What’s your SaaS main priority? You want to grow or earn money? Most probably you need both

Disclaimer: I don’t advocate of any of the pills

If you don’t have time to read the whole text, here’s executive summary:

I think most companies (startups in particular) underemphasize profits and overemphasize growth. They’re both crucial but one of the main reason startups ultimately fail is unprofitability, not slow growth.

In any case, to be successful you most probably you need both.

In this text, I’ll be sharing views from different perspectives I currently have:

- VC fund partner

- revenue management and pricing advisor

- ex funder who sold his company to a big multinational

The simultaneous pursuit of growth and profitability is one of the most exquisite and difficult leadership dilemmas. And there’s no right answer.

Maybe profit is not the right term for startups after all? We all know that very few startup achieve it. Numerous companies that are IPOing aren’t profitable — while not a great indicator, they sold the story of growth etc. In 2018 over 80% of IPOs were not profitable, in 2019 it was over 70%. Several of last year’s largest IPOs — including ride-hailing rivals Uber and Lyft — have fallen below their offering prices as investors turn away from business models with unproven paths to profitability. And there’s WeWork, who pulled its highly anticipated IPO.

How will things change due to the whole COVID thing? You hear more often of camels rather than unicorns as the way to grow your business. Unlike unicorns, camels are not imaginary creatures living in fictitious lands. They are real, resilient and can survive in the harshest places on Earth. While the metaphor may not be as flashy, these startup camels prioritize sustainability, and thus survival, by balancing strong growth and cash flow.

I’ve worked for companies that focused on growth, and I’ve worked for companies that focused on profit. More importantly I’ve seen successes and failures of both.

But if I had to pick, I’d pick profit. Or at least a strong proof for one.

Explanation for my choice is actually very simple; it all comes down to runway. The more profitable you are, the stronger your leverage in raising capital for more runway.

Fundamentally, you can grow as fast as you want, but if you aren’t profitable, then you’ll end up either:

A- fail to successfully raise capital

or

B- give away a significant ownership share of your company in exchange for less runway.

If you’re profitable, then you will have as much runway as you want. That’s why, generally speaking, I’d pick profit over growth in almost every instance. But it’s still a question of balance. And of course, there’s plenty of exceptions and you can name plenty of successful companies with hyper growth and negative profit.

VC perspective

Form a VC perspective- I want to see momentum, which is a form of growth. Tell me a story, that you’re getting traction and there’s something there. When we invest, it’s about to get you to the next milestone and next financing. Profit or breakeven is a great place to be but all that $ needs to go back into the company so you keep growing.

Still, remember that profit is the best verification of your product-market fit (read my other text on that https://medium.com/@academy_26786/from-product-market-fit-to-product-market-price-fit-e4faa0343336 ). And that’s why we want to see a perspective for profit in the future.

This is something you should keep in mind when raising VC or any other external funding- you must grow your business. You can always follow the other path- don’t raise capital, which is perfectly fine and allows you to control your own destiny, then be profitable, have a nice lifestyle business and live off of it. It’s all a matter of choice.

Personal perspective

There’s another perspective- for some strange reason we all think that bigger is always better. And it refers not only to business but also to other aspects of life.

When I was owning and running my own business, I felt this common and prevalent idea that bigger is always better. One of the most common questions I was asked by friends and family was, “How many people work for you?” For some reason, the number of people working in your office is often used as a metric of how successful your business is. But it’s not always a good metric.

For me personally, growing the number of people in my business was never a goal. Not even remotely. It was not easy to explain it to the outside world, though. Eventually I didn’t let society’s mantra that bigger is better influence me. Think for yourself, independent of all the noise out there, and then go for it.

Pricing perspective

I usually say that pricing is a tool. If you apply it well, you’ll successfully achieve your goals. Again, first you need to know where you want to get. My friend Wojciech Gorzen wrote a great post on that got almost 100k views https://www.linkedin.com/posts/wojciechgorzen_pricing-revenuemanagement-activity-6681108345744621568-Z-aS

You should set your pricing model differently for growth and for profit.

Balance? “Rule of 40”

Since few years we have the “Rule of 40” -the principle that company’s combined growth rate and profit margin should exceed 40%. It has gained momentum as a high-level measure of performance for businesses in recent years, especially in the realms of venture capital and growth equity. It is being embraced as an important metric to help measure the trade-offs of balancing growth and profitability.

Young companies often beat that mark with ultra rapid growth. But older companies, whose growth has tapered off, need to improve performance and profit margins to hit that metric. So, your goals will probably shift down the road.

How to beat the “Rule of 40”

Strong growth. My vague estimate would be that 1/2 of early stage companies that outperform the Rule of 40 in consecutive years achieve it with revenue growth above 40%. These companies might generate some profit while investing all the money in hypergrowth to build a large installed base. This works particularly well for any platform business.

Balanced, profitable growth.1/3 of companies consistently exceeding the Rule of 40 do so with revenue growth between 20% and 40%. It’s truer for large, more established companies that have successfully developed new products for markets adjacent to their core, and navigated technology or business model transitions (for example, to SaaS and subscription models) to keep growing.

Profitability. Remaining companies beat the Rule of 40 with annual growth below 20%. It’s easier to do it if you have large, established business. With growth stabilizing round 10%, companies turn to becoming more efficient and profitable — exacting pricing power, leveraging the scale and scope of large salesforces, cross-selling and expanding installed base customers, exploring new business models, increasing renewals, moderating R&D investment.

Wrap-up

The profit-growth question doesn’t have easy answers. Depending on your industry and the stage of your company, “success” equates to very different ratios. Ultimately, it’s important to remember that what all investors truly care about is the cash flow which a company generates over its lifetime. You may not be profitable now, but there needs to be a clear route to profitability, ideally in your near future. No matter how groundbreaking your business idea may be.

Dr Maciej Kraus
Movens VC, Partner
www.linkedin.com/in/maciejkraus

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Movens VC is an early stage fund (Seed/Series A), that supports the most ambitious founders in the first steps of building global startups — movenscapital.com

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Movens Capital

Movens Capital

Movens VC is an early stage fund (Seed/Series A), that supports the most ambitious founders in the first steps of building global startups — movenscapital.com

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