Bracing for a pending market correction, startup founders are going into survival mode in an attempt to control their own destiny.
Drew Houston couldn’t even get to the end of the answer to the first question he was asked on stage before breaking the big news. The CEO and founder of file-sharing startup Dropbox, Houston was visibly eager as he got up on stage.
“One of the things I'm really excited to share that we haven't talked about is that Dropbox is cash flow positive,” he announced Tuesday at Bloomberg’s Technology Conference in San Francisco.
I couldn’t help but be underwhelmed by what Houston and the media outlets that followed framed as breaking news. When it comes to performance metrics, cash flow positivity is by no means the leading indicator of startup success. Positive cash flow does not necessarily mean profit. It also is typically a metric that is within the control of a CEO who chooses to carefully manage growth.
So why was Houston so pumped to get on stage and announce to the world that his company is bringing in money faster than it is spending it? As tech startups prepare for what many are seeing as an inevitable slowdown in private market funding, staying cash flow positive is more impressive than announcing a unicorn valuation or another mega-round of fundraising.
“[Being cash flow positive] means you control your destiny,” he said. “Instead of being funded by your investors, you're funded by your customers.”
Houston spent nearly his entire interview discussing the importance of generating cash in what he dubbed the “post-unicorn era,” and the investors and operators that followed him on stage discussed more of the same. In a conversation about betting on big ideas, Roelof Botha, a partner at Sequoia Capital and a previous investor in Instagram and YouTube, put it simply when he said “profits give you power.” In wake of the news of Microsoft’s surprise $26.2 billion acquisition of LinkedIn, moderator Emily Chang asked him if he is concerned about startups being able to succeed as independent firms.
“Big companies have enormous resources and wonderful access to data and models,” said Botha. “Because Google and Facebook have such fantastic operating margins, they are able to make wonderful investments. I wonder how much room that leaves for little companies to be as bold.”
Andreessen Horowitz founder Marc Andreessen got on stage later in the day and predicted the concentration of wealth and power to a cohort of big tech companies will only grow this year. The cofounder of Netscape said his firm is seeing more mergers and acquisitions in the pipeline now than they have seen in the past four years. This puts even more pressure on startups to prove that they can generate profits independently.
“One of the big things that's changed is markets are much larger than they used to be, and so the winners are bigger than they ever were before,” he said. “A lot of the big American tech companies are in a great position to buy. We work with our companies to put them in a position where they can be the buyers.”
While Dropbox made headlines today for focusing on staying in the green, Drew Houston is by no means the only startup founder who is responding to a pending market correction. Katrina Lake is the founder of Stitch Fix, an online personal styling platform with $46.7 million in funding. Her startup was founded in 2011 and hasn’t gone through a fundraising round in just over two years, but Lake told me she isn’t going out for one anytime soon. While some startups are just now figuring out that valuations are just numbers and fundraising is really just taking on debt, Lake contends that she has been watching cash flow since the company was first founded.
“We’ve been focusing on unit economics since the early stage, not just all of a sudden when it is trendy to focus on unit economics,” she said. “Fundraising wasn’t easy so our survival mechanism against that was to figure out ways to build a healthy business and not be as susceptible to what is going on in the broader fundraising environment.”