3 ms·
Funny - you did exactly the same thing I did while reading the article - our spreadsheets are basically identical :) So here's my thoughts -- I think some outs
by nlh 12y ago
Funny - you did exactly the same thing I did while reading the article - our spreadsheets are basically identical :)
So here's my thoughts -- I think some outside "real world" perspective is needed here. While 9% M-M growth may seem OK in the VC-fueled hockeystick growth world, in the real world of profitable businesses it's spectacular. Some companies spend years running losses trying to get to profitability, and if that 9% is real (and sustainable), then I can think of only two things going on here: A) Either the whole world has gone crazy or B) More likely - there's missing information here.
As peter points out -- at a 9% growth rate the business turns profitable after 6 months and on the 13th month is net profitable. Any rational investor would be frothing to get involved in that sort of business - it becomes a money-printing machine in short order.
So I'm assuming that there's missing information here -- either the 9% monthly growth isn't sustainable (then it's not a true 9% M-M growth rate) or the costs must rise substantially to sustain it. And if that's the case, then you can start to see the real reason VCs might be hesitating.
So I guess my point is: Don't obsess over the raw growth number as the sole problem. That sets the wrong target. In the end, profits drive businesses, and massively profitable businesses can go public (and get great valuations), and public companies make VCs happy.
- lpolovets 12y ago> A 9% growth rate the business turns profitable after 6 months and on the 13th month is net profitable. Any rational investor would be frothing to get involved in that sort of business - it becomes a money-printing machine in short order. That's not 100% true. 1) Growth rates like this are not sustainable long-term, and a 9% growth rate doesn't look great when lots of other companies are at 15-25% monthly growth with similar revenues. 2) The revenues multiples for Series A startup are very high. Would I invest in a $600k revenue/year startup growing 9% monthly at a $4m valuation? Sure, that sounds good. But a Series A would be more like investing $5m at a $25m valuation, which is way higher than the startup is worth based on pure fundamentals. The reason to invest at a $25m valuation is because you think there's a 10% shot the startup will be worth $500m, not because you think it's a 100% shot at $25m. High growth rates are one of the best indicators that a startup has a shot at $500m. (My fund does seed/Series A investments.)
- nlh 12y agoSorry, bad choice of words on my part -- I shouldn't have said "any rational investor". What I meant is "any profit-focused, long-term investor" (as opposed to a moonshot-focused VC investor). I don't mean any of those things as negatives, just descriptives. Your first point is right (and I addressed 1 later in my comment) -- if 9% isn't sustainable long-term, then the whole picture is quite different and a different metric should be used. And your second point, put differently, is "asking prices are too high", which is a fair point. So I'd recast the original problem in a different light: "Company X is growing at 9% now, expectations are that it's unsustainable and won't be profitable for a while, and at the same time, they're asking a very high price relative to that growth & profitability rate", which explains why they're having trouble a bit more clearly. My fundamental point is that the meme "anything less than 5% growth per week is bad" in a vacuum feels crazy by itself. With more context, it makes more sense.
- lpolovets 12y agoI fully agree with that (and didn't read it negatively at all). The 5% meme/week is definitely surreal -- that's >10x/year growth! I'm always really impressed when I see companies with that kind of growth, especially after they've reached non-trivial revenues (e.g. $50k-$100k/mo)