“Porpoise to breakeven” – a capital allocation strategy to survive and thrive

It’s been some time since I posted to this blog, and my new financial year’s resolution is to put that right. Given the current investment environment, I thought it best to kick off again by revisiting a post I wrote two years ago, as COVID started to bite and markets fell around the world. It was about “porpoising to breakeven”, an approach to cash management that I believe is critically important, especially in times of uncertainty.

Back then, with the flood of money from government support and reserve bank stimulus, the markets reset quickly and ran to record highs, particularly in tech. The initial uncertainty was set aside and it quickly became a great time to raise capital.

At risk of being the “boy that cried wolf” I think the advice in the original blog post (repeated below) is even more relevant today. It was certainly relevant two years ago. I doubt any founder that cut back their burn in early 2020 and had a plan to get to breakeven despite COVID regrets it. They then had a stronger platform to go harder and bring in more capital six to 12 months later to invest in the next phase of growth – the definition of “diving down and porpoising back towards breakeven”. Conversely, if the markets had not bounced and times remained tough, they would have been in a much better position to ride out the storm.

Now, with venture capital markets more constrained, it is critical to plan your path back to breakeven, using your available capital to get there. A year ago, absolute growth was all that mattered for many investors, covering over multiple operating inefficiencies. Now, the investment paradigm has quickly shifted: investors are looking closely at cash burn, capital efficiency and core operating efficiency metrics (LTV/CAC, burn ratio, the magic number, etc). With investors balancing growth and burn, founders can be excused for feeling the whiplash of financing strategy messaging.

Many VCs are talking about having at least 24 months of runway. I would go a step further and discipline your company to get there with what you have. If you don’t have the cash to get to breakeven, or at least 24 months of runway, I’d seriously consider topping up the coffers now even at a less attractive valuation.

Set your company a burn budget and stick to it. Use your true current all-in burn as the starting point – including so called ‘one-off’ costs that are rarely one-offs in reality. Adjust your expenses to meet the number of months’ runway that you want – cutting back if you have to – ‘right-size’ the company to your cash burn plan. As you layer in more revenue (a nice thing about SaaS models) and your burn starts to reduce, you can invest some of this cash back into growth, particularly into revenue generating functions. However, per the porpoising concept below, you want to burn less over time, month by month, as you head towards breakeven.

Make this burn budget visible within the company and report against it monthly – or even weekly – so everyone understands that investment only happens as revenue targets are met. This will incentivise efficiency and revenue generating behaviour from your team.

So, let’s revisit what I wrote two years ago, unedited, as I think it also applies perfectly to today’s fundraising environment …

Porpoise towards breakeven

In an uncertain economy, how you manage your cash is critical. From where we stand today, that’s likely to remain true for at least the next couple of years. Particularly in this environment, I think that one of the best ways to scale a company over successive capital raisings is through what I call “porpoising”. Put simply, it’s an ongoing cycle of continually managing towards breakeven, within the limits of your current cash.

You porpoise up towards breakeven, as a porpoise moves towards the water surface, reducing cash burn each month, before raising capital and diving back down again. You progressively reduce your monthly cash burn then, after delivering strong performance, raise capital again, invest in revenue growth, increase the burn rate and push out the next planned breakeven point. The process keeps the right balance between growth and sustainability for your company.

Within 12 months of breakeven … for ten years

At Aconex, after going through a challenging and uncertain period in the aftermath of September 11, 2001, we took a view that we might not always be able to raise capital when we needed it. Whatever happened, we did not want to be dependent on a capital raise to guarantee the future of the business, so we ensured that we always had a path to breakeven with whatever cash we had in the bank. We did not have to raise more to get to breakeven, rather all capital raised was for accelerating growth. That gave us the flexibility to choose when we raised funds and put us in a strong position to negotiate terms.

As a part of every capital raising, we had a clear two-year plan to get the company to breakeven with the cash we had on hand. We would execute on this plan then, as the business delivered and new growth opportunities opened up, we would raise new capital to accelerate the next wave of growth – investing in new overseas markets, new products, and increased sales and marketing. With this cycle we’d porpoise towards the breakeven point, complete a capital raise, dive down and porpoise back towards breakeven again.

The result was that for the first ten years of the company we were always within range of breakeven, but never actually got there. I remember one shareholder remarking (or possibly complaining) that Aconex had been 12 months from breakeven for the last ten years, which was true.

The one exception to this was in 2007/2008 when we broke our “porpoising” rule and almost destroyed the company. We were growing fast (100% year over year) but our costs were running hot. We had access to debt facilities and in our planning included the debt facility as part of our available cash to get to breakeven. That was a big mistake and became a huge problem when we breached some covenants (including the debt / EBITDA covenant) due to costs being higher than expected. We were close to having the debt pulled by the bank, which would have put us out of business. Carrying a lot of stress personally, we hastily pulled together an equity capital raising to backfill the debt. I’ll write more on the dangers of debt for start-ups in a future post.

A bridge to nowhere …

One great benefit of “porpoising” is that you should never need to do a dreaded bridge round. I personally dislike bridge rounds as they just kick the capital raising can down the road. Aside from increasing the risk to your company (you never know what crisis is around the corner), it also means you end up doing two rounds rather than one. So, as a founder, you end up spending far too much of your time raising capital rather than working on the business, in which lies your largest value creation opportunity.

“Porpoising” principles

Some principles to consider, as you porpoise your way to breakeven:

• Plan to get to breakeven with your current cash balance. It may be all you have. Avoid bridge rounds and treat your last round as your last round.
• Don’t assume capital will be there when you need it.
• Get to breakeven with cash to spare. You need a buffer as (trust me) something always goes wrong. Related to this – when you do raise capital always take more than you think you need.
• Your burn rate should consistently decrease, particularly for a recurring revenue business like SaaS. Anything too lumpy in your burn model is probably an error – or else you have made heroic assumptions around revenue growth from one month to the next.

Balanced growth, operating discipline, optionality and reduced stress

Aside from ensuring you don’t blow up your business, using a “porpoising” cadence to grow ensures you:

• Balance growth and sustainability, keeping cash burn at a manageable level.
• Keep burn levels in proportion to revenue. I see some companies with burn well in excess of their revenue. Turning the ship to reach breakeven with this economic model is almost impossible if you hit hard times.
• Develop accurate planning and build operating discipline, so as not to over-rely on future investors for success.
• Manage cash so that you negotiate your next round from a position of strength and not from a desperate need for capital, retaining optionality to raise when the time is right not when you have to.
• Reduce stress levels for both founders and staff.

This “porpoising” cycle was a key success factor for Aconex over its first ten years. For me personally, it removed the stress of frequent, ongoing capital raisings, and put us in a position to grow rapidly without putting the company at risk.