Growth vs Profitability is a false dichotomy. How to achieve both?
It's actually growth AND profitability.
In the last part, we figured out How to build $100M business model bottom up (< 7 years)? Now you know your business drivers like the back of your hand. However, this is only half of the job. When investors ask "If I give you 2X $ can you get to 3X traction instead? how do you answer that question?
Well, this is where CAC and unit economics come into play.
One of the most misunderstood concepts in startups is profitability. You often hear in the news growth vs profitability. For example, in bull markets startups grow at all costs and in bear markets it's all about cutting costs and layoffs to achieve profitability.
In reality profitability and growth is not a dichotomy. It's not either/or instead its "AND". You can still have strong growth while demonstrating unit economics level profitability. It's actually other way around. When you show UE profitability you attract more capital for growth.
First let me de-couple the importance of growth from the profitability.
Startup = Growth
You have triple your business for 2 years and then double it for final 3 years pre exit.
The goal of early-stage startups is hypergrowth. Why growth is so important? As a new startup you find a 10x solution to core pain point of a massive market. Currently there are many entrenched incumbent players serving that market. Old companies move slow but eventually they wake up to your impact and try replicate your model (see how Azure, Google aggressively went after AWS).
In the initial 2-3 years of your company, revenue levels will be so small that incumbent will not notice you. Let's say you hit $1M-$2M ARR. Now your 5-year sprint to $100M begins. This where the famous T2D3 formula comes from. You aim for 3x growth for next 2 years and 2x growth for year 3,4 and 5.
Why do you need to get there so fast? The higher your revenue, the less risky you are for VCs. It shows that you have a strong moat and even a stronger exit potential (IPO, M&A).
For incumbents, acquiring a company with less than $100M revenue does not whet their appetite. For example, in my last corporate gig we have acquired a player for $5B just to make enough waves in the financial markets.
With lower risk, you can raise capital easier with higher multiples of your revenue and the virtuous loop continues. If you cannot grow fast enough, you can see your empire crumble. An incumbent can copy your model and push it through their massive sales network (remember distribution always beats the product). This is what Microsoft did with Teams to Slack.
With faster growth vs Teams, Slack could have been a standalone company. Who knows?
Your challenge is never to lose your sight on growth. That's always priority number one for early-stage startups. I highly recommend reading Startup = Growth (paulgraham.com) article why is highly internalized by YC portfolio companies.
So, how can you grow this fast, while showing profitability? This is where understanding your Go2Market chokehold comes into play.
End of Part
Coming Next
A simple way to map your Go2Market and Business Model
Why should you focus first on value chain before populating countless pain points?
How to find value chain chokehold and build high-margin business model
Bonus Stuff
Join us at Fundraising Success Group on LinkedIn where we share more in-depth insights and real startup examples.
