Profits vs. Growth

Just in case people are going to mentally summarize this as startups need to choose one or the other...the most important idea from Fred here comes at the end: Great companies can do both. Don't let investors (or anyone for that matter) say there's only one way to play the game. Reminds me of one of my favorite quotes from Charles Eames. And while it pertains to making products, I think it fits:

"Never delegate understanding."

We followed this strategy (the never delegating and balancing growth and profitability) at Wufoo and I can tell you that it was the best decision we ever made.

"But I’m a bit sick and tired of the objective of every operating plan I see is to get the business to a point where it can raise money at a much higher price."

Don't worry, the capital markets will enforce discipline sooner or later. With Fed hikes inbound, it'll be sooner rather than later. Even without the hikes, the stock market has stopped going up without QE (hasn't moved in seven months), which is increasingly crushing the ability for high valuation private companies to accomplish the big exits they require (which is why the IPO market has gone dry). I get the impression Fred is more or less warning his portfolio, and leading future would be pitchees.

I was recently at a festival in downtown Athens, GA. The college messaging site YikYak (raised $70m+) had 2 full size buses and a motorized bull to ride. They had 20+ reps handing out all kinds of free stuff.

There couldn't have been more than a few thousand attendees at this event.

To me this is exactly what Fred is talking about. A company so overfunded they can spend money on marketing efforts that don't really make sense...

I'm no big investor or VC or anything, but trying to at least come close to a positive cash flow also helps proof the business against turning out to be selling dollar bills for 95 cents. Scaling a business that's selling dollars for 95 cents is really, really easy (in relative terms), and also a really bad plan.

I remember people discussing whether Groupon boiled down to that. I see it's not dead, but I see it's not exactly living up to promises either: http://finance.yahoo.com/echarts?s=GRPN+Interactive#{%22rang... (and have a look at the "news" section there, too...)

Beyonds VCs and startups, focusing solely on growth mostly hurts founders themselves.

I've met some that, because of ego and narcissism, ignored profitability, raising unnecessary money and eventually losing autonomy and control.

it's really good to see Fred Wilson writing about the important of profits, but i'm a little surprised as it seems like his firm USV focuses on investing in network effects businesses (ex: etsy), which to me almost always focus on growth over profit (which is probably the right choice for these types of startups, at least in the beginning).

The simple truth is that the public markets place a premium on growth. For example, plot a graph of growth rate on the x-axis and revenue multiple on the y-axis for all public enterprise cloud companies. You will see a direct correlation - higher growth leads to higher trading multiples. That's why startups prioritize growth over profitability. Now this only applies to startups which scale to the point of going public. I think Fred's points are valid and apply to the vast majority of startups (that won't go public). Food for thought.

In general, I still think growth trumps revenues/profits for most growing companies. The fact is, making money off a delighted user base is easier than building a delighted user base. However, I do think making money is important as a demonstration that this team can make money on this product/service. Also, I think zero revenue works a lot better if there is at least a view to how this thing is going to make money (surprisingly, this isn't always the case)(and if "advertising" is the answer, needs to be better thought out).

I think the fact that a suggestion that maybe, for some companies, being profitable is OK needs to be couched with "I don’t want to come off as a positive cash flow freak" is really demonstrative of just how extreme the focus on growth to the exception of all else is.

For most people unfamiliar with the VC world, the statement "Companies should try to be profitable" is nearly a tautology. In tech VC world, it's practically heresy.

Startups are a signaling game. A large part of the reason why growth is important is because you're building a story for future investors to believe in, that you're trying hard to become the Next Big Thing. A lapse in focusing on growth signals that you might be satisfied with a smaller outcome, making it harder to attract VC money ever again, unless one has a plausible story otherwise.

Commenter: haven't most (maybe close to all) the returns in VC over the last, say, decade, come from exits of companies that never achieved real positive cash flows?

Fred: yeah. but i am celebrating that ones that did today.

So weird that for every piece of advice Fred gives on his blog, he says in the comments that he's not really giving advice, and just trying to balance out the people at the opposite extreme.

Good post and really interesting metric YOY growth+Operating margins=40% looks like a reliable northstar.

Difference in agendas. A typical founder might be pretty happy getting moderatly rich whereas that's a pretty bad outcome for a VC. Since we eat up the success stories it becomes our culture without allways reflecting enough on these very different world views. My 5 cents.

It wasn't too long ago when YC halved money to be received by their startups. PG famously said back then "$150k was too much".

Sounds very European.