Over the last several weeks, I have had the opportunity to speak with several seasoned entrepreneurs, many of whom are in the process of raising money for a new venture or follow on investment for an existing one. On an albeit small amount of data, I seem to have come across an interesting trend – more and more entrepreneurs are being told to sacrifice growth for capital preservation. Aside from the obvious issues around capital constraints in the market, there also seems to be a push by some VCs to build profitability sooner than the company may have originally planned for. Again, the tradeoff here is topline growth. This all makes sense, right? Position your company to increase runway, get to profitability so that you can survive this extended downturn, increase your option value once it’s time to raise capital.
But here’s the rub – macro trends and the transfer of debt from consumers to the government point toward higher inflation as we pull out of the recession. That means larger companies are going to be scrambling to find ways to grow in real terms, struggling to prove to investors that they their growth can outpace inflation. That, it seems, would point to a more active M&A market as companies try to buy up high growth companies. And the multiples they are willing to pay, it would also seem, will be connected to top line growth, not bottom line efficiency.
And so here’s the question – in this kind of economy, what’s really more important for a start-up to focus on? Top line growth or capital preservation/bottom line stability?
{ 5 comments… read them below or add one }
John Milciunas 06.15.09 at 12:30 pm
Start-ups always have to focus on growth. Otherwise they’ll never be anything more than a start-up. Prudent use of capital resources goes without saying but a start-up without a growth strategy is D.O.A.
Lance Weatherby 06.15.09 at 2:41 pm
I think it’s a balancing act. What I am seeing the smartest entrepreneurs is preserve their capital now while at the same time trying to get into a position of growth when the economy turns in the future. To main enough momentum not to fall to earth and be ready to turn on the booster rockets when that fuel is available and needed.
Angus McRae 06.16.09 at 10:18 am
Spending a dollar in the future with 1970’s level inflation will get you about $0.91 of satisfaction. Building the venture’s foundation now with more valuable dollars seems like an efficient strategy to me.
John Milciunas 06.16.09 at 10:39 am
@ Lance. Without a a doubt a careful balance is needed because cash is king, especially in an early stage venture. However, downturns in the economy are time for the strong players (incumbents) or innovators (start-ups) to grab market share. If a new young company is not trying to attack the weakest players in its market during tough economic times it’s not likely to be able to attack any better when the tide rises as that will lift all the boats.
Evan Kramer 06.18.09 at 11:52 am
you need to spend money to make more money.