Growth + Revenue (not either/or)

I have had a number of entrepreneurs signal that sentiment (especially in the Valley) is cooling down and that VCs are being “more conservative” in their evaluations of companies. When pressed as to what that means, it seems a number of entrepreneurs are surprised that a “pure” growth story now has to be balanced with a plan to make money.

I get shit for this sometimes, but growth alone is not a strategy for a sustainable commercial concern. A startup is, after all, a company and a company is defined as:

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Yes, money… That social utility that people trade in exchange for perceived value. The argument usually goes like this:

Entrepreneur: “We are foregoing revenue for the first few years while we focus on growth”
Me: “OK that’s great but you only have cash for 8 months”
E: “Yes but we will raise our next round on growth momentum”

From what entrepreneurs are now saying “growth momentum” alone might no longer be sufficient enough to raise a Series A or B. Bill Gurley has been saying for some time that Winter is Coming. Whether it’s a full winter or not, the point is that entrepreneurs need to understand that revenue helps lower burn, lower burn helps extend lifelines, and that the cheapest source of financing for a founder is cash from customers.

So the argument usually continue like this:
E: “Google focused on growth over revenue”

Err… no, Google had an amazing search product which people loved to use, and they were very lucky to have copied Overture to launch AdWords. Check out their S-1 or this post from it’s IPO in 2004. Founded in 1998, Google was generating $19M in cash by 2000 and was profitable by 2001.

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E: “FB prioritized growth over revenue”

Yes, it is true that Mark endorsed Chamath’s strategy to focus on growth to accelerate the network effects inherent in a social network to beat local competitors like StudiVZ in Germany, Orkut in Brazil, Hyves in Netherlands.

I can also categorically state that the commercial ad sales teams focused on growing Facebook’s revenue while the growth strategy was being executed sure as hell had a big number on top of their head and were strongly encouraged to help monetize FB’s growing audience. From TC’s article at time of FB’s IPO:

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Yup, FB founded in 2004 and focused on “growth”, was already making $9M by 2005 and $153 by 2007 and $777 by 2009. So much for not caring about revenue.

So yes, focus on growth by delighting customers, encouraging viral loops and network effects, accelerating penetration and features that increase engagement… but remember that you are a commercial entity and that at some point the value creation will come from being a sustainable business. And sustainability is tied to revenue > costs.

I don’t think the argument should ever be growth over revenue but rather how you grow as quickly as possible while increasing revenue in the right and sustainable way.

It’s a + not an “either/or”!


Christian Hernandez is the co-founder and Managing Partner of White Star Capital, an early-stage Venture Capital fund backing exceptional entrepreneurs with global ambitions.

Partner at @2150-vc backing technologies that make our world more resilient and sustainable. Salvadoran-born Londoner. YGL of the @wef Father ^3

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