11 ms·

Profits vs. Growth

134 points by gokhan 11y ago

egusa 11y ago
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).
- jgalt212 11y ago
  true that, I can't remember one highly profitable big win for USV, but I can remember a number of high growth big win exits for USV.
adventured 11y ago
"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.
- free2rhyme214 11y ago
  "I get the impression Fred is more or less warning his portfolio, and leading future would be pitchees." Correct.
- thomasrossi 11y ago
  Do you mean that they should "get ready for dry season" or "do it quick before it's too late"?
jerf 11y ago
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#{%22range%22:%225y%22,%22allowChartStacking%22:true} http://finance.yahoo.com/echarts?s=GRPN+Interactive#{%22rang... (and have a look at the "news" section there, too...)
- mathattack 11y ago
  The profit motive can also keep firms from blowing money and attention on stupid things. (Example: Team A and Team B have a 50% overlap in code they're writing. The profit motive will shut this down. An overfunded company will preserve harmony, waste money and push the problems down field)
- jpatokal 11y ago
  If I was a Groupon investor, I'm not sure which of these two I would find more disturbing: http://www.insidermonkey.com/blog/jumping-ship-groupon-insiders-continue-selling-spree-356712/ http://www.insidermonkey.com/blog/jumping-ship-groupon-insid... http://www.businesswire.com/news/home/20150625005756/en/#.VYzgx7ynU_s http://www.businesswire.com/news/home/20150625005756/en/#.VY... (and this is a press release! Srsly WTF?)
kevin 11y ago
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.
- paragpatelone 11y ago
  Do most YC companies follow this balanced approach?
  - DenisM 11y ago
    Not being in YC, I can only imagine that it's different strokes for different folks. For example, if you're doing a land-grab in a newly discovered market, such as Uber, you have to prioritize growth above all. On the other hand, if your market is well-established and your plan to win by superior polish of your offering, you're better off growing slowly, using revenue both as a funding source and as a guide for making a superior product. In any case, the competitive situation will dictate if you have to grow fast at all costs (by raising large rounds), or if you can grow slowly by using your own revenue.
    - danieltillett 11y ago
      Is Uber an example of a land-grab? Regulation arbitrage and long term domination of a market are not really compatible outcomes. Sure they need to focus on growth over all to beat their competition, but the end result will just mean that they end up as regulated as the current taxi industry once they actually achieve domination.
      - eru 11y ago
        And that's great for them! As a big company they can afford the lawyers to deal with regulations, and the scrappy upstart competitors can't.
dataker 11y ago
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.
- danieltillett 11y ago
  Yep. The cost of delayed profitability is extremely high for founders. Remember for the VC's you are just one of many plays and if things turn out bad then it is "oh well" for them. For a founder "oh well" is a disaster. I think the basic problem is it is more fun to run a startup that is focused on growth than one that is focused on profitability. Smart people are very good at coming up with justifications for doing what they would like to do.
rcarrigan87 11y ago
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...
- sjs382 11y ago
  FYI, I looked them up and YikYak is local to Atlanta, so that might have something to do with their large presence. Your point still stands, though—the two busses and the motorized bull...
  - rcarrigan87 11y ago
    I'm really not trying to bash YikYak, I have a lot of respect for them actually. My point is maybe they are so well funded it's clouding their judgement. I have to think there are more effective growth channels.
    - sjs382 11y ago
      I just meant to point out that it might have cost a lot less than you think.
- 7Figures2Commas 11y ago
  > The college messaging site YikYak (raised $70m+) had 2 full size buses and a motorized bull to ride. > There couldn't have been more than a few thousand attendees at this event. They definitely need more motorized bulls. My on-demand motorized bull company, UberBull, recommends at least 4 motorized bulls for every 500 people.
  - csentropy 11y ago
    Ha Ha
csentropy 11y ago
Good post and really interesting metric YOY growth+Operating margins=40% looks like a reliable northstar.
solve 11y ago
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.
- dylanjermiah 11y ago
  Which companies are you referring to?
lubos 11y ago
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".
pbreit 11y ago
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).
thejoefloyd 11y ago
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.
jkaljundi 11y ago
Sounds very European.
johanneskanybal 11y ago
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.
ryanbrunner 11y ago
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.
ken-chen 11y ago
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.

