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I'll never understand why a company has to keep growing. Obviously I don't have a degree in economics, but why can't a company do well and then continue being s

by adtac 10y ago

I'll never understand why a company has to keep growing. Obviously I don't have a degree in economics, but why can't a company do well and then continue being so without having the need to innovate all the time? Sorry if I'm missing something big.

martin_bech 10y ago
It only does if it cant pay the bills.. right now some of these unicorns have large amounts of debt, or similar obligations, that they cant payback unless they grow.
patrickthebold 10y ago
It doesn't. It's a choice the owners/shareholders can make, which increases (hopefully) the value of the thing they own.
droopyEyelids 10y ago
What you're missing is you're looking for too abstract of an answer. A company has to keep growing because of unique demands on that company. A different company doesn't have to grow because it has a different set of demands. Most you read about on here have a relatively similar set of demands based on the VC investments they took.
darkstar999 10y ago
They took venture capital, the investors want to see as big of a return on their investment as possible. I think you'd have to look at self-funded companies to find one that is "ok" with stagnant growth.
superflyguy 10y ago
If you start a company and you break even then you're free to not grow. As long as you're happy with the money you're making and you can pay stuff, rent, insurance, equipment, services, surprises etc then you don't need to. But if you can do it, someone else can do it, and if they are criminally inclined, sly, lucky, or are prepared to pay people less or provide a lower quality product, or they have money to burn or are backed by people with money to burn then they can take you on and, until they are caught/run out of money/lose business due to their business practices catching up with them, they can take your business. Companies which are set up with other people's money and/or which go public are going to have to answer to the people who "own" them about why they're not making more money this year than last year and the people notionally running the company will be out of a job if they can't explain this.
clairity 10y ago
dropbox is a startup and investors invest in startups to generate outsized returns (with commensurate risk). outsized returns require outsized growth (specifically in free cash flows, but many proxy metrics are used to forecast free cash flows, aka future profits). so the growth rate of a company is one of the biggest factors in its valuation, and higher valuation means more wealth generated for investors, including employee-shareholders. in DCF (discounted cash flows, a fundamental valuation method), revenue growth rate is typically an estimated input, and the model is highly sensitive to it. the outputs of the model are the present value of future free cash flows, otherwise known as the valuation of the company. (see the growth rate in the DCF sensitivity chart on this example of DCF analysis on wikipedia: https://en.wikipedia.org/wiki/Discounted_cash_flow#/media/File:DCFM_Calculator.JPG https://en.wikipedia.org/wiki/Discounted_cash_flow#/media/Fi... ) higher growth rate => higher valuation, all other things being equal. investors are looking for the largest delta between initial valuation and final valuation they can get, and growth is one of the most reliable ways to achieve that. companies that don't grow can generate nice returns for the current owners, but they don't generate outsized returns over time because as growth rate goes to zero, valuation becomes a constant, i.e., no delta in initial vs final valuation (all other things being equal).

by adtac 10y ago

martin_bech 10y ago

It only does if it cant pay the bills.. right now some of these unicorns have large amounts of debt, or similar obligations, that they cant payback unless they grow.

patrickthebold 10y ago

It doesn't. It's a choice the owners/shareholders can make, which increases (hopefully) the value of the thing they own.

droopyEyelids 10y ago

What you're missing is you're looking for too abstract of an answer. A company has to keep growing because of unique demands on that company. A different company doesn't have to grow because it has a different set of demands. Most you read about on here have a relatively similar set of demands based on the VC investments they took.

darkstar999 10y ago

They took venture capital, the investors want to see as big of a return on their investment as possible. I think you'd have to look at self-funded companies to find one that is "ok" with stagnant growth.

superflyguy 10y ago

If you start a company and you break even then you're free to not grow. As long as you're happy with the money you're making and you can pay stuff, rent, insurance, equipment, services, surprises etc then you don't need to. But if you can do it, someone else can do it, and if they are criminally inclined, sly, lucky, or are prepared to pay people less or provide a lower quality product, or they have money to burn or are backed by people with money to burn then they can take you on and, until they are caught/run out of money/lose business due to their business practices catching up with them, they can take your business. Companies which are set up with other people's money and/or which go public are going to have to answer to the people who "own" them about why they're not making more money this year than last year and the people notionally running the company will be out of a job if they can't explain this.

clairity 10y ago

dropbox is a startup and investors invest in startups to generate outsized returns (with commensurate risk). outsized returns require outsized growth (specifically in free cash flows, but many proxy metrics are used to forecast free cash flows, aka future profits). so the growth rate of a company is one of the biggest factors in its valuation, and higher valuation means more wealth generated for investors, including employee-shareholders. in DCF (discounted cash flows, a fundamental valuation method), revenue growth rate is typically an estimated input, and the model is highly sensitive to it. the outputs of the model are the present value of future free cash flows, otherwise known as the valuation of the company. (see the growth rate in the DCF sensitivity chart on this example of DCF analysis on wikipedia: https://en.wikipedia.org/wiki/Discounted_cash_flow#/media/File:DCFM_Calculator.JPG https://en.wikipedia.org/wiki/Discounted_cash_flow#/media/Fi... ) higher growth rate => higher valuation, all other things being equal. investors are looking for the largest delta between initial valuation and final valuation they can get, and growth is one of the most reliable ways to achieve that. companies that don't grow can generate nice returns for the current owners, but they don't generate outsized returns over time because as growth rate goes to zero, valuation becomes a constant, i.e., no delta in initial vs final valuation (all other things being equal).