Myth: you need hyper growth in revenues to generate extraordinary returns for your shareholders.
Reality: you don’t.
VC funding and its impact on your expectations
If you are the founder of a VC-backed startup you probably assume that your company’s revenues must grow at extraordinary rates to create value for investors.
The venture capitalist supporting you might have mentioned that they want every investment in their portfolio to have the potential to “return the fund”. At the seed stage this usually means that they want to see 100x upside potential from every investment. If 2 or 3 companies in their fund meet this target they will achieve attractive overall returns, which they can use as a selling point in raising their next fund.
VCs aim to raise a new fund every 2 to 4 years, which means that the window to show winners in their existing fund is very short. This setup creates pressure for entrepreneurs to generate massive growth in a short period of time.
Is this the only way?
While rapid revenue growth is certainly a valid way to achieve great returns for shareholders, it is not the only way.
The graph above shows the expansion rates of 8 publicly listed companies during a period in which their stock price appreciated by a factor of 100x.
The average revenue growth rate for this group was 12%. A decent annual pace, but far below what comes to mind when thinking about startups.
They achieved these returns on all sorts of businesses, from software (Intuit, Booking), to car rentals (Avis), retailing (Tractor Supply, AutoZone) and beverages (Monster, Boston Beer, Starbucks). And in different time frames: from 6 to 27 years.
Drivers of value
The factors leading to significant stock appreciation included:
Revenue growth: while hyper growth is not a necessary condition, some revenue growth sustained through time is vital.
Margin expansion: most of these companies improved their operating margin during their 100x run. AI offers new opportunities for improvement on this front for any business leader who wants it.
Controlled dilution: the number of shares for these companies was flat or declining. It is easy to forget that regardless of format -private or public company- the denominator matters.
Reasonable valuation: none of these companies had an overvalued stock at the starting point of the 100x appreciation period.
Why does this matter?
Crazy rapid growth can be a great fit for some entrepreneurs. For others it will lead to anxiety, burnout and sub-optimal performance.
The cost of burnout is shared by everyone involved: founders, investors, employees and customers.
From the perspective of shareholders, the framing of “all or nothing in 5 years” can damage the probability of obtaining a 100x return in 10, 15 or 20 years, which is still extraordinary.
It took Isaac Newton 23 years of work to publish his book Principia, which changed the way we see the universe. If he had been forced to do it in 5 years he probably would have failed, at a great cost to humanity.
Perhaps your business was meant to create significant value in 15 years instead of 5. As the leader it is your job to continually re-align investor expectations with the realities of your business and the pace of growth that optimizes team performance.
To summarize
You can build an extraordinary business and create a win-win situation for everyone while being true to yourself and how you want to work and live.