Are you confusing Optimization with Growth?

Are you confusing Optimization with Growth?

In a startup, there are always many things that aren’t working as efficiently as they could be – acquisition funnel conversion, manual processes, customer acquisition costs, etc.  This may be incredibly frustrating, especially for the team members who have to deal with it on a day-to-day basis.

It’s very tempting to direct precious money, time, and energy to resolving these frustrations, especially as its your team’s tired faces that you have to look at every day.  It’s always tempting to give the squeaky wheel some oil.

However, it’s vital that you remain focused on growth and don’t confuse growth with optimization. Burning lots of time optimizing at the expense of growing is not a recipe for success for early- to mid-stage, venture-backed startups.

Of course, there is some nuance here: if things are so broken that your team starts to leave, you have to address that – no team; no company.

Also, the smart investors (i.e. the ones you want) realize that, if your unit economics fundamentally don’t work, you will simply lose more money as you grow.

However, conversely, it’s unlikely that a Tier 1 investor will invest in the also-ran, #3 player in any category in terms of growth rate and/or absolute revenue, however optimized and healthy the acquisition funnels, gross margins, etc. Investors are in the business of selecting for the biggest return on their capital, not the best run or most efficient business.  The biggest return comes from the biggest exit and the biggest exit goes to the category winners.

As a venture-backed startup, the most important thing is to stay as one of the leaders in your category – this is what allows you to maintain team confidence and morale, attract the best talent and investors, and continue to raise money when you need it.  Note: there are usually only 1 or 2 “leaders” in any category.

Let’s take two startups:  to start with, Company A and Company B are neck-and-neck.  Both have a $5M in gross revenue, with a average revenue of $5,000 per customer per year and a customer acquisition cost (CAC) of $2,000.  Both have revenue that is doubling each year.  Both are mid-stage startups – they’re not yet profitable and don’t expect to be any time soon.

Both companies also know that their CAC is too high and, by some optimizations, the CAC can be reduced significantly.  The high CAC drives some members of the team crazy – so many opportunities lost, so many wasted marketing dollars.

So, the CEO of Company A directs the team to work on CAC.  Over 6 months, they manage to effect a series of changes process and product changes in their customer-acquisition funnel, through A/B testing, cost reduction, etc.  These compound and end up halving the CAC to $1,000 – that’s a huge improvement.  Company A’s gross margin has significantly improved.

Meanwhile, the CEO of Company B ignores the CAC for now and instead directs the team to focus on increasing the size of the sales and marketing teams significantly and filling the top of the sales funnel with as many leads as possible.

One year later, Company A’s revenue has doubled again and they’re netting an average of $4,000 per customer per year – 33% more.  Not bad.

However, by focusing on growth, one year later, Company B’s revenue has tripled rather than just doubling.  They still net an average of $3,000 per customer per year but there are 3 times more customers.

Both Company A and Company B need to raise more money.  So does a 3rd player in the category; Company C.  Company C is going gang-busters, beating both Company A and Company B on growth rate and total revenue.

You know how this story ends:  Company B and Company C are able to raise giant C-rounds from Tier 1 investors at great valuations.  Meanwhile, Company A has fallen behind – its unit economics are better than Company B’s but it’s now an also-ran and struggles to raise money.  Without that money, it cannot continue to grow and falls further and further behind Company B and Company C.  Perhaps it’s acquired by Company C at a fire-sale valuation or perhaps it’s a giant smoking crater.

Of course, this is a contrived story.  In reality, you can probably achieve growth and some optimization in parallel.  But, the key is not to confuse one with the other.

So, grow and optimize as you go, as long as that optimization doesn’t slow your growth.  Don’t optimize hoping that it will deliver meaningful growth.

tl;dr – in a startup, you can’t optimize your way to success – you must out-grow your competitors.

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