Playing the Game

There’s a type of business (and owner personality) that I like to refer to as a GrowthCo (short for high growth company).

We can learn a ton from these rare breeds.

These businesses want rapid sales growth above all else, and they aren’t afraid to outspend their profits to achieve it.

How do they stay alive?

Usually by issuing more and more equity through a concerted storytelling effort.
Investors get excited to participate in these fast growers (what if it’s the next Google or Microsoft or Apple?).

But taking that sort of investor money usually means hopping on the expectation treadmill. Forecast what you’ll achieve (revenue) by when, and make sure you hit it or you’ll lose the ability to raise more money. Lose your ability to raise equity and you're suddenly cut off from the oxygen required to keep operating (reminder: this is a no profit zone).

What’s the endgame for these companies? Why do it?

When done right, the result is spectacular... Life-changing technology, tools, or services for us mere mortals. But most often, the reason to play the game is for a fast and very large exit. We’re talking sale multiples of revenue instead of profits. Big bucks.

Take a look at XPO Logistics. It was an impressive GrowthCo led by serial entrepreneur, Brad Jacobs. He grew it from ~$180m in 2012 annual sales to $14bn by 2015, while losing money each year along the way.

It finally turned profitable in 2016 after a 77x increase in revenue. Pretty wild. To accomplish this feat, he had to issue nearly $4bn in equity along the way. Also pretty wild. (More on this cool business and the pocket change I made going along for the ride another day.)

Some of these owners enjoy the thrill of building in a mildly (or completely) chaotic work environment. Others simply love the feeling of sales growth.

These are complex machines, much more complicated than your typical small business. It takes a skilled finance professional (and team) to manage this without going kaput. Cash runway, otherwise known as how many months to live, is usually the most important financial KPI aside from sales growth.

There are a wealth of lessons and takeaways in these situations (for another day):

• Scaling
• Equity fundraising
• Building growth systems
• Exit planning strategies and conditions

So what's the point here?

I think there are 2 main takeaways...

1. Be wary of the expectation treadmill unless you're absolutely seeking it out. Owning or running a business should be fun, challenging, and rewarding. Playing a game where you don't control the outcome isn't fun.
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2. Don't paint yourself into a corner. I can list all sorts of business types, situations, profit models, owner personalities, etc.; but ultimately, you're free to create the type of business you want. There are a million different combinations to build a profitable business. Find the one that suits you best.

Cheers,

Colin King, CPA, CFA