HQQA042 Are you focused on growth or profitability?

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Are you focused on growth or profitability? – Don’t get caught off guard here

Here’s what they mean…

This is the same question we just went through on “When will you be profitable?” but phrased differently as “Are you focused on growth or profitability?”

Frankly, this is something a smarter investor would ask and at the later stages. When you will be profitable is something a neophyte, traditional investor, playing tech investor would ask.pitch deck

If you’re talking to American investors it’s more likely that they want you to focus on growth. Growth is what investors care about. If you respond to profitability, they may wonder if you really are a venture-capital type business and founder.

I wouldn’t’ ridicule the notion of being profitable. Being ‘profitable’ means you are default alive rather than default dead. Default dead means you are dependent on investors. Default alive gives you negotiating leverage.

The simple answer to this question (“Are you focused on growth or profitability?”) is ‘growth.’

Why does growth matter so much? Well, more growth means a bigger company. VCs need big exits for their business model to work.

I’m going to explain two useful heuristics that apply to SaaS companies:

  • 3T2D – This means you TRIPLE for three years and DOUBLE for two years once you are about $1m in revenue
  • Rule of 40% – This means at scale you add up your bottom line margin (Negative) and your top line growth (Positive). If they add up to 40% you are good. So you can break even if you grow 40%

Investors want you to be at least $10m ARR. So check out how the numbers work if we grow ‘according to plan’ starting on a base of $1m. Be amazed by the power of high growth and compounding.

Year Revenue Growth Rule
2018 1
2019 3 300% T
2020 9 300% T
2021 27 300% T
2022 54 200% D
2023 108 200% D
2024 151 40% Rule of 40%
2025 212 40% Rule of 40%

What you need to say

“We are trying to build a real business with fundamentals, but we are aware that we are building a venture capital funded business. I have studied how analysts value publicly traded companies too, and it is clear that the highest r2 is growth.

So our focus is on growth, but being frugal where we can. Bezos has shown that margin is an opportunity. Being able to get profitability if we need to is something that we have to consider, of course. We want to stay the course and being able to flip to profitability would give us great options if the landscape changes. The key milestone we are gunning for is $100m ARR in 5-6 years.”

 

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