self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
Amazon of course not only raise venture capital but also raised an enormous amount of money after that. They didn't get to where they are today by constraining their access to capital to their float.
They also reinvested their revenues very aggressively. It was years after IPO before they became profitable, and even now they're remarkably low-margin.
> Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Books are fantastic for other reasons: easy to ship, relatively non-perishable, mass-produced, and even affordable. Webvan, for instance, would always have a harder time because groceries fail at least three out of these four criteria (as well as the two you cited).
Amazon is trying its hand at groceries now, of course, but even they're having a hard time at it.
The other insight Bezos had about books was that the extent of the market was limited by a physical constraint in how big a store could get. It was a perfect product to exploit unmet demand for long tail titles. Groceries don't seem to suffer this problem to such a degree. Most of what people want to eat is available in local stores.
Is that actually true? I remember my dad always complaining that the supermarket had stopped carrying his favorite snacks & meals. And I can think of a few of my childhood favorite foods that are only available in New England, and I very much miss them now that I'm out in California. People do home-cooked meals all the time that combine ingredients in ways that store-bought food doesn't have, and they have family recipes handed down through generations for things that can't be bought in stores.
I suspect that most of what people want to eat is in local stores only because their wants are constrained by what's available. Typically, people don't continue to want what they can't have for long periods of time, because it just makes them unhappy. I suspect that if you solved the perishability problem, there'd be a huge untapped market for long-tail foods.
> If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model.
That 1% difference per week makes a huge difference in a year. A startup growing at 7% a week it is 34x bigger at the end of the year, but at 8% it is 55x - or 62% bigger. And at 10% it is 142x - or over 4 times larger than the 7% growth rate.
>> no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Not true, since a company takes the VC money to achieve the higher growth rate, will catch up precisely because of the exponential impact of that 1%. With a 10% growth rate they will be far ahead of you, and capture a bigger slice of the market, even after starting later than you.
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.