raising money is time subtracted from building stuff. Now, the next thing that you can do is anticipate that it could take you 12 months to solve for this profitable unit case. All right? So, um, you need, you don't want to run out of cash. Okay? During that 12 month period, if you run out of cash while you're running your experiment, you could get a false negative and you end up just wasting your time and money put in up until that point of failure. So what you want to do is you want to anticipate that it could take you 12 months to do it. And in the meantime, instead of raising money to float or pay your bills or whatever, you should just work a, another job, do a service, do consulting, do something in the same dimension as your, the, the product that you're building. So you can recycle some of the learnings and reference points, but I wouldn't raise money before that profitable unit cases, insights, once it's profitable and it replaces the income, that's when you can go full time. And, uh, then if you wanted to scale up really fast, then you can start thinking about raising money. Now there's a lot of steps to solving for this peat out value. Like I said, there's got to sell for the price you gotta solve for the cost of sale cost to market cost, to fill the time to sell the time to market time, to fulfill and realize the revenue. There's a lot of moving parts. If you need help with some of these things, maybe you have a few of those skills, but you don't have all of them. Or you just want to get to that peak, that positive $700 plus PD value as fast as possible. Then you'd be a great candidate for sales process sale and getting our help because we can, uh, we have a whole framework and we have a series of steps that can help you through that process. If you already have a great profit per customer per unit of time, then what you want to do is you want to scale that up with a marketing channel. Usually it's like paid advertising or a outbound sales team. So if you already have that great P dot value, then we need to duplicate it. We want to move fast. And that you'll be a great candidate for our second solution, which is that scale where we help you install the funnels. We help you install the sales team, the commission sales team, and you can go on a complete tear. Okay. So I know that was a lot of information. Hopefully that was useful. If you want to speak to someone on our team about this, we can show you the models. We can show you how we derive this stuff. Um, just book a call with me or one of my team members. And, uh, we will, uh, receive in the next video.

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