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The New Rules of Growth vs. Profitability

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This is a guide to help Founders build iconic businesses during challenging times and navigate the new rules of growth vs. profitability post-COVID-19.

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The New Rules of Growth vs. Profitability

  1. 1. The New Rules of Growth vs. Profitability NFX Managing Partner, Pete Flint
  2. 2. Navigating A New reality NFX 2 This presentation is meant to help Founders adjust their short-term and long-term strategy in a novel environment. Principles include: ● Survive: Understand your cash position & extend runway ● Thrive: Take advantage of cheap growth ● Plan for the long-term balancing act using the “Startup Glide Path”
  3. 3. Do you have enough cash? NFX 3
  4. 4. The Crisis Playbook for Startups NFX 4 ● Set a cash floor ● Exercise extreme frugality to become cash flow neutral / positive (infinite runway) ● Iterate on product to identify profitable streams ● Achieve short CAC / LTV payback periods ● Scale the business so revenue matches cost
  5. 5. The Balancing Act NFX 5 ● You’ll hear conflicting advice on what to prioritize between growth vs. profitability ● The truth is that it is a balancing act throughout the life of a startup
  6. 6. The Rule of 40: Growth vs. Profitability is a False Dichotomy NFX 6 ● In reality, growth & profitability are not mutually exclusive. ● Example: the “Rule of 40” shows top-performing companies need both. ● Rule of thumb particularly for late-stage SaaS companies that says that growth rate + profit margin combined should = 40%+
  7. 7. The Startup Glide Path NFX 7
  8. 8. Early Stage (Seed - Series A): Grow Aggressively NFX 8 ● If you’re early stage, you need to be aggressive about growth. ● First, make sure you have a strong cash position & fast CAC / LTV payback. ● Find product-market fit before spending aggressively on growth. ● Once you have product-market fit, a strong cash position, and fast CAC / LTV payback, you need 3-5x annual growth.
  9. 9. Mid-Stage (Series B & C): Create Optionality NFX 9 ● At these stages, it’s about creating conditions for optionality. ● One route to optionality is having efficient, scalable customer acquisition. ● Another is to launch in adjacent markets, or by expanding to capture greater market share in existing markets.
  10. 10. Late Stage: Gliding Towards Greater Profitability NFX 10 ● For later stage companies approaching their IPO or another type of liquidity event, growth is still more important than profits. ● The best case, of course, is when a company is both highly profitable and growing quickly. ● A company’s business model can also impact how late-stage investors and the public market react to the rate of growth and profits.
  11. 11. Weaker Network Effect Business Models = Less Tolerance For Losses NFX 11 ● For weak network effects business models, the risk is highest because the churn and replacement effect may be high but not high enough to immediately create warning signs. ● For companies like this, public investors will forgive lack of profits for a time. If losses continue to mount, growth needs to be absolutely outstanding for the company to maintain its share price and the confidence of investors.
  12. 12. Network Effects & “Blitzscaling” NFX 12 ● In an environment of abundant capital, network effects businesses pursued extremely aggressive “blitzscaling” growth strategies. ● Investors have in the past shown increased tolerance for loss-making in a winner-take-most situation. ● Low-margin businesses without significant network effects can’t use the same playbook. ● The environment is turning against aggressive blitzscaling, especially in a downturn.
  13. 13. Takeaways for Founders NFX 13 1. Understand your cash position. 2. Extend your runway to 18-24 months until you can nail your unit economics and be in a position to raise capital. 3. Improve your contribution margins to ensure you’re making money on every transaction. Optimize for profitability on a transaction basis as opposed to growth. 4. Tighten your CAC/LTV payback period. 5. After that’s secured, aggressively pursue growth and acquisition while the market is cheap.