If you ain’t first, you’re last. –Ricky Bobby
VCs have a maniacal focus on growth. We invest in small companies today in hope that our ownership stakes will be worth a lot more in the future. Some of the key drivers to achieving that success and a premium exit include differentiated products/technology, sustainable competitive advantages, an excellent management team and a large and growing market. With all that said, the foundational tenant to build long term value is fast revenue growth.
If you look to the public markets you’ll see that the fastest growing technology companies garner premium valuations. Here is a snapshot of the top 20 or so public technology companies with over $100M in revenue. Workday, Qihoo 360, Youku, ServiceNow and LinkedIn lead the group in revenue growth. All have had stellar results. Workday grew revenue 235% to $235M. An amazing accomplishment as maintaining a high growth rate is much harder as a company gets bigger. That’s one of the reasons Salesforce.com is such a unique company and worth looking at closer. Over the past year, Salesforce.com had $3.1B in revenue with 51% growth and added $1.1B in revenue (not including any churned revenue). Growing revenue over 50% is a big part of why Salesforce.com is trading at 8.5x sales. This isn’t new either for Salesforce.com. The company has been a fast grower for many years (see the table below).
Salesforce.com has grown rapidly since it was a $5M revenue company in 2001. It has grown revenue over 50% per year until hitting $1B in revenue. Any VC and entrepreneur can tell you that it takes a special leader, management team and company to pull that off.
The fact that growth compounds over time sometimes gets lost, but in relation to fast moving markets and competitors it’s a critical point. Here’s an example of two competitors: ABC and DEF. Let’s assume both companies are at $2M in revenue in the first year. Company ABC is investing heavily for growth and is able to achieve 100% annual growth for the next 4 years. DEF is also growing aggressively but is only able to achieve 50% annual growth. After five years, ABC is at $32M in revenue and DEF $10M. ABC is now 3x the size of DEF. ABC likely has more cash to hire sales people, do advertising and improve it’s products than DEF; all further strengthening its competitive positioning. While most markets are not “zero sum games” there is a significant premium paid in technology for being a market leader.
5 Reasons Why Revenue Growth is Important
- It’s the most relevant indicator for predicting future revenue and cashflows.
- Fast growers have a greater chance at winning their markets and becoming sustainable long term. Look at the 2012 IPO list from investment bank Software Equity Group. The median revenue growth at time of IPO was 54%.
- Increasing competitive advantages are created from growth.
- Acquirers and public companies are starved for growth. Over the past year, HP’s revenue growth was -5.4%. Microsoft and Oracle are both growing under 2%. IBM’s revenue growth is -1.7%.
- Public markets value growth highly. Look at the price/sales ratio of the top 20 fastest growers. The median of the list above is 10.32.
Barriers to Growth
Growing revenue rapidly over a sustained period of time is extremely hard to do. Many things need to come together in a company and market for that to happen. Customer demand must be extremely high. The management team must be strong. The product needs to stay ahead of the competition. The sales team needs a large and growing pipeline. The company must be able to service the increased demand. The company needs to be able to collect payments from customers in a timely manner supporting its business model and cashflow needs. Otherwise, it will run out of money.
Growth takes time. Overnight successes are years in the making. “Instagrams” do happen, but they are rare. Sometimes companies need to find the right product, team or market first. Microsoft, Intuit, BMC and Symantec all took 8 years to get to $50M in revenue. All are now well over $1B. During those years it pays to be “lean” until you can figure things out.
Raising venture capital is not for most companies and neither is fast growth. Spend time thinking about your personal and company goals. Growing your company fast is hard to do over the long haul, but if you want to build a large company, win and transform your market and maximize long term value you are wise to grow revenue as fast as you possibly can. Don’t forget that the quality of revenue is just as critical. Benchmark’s Bill Gurley has a great post on that topic here. We’ll also explore the “how” behind fast revenue growth in another post.