In Defense of Growth (Taking the Wrong Lesson From WeWork)

Every few years, as if on cue, the conversation and media narrative in the startup ecosystem decides to challenge the prevailing wisdom that growth is a startup’s most important function, instead suggesting that startups should prioritize profitability and unit economics, even at their earliest stages. These conversations have historically been driven by a highly visible external catalyst – Fab.com’s implosion in 2012, the 50% multiple contraction for public SaaS companies in January 2016, and, most recently, WeWork.

It’s indisputable that WeWork has become comically appropriate scapegoat for critics of the Silicon Valley growth complex. The interesting thing about using WeWork as the epitome for all that is wrong with startups and Silicon Valley is that actually serves to obfuscate one of the things they did exceedingly well: become a globally recognizable, beloved brand in just a few short years.

There’s a reason venture capitalists describe the companies they invest in as “startups” rather than “businesses.” This is because startups – which are functionally hobbies, projects or experiments – are inherently comprised of a series of unvalidated, untested and unclear assumptions. Growth, at its core, is a mechanism for generating sufficient momentum and excitement about a startup’s future state, that the market is willing to subsidize the validation of those assumptions over a defined period of time. But growth is not a balance sheet item nor does it exist in any line item on a P&L; it is, fundamentally, a mechanism to enable subsidization.   

Entrepreneurs run into trouble when they conflate growth with long-run business objectives. This is because a business does not generate free cash flow from its growth – it generates cash flow from its unit economics and operations. As Geoff Lewis, co-founder of Bedrock noted in December, “the line between victory and catastrophe is…always thin.” Nearly all venture backed management teams are playing a high stakes game of chicken wherein they must accurately calculate and predict the amount of time required for validating core business operations juxtaposed with generating sufficient momentum to subsidize themselves to that point. In retrospect, WeWork’s management poorly misjudged the market’s appetite for continuing to subsidize the validation of its business, incorrectly assuming they could defer proof of demonstrable unit economics for any number of months or years.

Back in 2016, the last time this conversation was as active as it is today, Jeff Bussgang, General Partner at Flybridge and Professor at Harvard Business School opined in Growth vs Profitability and Venture Returns:  

“I fear, though, that the pendulum is at risk of swinging too far the other way. That is, entrepreneurs are not appreciating or understanding the true value of growth and thus taking the slow road to building a big company. Right now, it’s fashionable to humblebrag about your startup that was a ‘15 year overnight success.’ The problem is that the slow road to success doesn’t typically result in ‘venture returns.’ And the entire VC-backed fundraising model is predicated on generating ‘venture returns.’”

The reality is no different today. The pendulum is at risk of swinging too far the other way – if entrepreneurs at the earliest stages perceive growth to be a liability rather than an asset. There are very valid critiques that certain later stage startups have not appropriately transitioned into “businesses” quickly enough. But that is a referendum on later stage startups, not those at earliest stages. The single best way to prove to the market that your early stage startup has the potential to one day be a globally scaling business is no different than it was a decade ago - provide powerful data points that there is insatiable demand for your product and that you are currently or will soon grow extremely quickly.