As expansion stage venture capital investors, we at OpenView Venture Partners press our companies to go after fast growth. Even so, our thrust is very much mitigated by an equal desire for capital efficiency. In truth, what we communicate to our companies is “grow as fast as you can, while staying capital efficient.”
This brings up a problem that requires mindful balance… How fast should a software company grow and how much capital efficiency should it retain throughout that growth?
My colleague, Adam Marcus, not long ago forwarded me a link to this interesting post in the WSJ, “How Long Does it Take to Build a Technology Empire?”
Oracle, one of the world’s largest software makers, reached $50 million in revenue in its 10th year. It took software king Microsoft Corp. eight years to hit that milestone. Yet many technology start-up business plans typically project revenue of $50 million in the first five years. The reality, according to research supplied by data visualization company Tableau Software, is that most tech giants come nowhere near those numbers in the first five years. Tableau defines “rocket ships” as companies that reach $50 million in annual sales in six years or less. Only 28% of the nation’s top software companies met this mark.
These stats were quite an eye opener for me. What it reinforces to my thinking is that building a great huge technology company is likened to running a marathon. It takes a very long time to finish, it has its share of highs and lows, it can be painful, and at some point or another it seems like it’s taking an eternity to finish. As any marathoner would tell you (and I’m not a marathon runner!), the crucial thing to completing a marathon is to be properly prepared, to pace yourself, and to constantly move forward.
Now there may be some exceptions… Evidently the rate of growth of the likes of Facebook and Groupon offer hope to those that prefer sprinting. The difficulty is that these businesses are an extremely small percentage of the thousands of software organizations that continue to move forward at the marathon pace.
In my role mentoring software CEOs, I try very hard to balance growth and capital efficiency, however, it is a tough balancing act. For more about this, allow me to refer you to The VC Dilemma – Capital Efficiency or Big Big Exits.
For more on capital efficient growth, read through , “What is a Profitable Distribution Model and The Ideal Path to Expansion Stage Growth?”
What path have you chosen?
Firas Raouf is a Venture Partner at OpenView.
