BESSEMER CLOUD COMPUTING LAW #4: Grow or Die
September 26, 2012
"At Box, we discovered that the market for cloud-based content management and collaboration was far larger than any of the analysts or existing players had recognized; because cloud solutions are instantly available to businesses of all sizes and all geographies, and new mobile devices and platforms enable every worker to bring technology into the workplace, opportunities today are 10x larger than traditional enterprise software startups. The corollary to this re-sizing, of course, is that you must grow rapidly for a sustained period to win in your market."
In technology, very few things remain constant. As a result, you either grow up to become a dominant company in your category, or get passed by and killed off by someone who does accomplish this goal. Not surprisingly, growth rate is often the biggest driver of valuation multiples in both private and public markets. Investors, employees, and partners aren’t buying into your current company as much as they are investing into some future version of your business, and growth rate determines the size of the business, at that future period.
The power of compounding numbers is straightforward but still surprising, when you consider that a $1M business that grows 100% each year will be a $1B revenue business within 10 years, whereas the same business growing at 10% per year will reach less than $2.6M in revenue a decade later. Both growth rates may sound interesting against GDP growth, but in technology, that’s the difference between life-changing wealth for a core management team and a wasted decade.
“Growth really is the lifeblood of any startup. If your product can drive increased revenues for your customers, it becomes highly viral. The "Land and Expand" sales model works well for us, because once a few sales reps start closing deals faster with ClearSlide, the rest of their team quickly follows.”
As a senior executive of a cloud business, you will likely want investors to pay you a huge valuation based on current financial metrics, and you will need to convince prospective employees to walk away from rich cash compensation packages from others in exchange for the potential upside of options for your stock. How do you do this? Present a credible plan for capital efficient hyper-growth.
For a business growing 300+% a year – as many of our early investments often do – the discussions are much easier because time is an easy variable. Valuation gap? No problem, just wait a few months and the business will grow into it. Even if you make an investment and later believe you are off on “fair” valuation by 50%, all other things being equal, you will still grow through the gap in just over a quarter. Similarly for the entrepreneur, there is massive value in deploying capital and resources of an investor against the plan to get leverage from the investments earlier. If you can bring capital into the business earlier – even if it’s at a lower valuation – and steepen the slope of the growth line to get the compounding effects of deploying the capital, then the dilution will quickly pay for itself over time.
Related to high level growth are many more detailed metrics that you’ll want to understand including areas of acceleration and deceleration in the business and cohort performance over time. In technology, you’re either getting bigger or you’re getting smaller. Growth, and ways to efficiently accelerate the rate of growth, should always be top of mind for your entire team.
For a PDF of Bessemer's Top 10 Laws of Cloud Computing and SaaS please click here.