Businesses don't grow themselves, entrepreneurs grow businesses!

What matters more - growth or profitability? For similar businesses & quality of revenue (aka unit economics), growth matters more than profitability for value creation, IMO.

1/ What matters more - growth or profitability? For similar businesses & quality of revenue (aka unit economics), growth matters more than profitability for value creation, IMO. Here's a thread capturing highlights from our latest ep The HACK Job! w/ @rbalaraman

2/ In Finance, capital asset pricing model (CAPM) holds the value of an asset as present value of future cash flows discounted by cost of capital (WACC). Loss-making businesses derive most value from terminal value which is strongly correlated to growth…

3/ …and hypersensitive to change in cost of capital (eg. treasury yields & liquidity driven by central banks). Hence the increase in high growth asset prices in low cost of capital environments like the present one & SPACs in its extreme manifestation!

4/ Profits are key for value preservation just as growth is for value creation - profits with no growth create "zombie" yet resilient businesses! Growth without profits is scary but can create significant value long term if the business model is solid & capital can fund losses

5/ Good news for India tech co.'s: 2 archetypes of late-stage investors (i) PE investors who value good growth w/ profits-good growth IMO is 25%+ (2x nominal GDP) compounded & (ii) solid growth tech investors who value high growth (60%+) w/ unit economics & market leadership

6/ A biz w/ working unit economics + market leadership potential should go for growth- those w/out should slow down, cut burn until they have a working unit model. Increasing losses w/ increasing scale w/out new mkt entry/ product launches is usually a sign of a broken unit model

7/ In this context: Famous rule of 40 - Growth + Burn >= 40% (applies to all sectors beyond Saas IMO):https://feld.com/archives/2015/02/rule-40-healthy-saas-company.html?source=content_type%3Areact%7Cfirst_level_url%3Aarticle%7Csection%3Amain_content%7Cbutton%3Abody_link

8/ How fast should companies grow? Until they have working unit economics! So for a D2C biz one can choose a target LTV/CAC (based on early cohorts) which will give a CAC payback target and based on paid CAC for the biz, the sustainable growth rate can be determined

9/ For marketplace models w/ strong network effects & cohorts, growth is easier to predict & one has to model potential contribution margins for profits based on the financial architecture of the business; overall bias would be to push for growth given market leadership potential

10/ IMO in certain sectors it's better to grow 2.5-3x YoY for 2-3 years vs. 10x in a 1 year - FinTech; D2C; Saas; B2B come to mind. Trying to bend the growth curve breaks the structural business model in such businesses and is hard to reverse

11/ Growth creates more value but is also harder than profits IMO for a company to have a repeatable and scalable flywheel working. Hence the fascination with "growth hacking"

12/ Growth hacking is anything but hacking - it is a thoughtful & hyper-analytical process driving product, distribution, technology, marketing & other growth vector interventions using customer insights to deliver growth

13/ Re: profits - besides the usual gross margin (GM) & contribution margins (CM) which are P&L measures, Balance Sheet type items like LTV/CAC and payback period (including for Capex) are also critical as a proxy for ROE

14/ LTV - measure on CM and not GM and using actual cohorts. CAC - measure on paid not blended since latter understates as organic mix cannot be changed quickly

15/ Target LTV/CAC? IMO IRR of the customer gives IRR of biz so should be 35-40% hence > 5x in 5 years; bar is too low in India. Thumb rule => 1x in 1yr, 2x in 2yr, 3x in 3yr would set the company up in the right direction

16/ The Hack Job flywheel - our framework for profitable scaling of businessescustomer backwards

17/ Hack Job in summary - create an understanding of user personas & journeys, matching them to the company's products, utilizing the profit & growth vectors to scale profitably while creating moats around the users. All this backed by customer insights

18/ Step 1: build customer insights + data sciences teams. Make product, marketing, sales, community & other core functions as clients of these teams

19/ Step 2: build growth + profit teams organized by personas driving hard-working growth & profit vectors using the functions above

20/ Watchout #1: personas are abt the "why" & "how" of customers not "what" - going beyond just demographics. An outside-in vs the businesses view of customers - i.e. inside out, "Build and they will come" - is dangerous. "Build for them" & customers were always there!

21/ Watchout #2: each step of a personas journey - acquisition, activation, activity & referral requires unique interventions and mapping to the company's growth & profit vectors as part of customer lifecycle management

22/ Watchout #3: paid marketing is not the growth engine - it’s the fuel to fire up a hard-working growth engine. However often used as the key growth engine (to a hammer, everything looks like a nail). Can result in leaky bucket issues which shows up in poor unit economics

23/ Lastly a word on profit (hacking) - GM < 20% = 20% no value addition (trading business); CM1 -ve = false PMF and CM2 -ve = no growth engine (unless strong LTV/CAC)

24/ Lazy profit vectors: price increase (which reduces TAM) & cost decrease (which hurts future growth)! Hard working profit hacking: dynamic pricing/bundling (mapped to personas); increasing repeats/cross-selling; productivity enhancement; biz process reengineering; right-sizing

25/ Simple thumb rule: Top 2 metrics for overall health of growth + profits: cohorts & contribution margins! Tune in for deeper insights on hacking for growth & profits

26/ Building in virality (e.g. P2P payments) & thoughtful referrals beyond rewards (eg. Robinhood's waiting list jumping the queue w/ referrals) are under-tapped tools. Key is to find new customers organically, serve them better & delight them to target repeat behavior + referrals

27/ Referrals is operationalizing word of mouth (WOM) and very few companies do it well - cheap source of right new customers but doesn't work just with rewards. Harder working approaches like community, content & gamification are much more effective

28/ Businesses should get their unpaid growth vectors - products, tech, distribution, personalization, gamification, community, content, channels, x sell, virality, referral - working before spending a penny on paid marketing!

29/ Paid marketing doesn't scale - unless it's customer insights and data backed! Digital gives instant data on user behavior and preferences which makes digital marketing more powerful than physical but only if used well

30/ How does one know that the core growth flywheel is working - a business should stay flat or grow marginally - aka negative churn in Saas - without any marketing; once that is the case spend away!

31/Businesses don't grow themselves, entrepreneurs grow businesses!

32/ For this focus has to be on repeats, repeats, repeats (repeat :)) Interventions such as cross-selling, referrals etc. are effective early in a customer's lifecycle journey. Lapsed customers are very hard to reactivate

33/ Measuring paid user cohorts separately from organic user cohorts, 1 might be able to target marketing spend more effectively 33/33