I Couldn't Spend Money Fast Enough, and It Almost Killed My Startup

In their earliest days, startups are supposed to be scrappy. After all, with minimal resources, they don’t have many other options.

This type of “lean” approach to building startups even has a name. It’s called “growth hacking.”?You’ve surely heard the term. It’s basically shorthand for: “You’d better figure out how to get customers without spending lots of money because, unfortunately, you don’t have any.”

For most startup founders, growth hacking is a necessity. That was certainly the case for me. When I launched my earliest companies, I didn’t have any money. All I had was time, so I had to get customers by using my time as creatively as possible. This trained me to be a resourceful and frugal entrepreneur, which was great when I was running a three person startup. Heck, I remember being able to stretch a $15,000 seed grant to fund my company for four months. However, what I didn’t realize at the time was?all my?growth hacking and frugality was teaching me terrible habits that would make it hard for me to scale my startups into successful businesses.

Don’t let the same thing happen to you. You might be running a small, underfunded, understaffed, under-resourced startup right now, but,?if you want to become a real company, you’re going to have to learn how to spend money in order to make money. For frugal entrepreneurs who only know how to growth hack their way toward revenue, it’s a harder transition than you probably realize.

Growth hacking success, fundraising failure

One of my first startups was a B2C company we’d growth-hacked to nearly 3,000 paying customers using mostly guerilla marketing tactics — strategies like spamming online forums, social media bots, and local word-of-mouth. We also earned some traditional press by schmoozing with journalists. In other words, none of the strategies we used to get customers cost money.

After nearly a year, we’d generated a few hundred thousand dollars in revenue and had what I believed was an impressive growth curve. My plan was to go to the West Coast, where investors seemed more excited about the type of company we were building, and parlay our scrappy, growth-hacked success into what I hoped would be a $3 million seed round.

To accomplish this, I spent a month scheduling nearly 30 meetings with West coast angels and VCs. I ultimately organized a quasi-epic, two week fundraising trip through Silicon Valley with an average of three pitch meetings per weekday.

Once I had all my meetings scheduled, I spent the next few weeks preparing what I hoped was a killer fundraising pitch with the perfect climax to hook investors. Specifically, after describing our total number of paying customers and revenue, I flipped to a simple slide revealing the piece of information I was certain would make every investor want to throw money at us. Here’s basically what the slide looked like:

As I showed the slide, I said, “And, best of all, we’ve achieved all our growth without spending a single penny on advertising.”

To me, this was truly our biggest differentiator and why we were a good investment. In my mind, we’d done exactly what startups were supposed to do. We’d been a creative, scrappy, lean, hard-working team that managed to get all our customers without spending any money.

“If we’ve done all this without spending any money,” I said at the climax of my pitch, “just imagine what we’ll be able to accomplish with more resources!”

That’s the message I took with me to the West Coast: a strong initial set of customers, good revenue, and minimal customer acquisition costs. I was sure it was the kind of company that would get funded.

I was wrong.

Growth hacking doesn’t create investable growth

I took my message of strong growth and minimal CAC into nearly 30 meetings around Silicon Valley. I left the West Coast two weeks later with no funding and a massively bruised ego.

So what happened? How did thousands of customers, hundreds of thousands of dollars in revenue, and a tiny CAC get no interest from venture capitalists?

I didn’t learn the answer until my last West Coast meeting with a VC from a small seed fund. By that point it had become clear the entire trip was a bust and there was something fundamentally wrong with my pitch. Still, I had the meeting scheduled and figured I clearly needed more practice. I went to his office, gave my pitch, and then I braced myself for the inevitable rejection.

“Great pitch,” said the VC. “This seems like a strong opportunity.”

“Thanks,” I said, sensing a glimmer of hope that he might actually want to invest. “I think we’re doing some really good work so far, and I think we’ve got a real opportunity to scale with the help of capital.”

“Maybe,” he said, “but, I’m guessing you haven’t had much luck fundraising.”

