
Profits vs. Growth - gokhan
http://avc.com/2015/06/profits-vs-growth/
======
kevin
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
Do most YC companies follow this balanced approach?

~~~
DenisM
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
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
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.

~~~
danieltillett
Yes but once they reach a certain size they will need to transition from
regulator arbitrage to a model similar to the one the current taxi system.
Once this happen they will be as vulnerable to the next scrappy upstart as the
taxi industry is. Either domination or regulatory arbitrage has to give.

~~~
eru
They'll change from arbitrage on the current regulation, to having a say in
the next regulation and living cosily in it.

Side question: why do the new regulations have to be similar to the current
taxi system? Uber doesn't need eg a medallion system, they'd be happy with
onerous legal (eg reporting) requirements to keep upstarts out.

~~~
danieltillett
Sure Uber might be able to help write the new regulations to their advantage,
but at that point they will be open to attack from upstarts who choose to
ignore the regulations. They need not only write the regulations and then be
able to get them enforced to keep the upstarts out.

The new system does not need to the same as the current medallion system, but
unless the new system is providing them with a competitive a means of keeping
upstarts out the market will become one of perfect competition where profits
all end up with the consumer.

------
adventured
"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
"I get the impression Fred is more or less warning his portfolio, and leading
future would be pitchees."

Correct.

------
rcarrigan87
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...

~~~
7Figures2Commas
> 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
Ha Ha

~~~
chris_va
You laugh, but the motorized bull business is hoppin'.

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

~~~
mathattack
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)

------
dataker
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
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.

------
egusa
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
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.

------
thejoefloyd
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.

------
pbreit
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).

------
ryanbrunner
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
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.

------
solve
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
Which companies are you referring to?

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

------
johanneskanybal
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.

------
lubos
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".

------
jkaljundi
Sounds very European.

