All Revenue Is Not Created Equal (2011)
abovethecrowd.com
abovethecrowd.com
There is a reason to save growth for last. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. Here is the problem. Growth that can never translate into long-term positive cash flow will have a negative impact on a DCF model, not a positive one. This is known as “profitless prosperity.” - Bill Gurley
If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. - pg [0]
P.S. - Dang can you add the (2011) tag?
- Rapid growth is a good sign, but not on it's own (i.e. without profit). - VCs like startups because they show a rapid amount of growth (but the risk is also higher due to a potential lacking model for profit in the startup).
If I'm investing into a business for the longer haul, like a pension fund might or maybe looking at a company to take a senior position in and stay in a job for years and years, etc. the viability of the business as a business becomes more important than if I'm investing for an exit 2-5 years down the road. If I'm a VC or similar looking for a relatively quick turnaround, in short two to five year window the company might become recognizable enough or have a popular technology etc. that the long term viability of the business qua business becomes less important than does who might want it for reasons other than current revenue or profitability.
Once you get the context, the quotes aren't so much contradictory as much as referring simply to different goals.
In that context, a company that reaches 50 billion in 30 years is far less valuable to a VC than a company that hit's 10 billion in 3 years and then goes bust in 10 years.
Bill essentially covers this in section 9: Organic Demand vs. Heavy Marketing Spend.
There's a whole slew of factors that need to be taken into account here: customer acquisition cost (and how it changes - e.g. does it go down as you grow, due to network effects or virality?), the lifetime value of a customer (which should be discounted appropriately), cost structure (particularly fixed vs variable), cash flow profile (i.e. when do you actually start receiving revenue from a customer?), and working capital requirements are (e.g. are you a company with negative working capital, like Groupon?).
Jason Cohen wrote a good blog post about this sort of thing in the SaaS space: http://blog.asmartbear.com/unprofitable-saas-business-model....
"All x is not y"
"Not all x is y". "All x is not y"
"Not all x is y".