Higher Growth or Profitability: What’s Better?

Q: What are your views on growth or valuation over profitability for startups?

In the end, the trade-off between growth and profitability may sound like a balanced one. Both are great ways to build something enduring.

But the question (and answer) is how will you make money from your equity:

  • If you are going to make money from profits and “dividends”, like 99.9% of businesses do, then profitability at some point is better than marginal additional growth. A restaurant, a store, a consulting business that makes no profits is no fun. Not at all.
  • But if you think you can IPO some day, or be acquired by a tech company or other large co, then you will get paid for revenue growth. At least, for high-quality growth.

Let’s look at a simple example, three versions of a business doing $10m in revenue a year (not easy to do).

  • If it’s a consulting business at $10m, it might be worth 3x-5x “EBITDA”. Let’s just call that profits. So if that $10m business does $2m in profits, you might be able to sell it for $6m-$10m. Not bad.
  • If it’s a slow-growth SaaS company at $10m ARR, e.g., 30% growth a year, maybe a PE firm or competitor would buy it for 3x revenues. Maybe a bit more. That’s say $30m. Better.
  • Now … in 2020 … if it’s a high-growth SaaS Company at $10m ARR, e.g. 100%+ growth, a top-tier acquirer would probably pay 20x revenues today. That’s $200m. That’s a lot more. Even with the dilution you might take from investors.

So don’t be something you aren’t. Don’t play the high-growth game if that isn’t you, or your product. There’s nothing in it for you there if you do but tears.

But also, don’t listen to folks telling you to go down one of these tracks or the other. They don’t know what is best for you.

View original question on quora

Published on January 3, 2020

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