While cash flow is very important, let’s take a look at why user base could be a more significant metric
If you’ve spent any time on YouTube in the last few years, there’s a good chance you’ve heard of Dollar Shave Club. The company’s introduction to the world, via a hilarious 2012 video “DollarShaveClub.Com – Our Blades are F***ing Great,” gave Gillette some stiff competition in the men’s razor market after years of total dominance.
You see, Dollar Shave Club was not just another viral video fad, although that original video did go on to have over 23 million views; through creative marketing, a streamlined business model, and a good product, Dollar Shave Club was able to turn their viral audience into paying customers. And, after scooping up $160 million in venture capital funding and over $240 million in revenue just five years into their existence, they had their biggest payday yet, in the form of a $1 billion acquisition from Unilever.
The success of Dollar Shave Club has reignited an important discussion among entrepreneurs regarding what fledgling businesses should prioritize when it comes to courting investors. On one hand, the success of their viral advertising gave Dollar Shave Club exposure to a wide audience to whom they could offer their products and ultimately establish a loyal user base. On the other hand, Dollar Shave Club’s streamlined business structure, low overhead, and competitive pricing — the self-explanatory name of the business alone probably had a huge impact on garnering customers — all contributed to a cash flow-positive recipe for success. The question, then, becomes a sort of chicken-egg scenario, in which entrepreneurs are left wondering: should you prioritize acquiring a user base, or focus first on cash flow?
When it comes to young companies strategizing in order to raise funds, recent trends in major investments seem to suggest that investors are often more impressed by businesses that can bring a huge, loyal user base to the table. While cash flow is, of course, very important, let’s take a look at why any investors are prioritizing a startup’s user base.
In favor of cash flow
If you’ve ever seen the hit TV show Shark Tank, you’ve likely heard a common refrain from investor Kevin O’Leary: “How do I make money?”
It’s important to remember that an investment, at its very core, is a way for someone to make money; an investor puts money into the company with the expectation that they will earn more money from that investment down the road.
For a B2C company, there’s a pretty simple solution to this answer: Attract a huge customer base, continue to grow it, and there you have it — cash flow and the promise of future earnings. With B2B companies, however, that equation is a little more tricky because your business is not necessarily audience-oriented. You often cannot point to a metric that shows how many users are interacting with your business on a daily basis.
To attract investors, then, you have to show them a different metric. In this case, prove your cash flow positivity by exhibiting the cost-effective methods of your business and the promise of your market share in your relevant industry. Dollar Shave Club did both by showing how they could establish a foothold in the market and run a very efficient, streamlined business. The viral video was just the icing on the cake: They were well on their way to success with investors.
Establishing a connection
Now, let’s look at the other side of this argument: prioritizing a user base. This scenario may sound familiar to you: you’re at a restaurant with friends, and one friend orders a Coke to drink. The waiter says, “Is Pepsi okay?”, and your friend says, “No, it’s not okay. I’ll just have water.” This exact situation is proof that brand loyalty is real, and the most successful brands out there attract huge audiences by establishing an emotional connection with customers.
A solid, stable brand that’s built to last will resonate with potential customers on many emotional levels, the most urgent of which is satisfying a specific, unique need. Product Hunt, for example, regularly garners rave reviews from industry experts as a respectable brand, despite not having any revenue stream yet. By serving as a curated and crowdsourced depository for various tech product reviews (only chosen experts have the power to vote on the site), Product Hunt fills the need of giving users a trustworthy forum to make sense of all the many offerings in the vast world of apps and other tech products.
Establishing a strong brand with which customers can share a connection gives your company some great earnings potential early on, something investors like to see. Indeed, Product Hunt raised $6.1 million in funding back in 2014 based solely on their popularity among users — they didn’t have any monetization plans. An audience of devotees is great for spreading awareness of your business and growing your customer base organically and free of cost, a feature that will become especially handy when it’s time to monetize.
The concept of social proof is one that many marketers are privy to, and for good reason. People are easily swayed by other people, more so than they are other by other selling points such as price. Just think about how a movie’s Rotten Tomatoes score has become a big talking point for or against that movie.
Or take GoPro, for example. The many GoPro cameras, and the videos users create with them and then post to YouTube, are great organic advertisements for GoPro itself, and an exceptional example of social proof. The proof worked, too; GoPro eventually scored a multi-million dollar investment with a valuation at $2.25 billion before ultimately going public.
According to Kissmetrics, positive social proof is more likely to convert customers than promised savings, citing a study in which more customers were persuaded to buy a product by being told their neighbors were already using it than they were by a promised cut in their monthly bills. People are better influencers than price points, and investors know that; proving you’ve got the loyal audience there to grow your user base will go a long way in helping to raise funds.
If you build the audience, the money will come
Many headlines coming out of the investment world seem to suggest one common thread: enormous investments go to those with massive audiences, more so than cash flow positivity alone. One could point to Instagram as an example, noting that they didn’t have any incoming revenue when Facebook bought them for $1 billion. While many criticized Zuckerberg and co. for the purchase, Instagram has only continued to grow its user base since the acquisition, in part because of their strong brand and ability to scale and continue to grow their audience. Facebook applied the same successful advertising strategy that boosted the profitability of Facebook to Instagram’s platform, and now that Instagram’s global user base has eclipsed 500 million, the payout is huge. The great initial audience, and Instagram’s emphasis on aggressively growing that user base, was a huge draw for Facebook, as it meant the revenue possibilities were increasingly promising.
Snapchat has followed a similar path to success; after turning down a $3 billion acquisition offer from Facebook, Snapchat, like Instagram, committed itself to increasing its audience in order to maximize the potential revenue stream. Recent valuations put a $20 billion price tag on Snapchat. Considering that the company was only making an estimated $60 million in revenue at the time of its valuation, this price valuation and the $1.8 billion Snapchat received in funding are entirely based on its rabid user base.
There’s no one way to run a successful business. Dollar Shave Club showed that prioritizing cash flow was best for their business, and others have followed suit. When one looks at some of the recent blockbuster acquisitions and investments, though, there consistently seems to be a heavier emphasis on a business’s user base and the potential to grow that audience so that the cash flow further down the line is even greater. This all depends on your industry, though: if you’re a B2B business, it is worth considering prioritizing cash flow positivity and streamlined business practices.
Do you agree that businesses should be prioritizing user base over cash flow to attract investors? Let’s discuss in the comments below!
The views expressed are of the author.
Geektime invites global tech and startup professionals to share their opinions and expertise with our readers. If you would like to share your point of view, please contact us at [email protected]