The startup and venture funding environment is experiencing a dramatic shift. Especially in SaaS, public stocks are down 30-60% and private companies are struggling to raise capital. As a result, we are all reading blogs with survival advice for entrepreneurs. The advice boils down to the following: raise money if you can, preserve cash, reduce burn rate, let go of under-performing employees, and focus on profitability. I think all of this is advice is rational and I am giving similar counsel to the companies I’m involved with.
But, there is another piece of advice that I am not hearing enough. And, that is: KEEP GROWING! Once again, the debate between the merits of growth vs. profitability is underway. My take: I don’t care what environment we are in, the startup and venture capital game is all about growth. As others have said about startups in the past, if you aren’t growing, you are dying. Of course, it is also wise to focus on unit economics, efficiency and to establish a “path to profitability”. It is also okay to slow down growth (e.g. grow 60-70% with strong unit economics vs. 100% "at all costs"). But, keep growing. And, regarding profitability, I believe that most early stage venture-backed startups are not able to grow rapidly AND be profitable until nearing IPO or soon after.
The current public market is not rewarding high growth unprofitable companies. As you can see in the chart below, it is the high growth unprofitable SaaS companies that have fallen the hardest. In fact, if you look at the grey line (high growth unprofitable) and the dark blue line (low growth profitable), there is literally zero premium for being a high growth company without profits. The premium comes for high growth profitable companies (the yellow line). The yellow line is the desired state that all entrepreneurs should be striving for when public.
I believe that the market for early stage, private companies is different. As venture capitalists, our job is to back high growth companies that can eventually become profitable. That’s what venture capital is for. The role of venture capital is to fund a company to become the leader of a new category. In the early years, growth is the primary goal, not profits. But, by the time a company is nearing or newly public, profits AND growth are the key to a premium valuation.
So, my advice is to keep growing. My bet is that by the time you are looking to exit or go public in a few years, the market will be rewarding growth again.