Profitability vs. Growth. The VC Conundrum

One of the most challenging decisions this year for startups and investors alike is choosing between profitability and growth. Cash flows are tight, interest rates are high, funding is at an all-time low, and on top of that, you have a crazy geopolitical environment with a lot of uncertainty, making it harder than ever for entrepreneurs to grow their businesses. Founders are hearing conflicting advice from their investors: "Watch for profitability, but... also keep growing at a venture pace!" This type of advice seems schizophrenic.

The stakes are high. If you are very responsible with your cash and very conservative, the impact on multiples will be very apparent when you try to sell your company or raise the next round. You also risk falling into the dreaded Zombie Zone, where you are no longer considered a high-potential opportunity and end up with limited options either to restart, pivot, hibernate, or become a "lifestyle business."

Our approach: Slow-down before running fast

At Crescent Ridge, we have a contrarian approach to most VCs and are strong believers in slowing down in the very early stage to avoid this conundrum. Instead of the classic advice: "Raise a lot more in your pre-seed/seed because you'll make mistakes and will need more money than you think," we encourage startups to slowdown in the early stages, and raise less to minimize waste. The early stage is the best time to slowdown to test your product, validate your market fit, and refine your business model. You really need far less than you think, and you can even do most of the customer validation work while having another job or by raising a minimal amount. The constraints of capital in this early stage will only make your product stronger.

Once you have solid proof of concept and significant market traction, proceed with fundraising. At this stage, you can confidently scale, knowing your product and market fit are secure. And you won't be wasting money on the wrong product, customer, or approach.

But... what if my company is already in growth mode?

For startups already in the midst of rapid growth, balancing burn rate with sustainable development is crucial. Here are some strategies:

• Prioritize and focus on core activities: Identify the initiatives that drive the most value and cut back on the "shiny objects". This helps manage resources more effectively and avoid burnout.
• Streamline operations: Streamline operations to reduce costs without compromising quality or customer experience. Use agencies or contractors when possible to keep overhead low. We see more and more seven-digit revenue businesses with very lean 2-5 people teams. Small is the new big.
• Strategic partnerships: Form partnerships that can provide additional resources or capabilities at a lower cost. We have many such partnerships in our portfolio, and cross-selling can significantly impact organic growth and lower CAC.
• Maximize existing relationships: Focus on upselling and cross-selling to your current customer base. Expanding within an existing customer segment is often more cost-effective than acquiring new customers.
• Drive your decisions with data: Use customer data to drive decisions on where to allocate resources for maximum impact. It's always good to have a methodical team member aka "the dream killer" who can keep everyone focused and who helps prioritize the best initiatives for the company.

The profitability versus growth conundrum remains one of the toughest challenges for our portfolio companies, especially in 2024's tight financial landscape. By taking a measured and strategic approach, startups can navigate this complex terrain. Patience in the early stages, combined with strategic scaling and resource management, can help companies achieve both profitability and sustainable growth. Balancing these priorities is not easy, but with careful planning and execution, startups can thrive even in this challenging environment.