Silicon Valley is embracing the new reality of constrained VC markets, lower exit multiples for technology businesses, and a much more balanced perspective on risk versus return. As the cost of capital has gone up, both sides of the entrepreneurial ecosystem (investors and founders/CEOs) have taken predictable positions. Investors are a lot more bearish on funding, in large measure because the assumptions that underlie their Internal Rate of Return models are uncertain and they are busy funding portfolio companies. Founders and CEOs are engaged in belt-tightening – as we’ve seen from fellow SaaS companies Optimizely, high-flier Zenefits and a range of others. Internet businesses have arguably fared worse. A lot has been written about the rapidly narrowing mismatch between public and private company valuations.
The point of a business is to make money, and too few Silicon Valley businesses, including us at BloomReach, do. As one CEO told me, effecting a culture change from unprofitable growth to profitable growth is “the hardest thing I’ve ever done.”
At BloomReach, we have set the course to achieve the triple play — the kind of recurring revenue scale that provides an ability to tap public markets, best-in-class growth rates, and profitability. We believe that’s what creates long-term sustainable value. We just raised $56 million in capital, so some might ask – why are you worried about driving to profitability now? Now is exactly when we should be worried about it, so we control our own destiny and don’t have to make tough choices to achieve the triple play. Fortunately, we have the benefit of a natural history of capital efficiency and strong unit economics to help get us there, but I fully expect it to be really hard – maybe the hardest thing I’ve ever done.
Building towards profitable growth requires a metamorphosis in the culture of one’s business in so many ways.
- Hiring: We intend to use the favorable hiring environment to hire extraordinary people, but we’re fully committed to raising the bar from an already high standard. The natural instincts of a growth-only business are to hire as fast as possible and against a “headcount plan.” That’s not what gets one to profitable growth. Every hiring manager must ask the question — “Is this incremental hire going to move the needle on growth or profitability? Is it going to meaningfully upgrade my team?”
- Shorter-horizons on investment: There are a ton of good investments to be made, and in a non-capital constrained world, the question is — “Is this investment going to get us a return?” In a capital constrained world, the question is — “Is this investment the lowest risk, shortest horizon, highest return choice?” Are your marketing programs the ones that have a history of results? Are your product investments sufficiently oriented to where the revenue is rather than where it might be? What’s the risk of achieving those returns?
- Investments in productivity and cost-control: You only get to profitability if you spend less than you make. And focusing only on the top line is like fighting with one hand tied behind your back. The natural ethos of Silicon Valley is to build and sell great products. That’s important in any market environment. But what about productivity tools for your customer success team? Or initiatives that help bring down your Amazon Web Services spend? Do you celebrate those victories with the same passion as a new feature or product?
- Leveraging teams in every geography: At BloomReach, we have teams in India, the U.S. and the UK. There is a cost to effectively leveraging teams globally, but doing so can make a huge difference in effectiveness and the cost structure. We built a significant product (BloomReach Commerce Search) in India. Of course, teams will always have good reasons for why proximity to HQ or the market matters. But the reality is, if you don’t leverage geographic diversity – you compound the profitability challenge.
- Alignment within your executive team and your overall leadership: You’re not going to get to profitable growth if you’re doing it alone. As we started the journey towards profitable growth, our CFO pulled us all together to map out a range of scenarios (around growth vs. profitability) and we committed together to the mission of profitable growth. An aligned leadership team goes a long way towards good decision-making.
- Just say no: At times, the decisions to not spend are really painful — a hire you’d really like to make, a trip you’d like your team to take, an initiative you’d really like to start. You’ve done all the context-setting possible but there will come a point on your journey where you’ll just have to say, “No.” It will be highly unpopular, but it’s necessary.
- Answering the question,“Is the company in trouble?”: Not growing headcount super-fast can somehow feel the same as reducing your employee base. The psychology of the change from growth-only to profitable growth, requires over-communication of the message that growing costs at a slower rate than revenue growth is exactly the way for a successful company to win. This is particularly true when certain teams are working on growth-oriented initiatives and others are working on profitability-oriented initiatives (important for each set to stay focused on their objectives).
- Over-index compensation and culture initiatives on the great people you have: If you have a dollar to spend, spend it on the key people you have that help make you great, and the environment around them that helps them succeed and thrive. At BloomReach we invest a ton in culture and citizenship. I’d rather hire a little slower and over-index on the proven winners than over-hire but sacrifice culture.
- Getting rid of the growth-only mindset or marginal-contribution people: There are some people in your business who are only well suited for a growth-only mindset. You’re not going to change them. It’s time for them to move on. There are others who are OK performers, but not great – move on from them.
- Don’t over-correct: In a drive towards profitability – your team can interpret your goals as only about profitability. That’s a mistake. Growth still matters a ton, it’s just got to be accomplished in a smarter manner.
The journey to bring the triple play to BloomReach is going to be a tough road, and it is one that is paved with good, balanced decisions. When the temptation to spend the extra money with an uncertain result comes up, remember that the ultimate choice you have to make is – do you want to subject your company to the whims of fickle financial and venture markets or do you want to control your own destiny? I want us to control our own destiny.