Series A investors look for businesses that are ready to scale rapidly for the next 3-5 years. Attractive candidates will have shown strong growth in recent months and that growth will be sustainable.
- Momentum and growth are everything for startups;
- Only growth that can fund itself has value over the long term;
- Unsustainable growth is damaging.
Not all growth is created equal
Momentum and growth are everything for startups. A few years of rapid growth is the only way to get to scale in any reasonable timeframe and nothing gets investors calling like a fast growth story. But not all growth is created equal. Good growth is growth that can fund itself, or will be able to do so at some point in the future. Companies with good growth will have some or all of these characteristics:
- Positive unit economics (i.e. revenues per user > cost of acquisition + cost of delivery)
- Good understanding of the benefits provided to customers
- High referral rates
- High net promoter score
- Loyal customers (low churn)
Whilst bad growth looks like this:
- Key channels will never be profitable
- Main products have no path to positive gross margin
- Return rates are prohibitively high
- Acquiring users who are unlikely to ever engage - e.g. through incentivised traffic
Surprisingly, companies do this stuff, all the time. It happens so often it's been given it's own name: Sugar growth. Sugar growth is like a sugar high. It comes quickly and feels great whilst it's there, but goes again just as fast, leaving you worse off than when you started.
The pressure to keep growing can be so intense that some founders bend their businesses out of shape to keep the top line moving in the right direction, often encouraged (wittingly or unwittingly) by investors. If good growth is coming naturally then it's happy days. If good growth isn't there it can make sense to do unnatural things to keep the momentum up for a few months, and founders find themselves having to strike a difficult balance between doing what it takes to raise money in the short term and doing the things that will generate the most value over the long term. The more money there is in the bank the easier it is to focus on the long term, but if money needs to be raised posting better results each month can be the only way to get the funding required to play the game long term.
In practice entrepreneurs can find themselves dipping into bad growth for two reasons, either they deliberately dip into it temporarily or their assumptions about margin improvement or increasing marketing efficiency don't pan out. In both situations the challenge is to recognise that the situation is unhealthy in the long term and find a fix. Usually that will mean taking a (painful) short term hit to growth.
There are companies that jump from one unsustainable growth spurt to another raising money on the way and eventually get to some kind of exit. They are few and far between though, and it's much, much more common to have an embarrassing flame out along the way.
By Nic Brisbourne
Original Article Posted on The Path Forward