134 points by gokhan 11y ago

egusa 11y ago

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).

jgalt212 11y ago
true that, I can't remember one highly profitable big win for USV, but I can remember a number of high growth big win exits for USV.

adventured 11y ago

"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.

free2rhyme214 11y ago
"I get the impression Fred is more or less warning his portfolio, and leading future would be pitchees." Correct.
thomasrossi 11y ago
Do you mean that they should "get ready for dry season" or "do it quick before it's too late"?

jerf 11y ago

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#{%22range%22:%225y%22,%22allowChartStacking%22:true} http://finance.yahoo.com/echarts?s=GRPN+Interactive#{%22rang... (and have a look at the "news" section there, too...)

mathattack 11y ago
The profit motive can also keep firms from blowing money and attention on stupid things. (Example: Team A and Team B have a 50% overlap in code they're writing. The profit motive will shut this down. An overfunded company will preserve harmony, waste money and push the problems down field)
jpatokal 11y ago
If I was a Groupon investor, I'm not sure which of these two I would find more disturbing: http://www.insidermonkey.com/blog/jumping-ship-groupon-insiders-continue-selling-spree-356712/ http://www.insidermonkey.com/blog/jumping-ship-groupon-insid... http://www.businesswire.com/news/home/20150625005756/en/#.VYzgx7ynU_s http://www.businesswire.com/news/home/20150625005756/en/#.VY... (and this is a press release! Srsly WTF?)

kevin 11y ago

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.

paragpatelone 11y ago
Do most YC companies follow this balanced approach?
- DenisM 11y ago
  Not being in YC, I can only imagine that it's different strokes for different folks. For example, if you're doing a land-grab in a newly discovered market, such as Uber, you have to prioritize growth above all. On the other hand, if your market is well-established and your plan to win by superior polish of your offering, you're better off growing slowly, using revenue both as a funding source and as a guide for making a superior product. In any case, the competitive situation will dictate if you have to grow fast at all costs (by raising large rounds), or if you can grow slowly by using your own revenue.
  - danieltillett 11y ago
    Is Uber an example of a land-grab? Regulation arbitrage and long term domination of a market are not really compatible outcomes. Sure they need to focus on growth over all to beat their competition, but the end result will just mean that they end up as regulated as the current taxi industry once they actually achieve domination.
    - eru 11y ago
      And that's great for them! As a big company they can afford the lawyers to deal with regulations, and the scrappy upstart competitors can't.

dataker 11y ago

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.

danieltillett 11y ago
Yep. The cost of delayed profitability is extremely high for founders. Remember for the VC's you are just one of many plays and if things turn out bad then it is "oh well" for them. For a founder "oh well" is a disaster. I think the basic problem is it is more fun to run a startup that is focused on growth than one that is focused on profitability. Smart people are very good at coming up with justifications for doing what they would like to do.

rcarrigan87 11y ago

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...

sjs382 11y ago
FYI, I looked them up and YikYak is local to Atlanta, so that might have something to do with their large presence. Your point still stands, though—the two busses and the motorized bull...
- rcarrigan87 11y ago
  I'm really not trying to bash YikYak, I have a lot of respect for them actually. My point is maybe they are so well funded it's clouding their judgement. I have to think there are more effective growth channels.
  - sjs382 11y ago
    I just meant to point out that it might have cost a lot less than you think.
7Figures2Commas 11y ago
> The college messaging site YikYak (raised $70m+) had 2 full size buses and a motorized bull to ride. > There couldn't have been more than a few thousand attendees at this event. They definitely need more motorized bulls. My on-demand motorized bull company, UberBull, recommends at least 4 motorized bulls for every 500 people.
- csentropy 11y ago
  Ha Ha

csentropy 11y ago

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

solve 11y ago

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.

dylanjermiah 11y ago
Which companies are you referring to?

lubos 11y ago

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".

pbreit 11y ago

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).

thejoefloyd 11y ago

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.

jkaljundi 11y ago

Sounds very European.

johanneskanybal 11y ago

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.

ryanbrunner 11y ago

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.

ken-chen 11y ago

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.