In Silicon Valley, not growing can feel like dying — but is growth really the imperative we make it out to be? We explore how growth became the go-to startup benchmark, and what alternatives may lie ahead, with Danielle Morrill, Cofounder & CEO of Mattermark.
Tim Anglade, Executive in Residence at Scale Venture Partners: One of the things a lot of people don’t necessarily understand very well about Silicon Valley is this idea of growth. Growth is central to a lot of things we do, whether we’re a VC or we’re a startup, but why is it so central?
“the reason it’s so important is people are buying the future”
Danielle Morrill, Cofounder & CEO of Mattermark: Growth is really interesting because it didn’t used to be so objectively measurable. Like we say data is important, but even when we started Mattermark in 2013, I think a lot people thought “no, you can’t measure startups with data. It’s an art, it’s a gut feel”. And growth can feel like that, too, in the beginning, but the reason it’s so important is people are buying the future, so you get a valuation from an investor, you raise a bunch of money, you’re not just being valued on the business as it is today, you’re making a promise about here’s what we’re going to do, here’s what we’re going to prove out. If you’re getting a $100 million valuation, the idea is someday your company’s gonna generate a hundred million dollars of revenue. And until then, you’re gonna be valued at some multiple of the future. And so growth is about proving that you’re gonna get there.
Tim: Right, and it’s been this flight towards future returns, right? In the early days of investment, you were just happy to put money into a company that was selling goods, then you were gonna get some returns on that margin from the good you were selling, and now I think so much of it has obviously turned into a little bit of forecasting, a little bit of trying to figure out where are gonna be the big opportunities, where are you gonna get bigger returns. And so, essentially what people are doing, whether it’s right here in Silicon Valley or in Wall Street is taking the risk of “maybe this company isn’t gonna grow that well“, or“ maybe it’s even gonna go down completely, but if it does grow at the current rate or faster, then I’m gonna get a really good share of returns”.
Product > Fit > Growth
Tim: Let’s talk concretly about what that means. Would you say right now that growth is the top thing a startup needs to worry about?
“To grow, you have to have something to grow.”
Danielle: To grow, you have to have something to grow, so I think product generally ranks as the number one priority for most companies, and then some companies figure that out very quickly, and they’re fortunate to find product-market fit, and then from there they can focus a lot more on scaling. But generally product market fit is not a binary thing, it’s more that you get it for some portion of the market, and then you get to a certain point, and then you need to get it again with some new set of customers. So, it’s kind of this iterative product charges ahead into the future, builds things, then you grow, then product has to then do its next act, and then you grow again, and you don’t just see this in startups, you see this in huge companies like Salesforce. And so I think product and product market fit and growth, it’s more like knowing where you are in that cycle. And I think what happens is a lot of people get confused about where they are in the cycle, and that has a huge impact on things like when to fundraise, how much to fundraise, all these other questions, but primarily it’s about product, and when we say product market fit, that’s almost become this weird placeholder, like people aren’t thinking. Link the two words in there. Product, the thing you’re making. A market, people that you’re talking to all the time, hopefully, getting their money. So I think those two things are usually kind of like a yin yang of what’s the most important, and then everything else is orbiting around.
Product market fit is not a binary thing
Tim: Right, it makes complete sense, breaking those three things, of having a product, having that fit, and having the growth, and it’s really, really interesting what you said about realizing where you are. I think there’s a couple examples maybe we can go into about what that means, so, I’ve seen a lot of companies, for example, that arguably had a product and were pursuing growth, but didn’t really have product market fit in the sense that they weren’t making money from it. And then Facebook in the early days, an example of that where you pursue growth maybe in the user acquisition sense and audience sense, but you don’t really have the product-market fit in the traditional sense of “these people are paying you money directly”, but in the end, it worked out, but that’s maybe the edge case, right, that confirms the rule.
And then conversely, I think there’s also a lot of companies that have very strong product and very strong product market fit, but then the market’s too small. And so, their growth is capped. Even if they were to keep growing at the same rate, they would eventually own all the market and wouldn’t be able to generate enough money. So I think, yeah, it’s very kind of well put to kind of break that down as those three concepts. And so, ideally, you’re right, you find yourself in one of the phases of your company where you have a product-market fit on a market that’s big enough for you to actually grow and grow faster and faster, and that’s kind of the typical, almost stereotypical, struggle, that a startup has on an average day where the CEO is like, “how can we grow faster?”
In a way, what Facebook did was the hardest.
Danielle: Right, I mean, if it was easy, there probably wouldn’t be an opportunity there, so that’s part of it. Most of the easy opportunities, easy is all relative, right? But whatever becomes easy, it’s picked over quickly, so the bowling pin strategy of going into several different markets is generally difficult from an execution risk perspective, which means, if you achieve it, it’s valuable. And so, there’s definitely that balance of some of the hardest things to execute are the most valuable if you get it right. In a way, what Facebook did was the hardest. To execute on acquisition and then put off revenue long enough where you’re taking, I mean, you’re taking a huge bet that you can aggregate enough interest, and not just that, but the execution risk of being able to deliver the ad business at the end of that, Twitter is a great example of maybe, I mean, they’re still making billions of dollars, but maybe they haven’t executed quite as well, yet they still have this huge audience, and you can see the difference in terms of how these two companies get valued. So I think in the consumer space, that’s both the easiest and the hardest. It’s easy in the sense of you get to put it off, but it’s the hardest in terms of, you’ve loaded all the risk on the back end.
