Originally published in 2017.
As a founder, you are lucky because there is a lot of money out there to be invested. We see hundreds of millions flowing into postmates, deliveroo, foodora and the like. Company valuations go through the roof. Another unicorn with a valuation of one billion dollars… and another one…. you may think from time to time. But is this really sustainable and will this go on forever? Many of these companies have not been able to demonstrate a viable business model and an ability to break-even at a certain point in time. Will we eventually see another bubble bursting? Well, we will see....
Certainly, you can still create business plans reflecting unprofitable growth, bad unit economics and maybe a freemium business model where you scale your business fast, where you call it a land grab case and where you tell your potential investors that you will monetize later, after years of scaling and burning cash. I sometimes hear “I know, customers do not pay for our products and services yet but believe me they will eventually do.” or “It is a really good product, customers must pay for it.” Or you may try to convince investors with “Now it is the time to use our first mover advantage (if there is actually something like a first mover advantage) and rapidly scale. It will be unprofitable growth, but anyway, we will become profitable later on. Let's focus on our top line”.
There are indeed companies out there that have successfully implemented these strategies. Amazon is a perfect example of a business without years of profitability (although it is a special case, since Amazon reinvested much of its positive operating cash flow into growth) and that have received funding on the basis of business plans not showing a clear path to profitability for a long long long time. In their book "Blitzscaling", Reid Hoffman and Chris Yeh nicely explain why prioritizing speed over efficiency and disregarding profitable growth and profitability can make sense. But they make also clear that Blitzscaling requires some compelling strategic reasons, a business model that generates major cash flows in the long run and comes with a lot of risk. Therefore, unless market dynamics require you to pursue a relentless top line growth strategy, bear in mind that building a business (at least eventually) is also about earning money.
So, if you are about to create a business or ponder how to grow your business, be smart and look for ways to achieve high growth and capital efficiency at the same time. Blitzscaling should be the exception, not the rule. Smartscaling may also lead to high growth and massive valuation, but may also come with less dilution for you as the founder and your early stage investors.
First you may focus on customer success and finding product/market-fit and product/channel-fit, so that you can scale your business on the basis of compelling unit economics and a short payback period. Only then you may fuel your growth engine and enter a high growth phase.
Or in other words: First, you crawl and test your MVP/product or service in a lean startup manner by repeatedly going through the build-measure-learn feedback loop. Then, you walk and establish processes that ensure that you can run and scale the business. If this has been accomplished, you can fuel the growth engine.
Eventually, you will not only fly, but also be less diluted.
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