“No,” I admitted. My glimmer of hope faded, and?I was confused at how he knew about all my fundraising struggles just from hearing my pitch.

“That doesn’t surprise me,” he said.

“Why is that?” I asked, recognizing this VC clearly understood something I didn’t and hoping he might provide some honest feedback. “I feel like we should be a great investment. We’ve already been able to get lots of customers without spending money. Isn’t that a good thing? I thought investors would be throwing money at us. Clearly we’ve proven market demand and some level of product-market fit.”

“You’ve proven some market demand,” the VC responded, “but the problem is?you don’t have any proof you know how to get customers at scale.”

“But we do have proof,” I insisted. “We have almost 3,000 customers! How many customers do we need before it’s compelling evidence? 10,000? 20,000? What’s the magic number so I know what we should be aiming for?”

“There is no magic number of customers,” he answered. “That’s where so many entrepreneurs screw up.?They think they can impress investors by flashing a big number on the screen showing how many early customers they have. But that doesn’t matter. What matters is?how you get your customers.”

“But I told you how we got them,” I reminded him. “I talked about it in my pitch. We’ve used lots of different growth hacking strategies.”

“And that’s exactly the problem,” the VC said.?“Nothing you’ve done is repeatable or scalable. Yes, your growth hacking worked. But so what? Who cares? It didn’t require money.?That’s good for you, but?my job, as an investor, is to give you money you can use to scale your company.?At this point, if I write you a check, how do we know the money I invest will have any impact? What evidence do I have you’re going to use my money successfully?”

“I guess I don’t really know,” I conceded, as it finally dawned on me why my pitch had been so ineffective. “That actually makes a lot of sense.?I was focused on how many customers we’ve gotten, but I never considered the fact that we didn’t get them in an investable way.”

“Exactly,” said the VC. “As an investor, I don’t just care if a startup has a good business. I also have to care whether or not my investment can help grow that business.?So when I see a startup that’s growing without capital, it doesn’t excite me. It worries me. All I see is a startup that doesn’t need funding to get customers. If anything, I worry my money is going to create a glut. It’s going to put extra cash in the startup’s bank account that’s going to tempt the founders into spending money on stuff they shouldn’t be buying, which is the last thing I want.?If you can’t show me how you’re going to spend my money in productive ways, no matter how great your startup is, I can’t invest.”

Real companies spend money

I remember that conversation vividly because of how much it helped me mature as an entrepreneur.?The VC taught me about the type of growth investors need to invest in — paid, predictable, scalable growth — because it’s the only growth that demonstrates a clear, longterm, sustainable return on investment.

As an entrepreneur, regardless of whether I wanted to raise capital or not, I needed to be pursuing the same type of growth. While being frugal and growth hacking may have been a great (and necessary!) strategy when I was first launching my startup, eventually,?all growth hacks reach a scalability limit. When they do, companies have to transition into using the kinds of traditional customer acquisition strategies large companies use that cost lots of money. Those include things like?paid media, advertising, and sales.

As a frugal founder, I was uncomfortable spending lots of money on things like marketing and advertising and sales people. In retrospect, overcoming that discomfort was one of the harder challenges I faced while building my startups. In fact, it almost caused more than one of my companies to fail.

As your startup grows, be prepared for a similar challenge.?You can’t stay lean and scrappy forever.?When your company acquires more resources, you, as the founder and leader, will be responsible for deploying those resources effectively.?After years of growth hacking your way to success while pinching every penny, spending lots of money to scale your company is going to feel uncomfortable. However, as your startup matures, you’re going to need to?shift your mindset. You’re going to need to learn to spend money in order to make money.

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Aaron Dinin teaches entrepreneurship at Duke University. A version of this article originally appeared on?Medium, where he frequently posts about startups, sales, and marketing. For more from Aaron, you can also follow him on?Twitter?or subscribe to?Web Masters,?his podcast exploring digital entrepreneurship.