Negative Operating Margins
Tim: Right, and I guess most startups do a different version of that balance where maybe they don’t trade off to the extreme that Facebook did of just saying we’re gonna get users and money will come some way, but they’re trading off profitability for growth. And that’s an example of something we in Silicon Valley think “oh of course you do that”, and you never question it, but that’s not traditional economics, and a lot of people maybe wouldn’t understand that. You’re saying, it’s better for me to grow my revenue even if I have zero profits. I’m not actually turning a margin because that helps me get more customers onboard, that helps me move the revenue curve higher, and at least for a while that was the case it seems in some of the startups, but maybe you disagree.
Danielle: I mean, I just, first of all, I think I don’t know enough about consumer businesses to say, to be super honest. I think in most businesses, margin does matter all the time. Gross margin is one thing. Software businesses are wonderful in that sense. Operating margins being negative for a long time, I think all these startups do that, but I think, I believe fundamentally your opportunity’s a function of a combination of your market and the business model. So if the business model allows a software margin of 80% gross margins at Mattermark, and then your market is every businessperson in the world, you can do a lot of crazy things because, you’re like, “well, long term, there’s enough out there”. In the beginning, when we were just focused on VC, the market was really small, and the gross margin wasn’t quite as good because the service level that was expected needed to be higher. So then you make different choices. So I think, it’s a little harder in consumer because you basically don’t know what your gross margin is, and you can do a lot of things to try to figure that out, but ultimately you have an operating margin, and you don’t really know what your cost of sales is gonna be, and so I think it’s a very hard world to operate in.
Who Cares about Profitability These Days?
Tim: Right, but even in B2B, I feel like there’s a similar tension, right? I’ve seen many enterprise software companies that still don’t have a profit, and I’ve become public now, and they’re still operating at a loss, and I think that’s a typical startup gambit, of saying, no, we’re gonna recruit these customers, and eventually, we’re gonna lower our cost, we’re gonna increase our margin, and we’re gonna get to profitability. But even that, it seems like the public markets still have more of an appetite for growth, than they do for actual profits.
“If they think that the management of the company believes that it would be better to hold on to the money than to invest it in the business, then why should they invest in the business? So there’s a signaling issue there.”
Danielle: Well, they want returns, right? So if they think that the management of the company believes that it would be better to hold on to the money than to invest it in the business, then why should they invest in the business, right? So there’s a signaling issue there. People talk about signaling risk, that never goes away, that’s existing in the public market, too, so there’s almost like this sweet spot of losing just enough money to show that you’re continuing to invest in the business, but not losing so much that you’ve created some kind of existential threat. But yeah, I think that that is the bet any technology company is making, is that it’s going to become much more valuable in the future, and that we’re at the beginning of a very long wave. And then of course when other companies try to act like tech companies, public or private, generally they find that they don’t get the same valuation or same kind of investor sentiment.
Tim: Right, and that can be really tricky. It seems now that that reconciliation between the private market and the public market is interesting, and you have a series of blog posts about “the Changing Value of ARR”, and how that’s changing between public and private market, and that keeps changing and remaking itself, but I think even the growth story has changed quite a bit where I think in the olden days, at least the stereotype used to be, you were playing it loose, and then you became public, and then it was about getting to profitability, and doing all that, but now it seems the story for you to IPO and to be successful post-IPO is to still stay on that growth curve and still go far beyond the benchmark of a Fortune 500 or Global 2000 stodgy old company. And so it seems growth is a central theme, even past your early series A, series B, series C, and into private funding and public markets.
Beyond the Valley of the VC Darlings
Tim: So what do you see as a future trend?
“I don’t think growth is actually a true imperative for companies. It’s an imperative for investors.”
Danielle: I mean, it depends on the time horizon. I don’t think growth is actually a true imperative for companies. It’s an imperative for investors, and so, if you have investors, then that imperative exists. There’s a couple of reasons. It’s not just because investors want a return. It’s also because investors have LP’s who want a return. LP’s have underlying constituents, and also, we just have lifespans. Like, that’s a huge problem, actually. So I think one thing you’re gonna see is you’re gonna see growth becoming less of an imperative for some companies and more of a choice. You’re seeing a lot of companies like fashion brands trying to act like startups. I think, unfortunately, I don’t expect that to play out very well. I don’t think you get a 10x valuation multiple from making wool shoes. I think they’re really cool, but that’s just a difficult racket. The margins on shoes are just the margins on shoes. They have been for a really long time. I think there’s a growing degree of literacy though, across just the entire ecosystem. I think investors for a long time held the asymmetry. They had a lot more understanding of the market than anybody else did, and I think founders and other participants in the ecosystem are getting smarter, so we’re just gonna see markets, super long term, just be more rational and be more realistic, which will mean some people won’t make as much money, but also means other people will make a lot more, so it continues to kind of all move towards the truth.
“There’s a growing degree of literacy, across the entire ecosystem. I think investors for a long time held the asymmetry, but founders are getting smarter.”
Tim: Right, and so maybe instead of being the monoculture, this startups / VC, high-growth model is gonna become one of the many models a startup can use to build itself and to grow.
Danielle: Absolutely, and maybe there will be companies that we don’t call startups that will go public. Which actually would be a wonderful thing.
Tim: Yeah, that’d be nice. Thank you so much!
Danielle: Absolutely, thank you.