For startups looking to scale, the Silicon Valley mindset encourages growth before profit, which often means raising capital to sustain continuous losses for many years.
This approach has certainly yielded positive results. From Twitter and Uber to Tesla and Yelp, many Valley giants are notable for their slim or non-existent profit margins and purposeful reinvestment.
But the Valley method is also very risky, and for every startup that pilots its “100 percent skin in the game” ethos to success, there are a thousand others that flop.
While I can appreciate the Valley approach, I think the degree of risk involved is massive. In my experience, growth doesn’t have to come at the expense of profit or security. To me, there’s an alternative, more stable approach to startup development — right here in Seattle.
The big risks of Blitzscaling
By positioning growth against revenue, the Valley ethos has normalized unprofitability.
This strategy is well articulated by Reid Hoffman, a Silicon Valley luminary (he was a PayPal co-founder and founded LinkedIn) who calls the practice “blitzscaling.” As Hoffman told The Harvard Business Review, blitzscaling is “the science and art of rapidly building out a company … with the goal of becoming the first mover at scale.” The practice demands doing whatever it takes to corner your market as fast as possible, including burning through cash.
On Wall Street, investors affirm this approach by continuing to funnel capital into relentless-growth companies that have yet to turn a dollar in profit, even once they reach scale. Just a few months ago, Lyft had a public valuation of $24.3 billion — despite close to $1 billion in losses in 2018.
But for every story like Lyft’s, there are many other instances in which an all-out-growth mindset doesn’t work. Of the 311 (and counting) start-up post-mortems compiled by CB Insights, a recurring reason for company failure is “unexpected financial constraints.” But are these constraints truly unexpected?
The new ethos: Growth and profitability can coexist
Yes, blitzscaling works when it works. But as the CB Insights list illustrates, it’s also created a U.S. startup culture of expected failure — one in which the odds of success are well known, and daunting: one in 10.
Yet even when blitzscaling startups do manage to surmount initial growth obstacles and advance towards public company scale, there are other consequences to the “no expense spared” growth mindset — consequences that can seriously impact longevity.
First, there’s the impact on operational scalability: When a new tech company is singularly focused on top-line growth, internal operations can take a hit. That’s because company leadership may not be thinking about creating efficient growth and well-managed internal processes; instead, they’re often thinking primarily about revenue. That leads to the second consequence of blitzscaling, which is cultural: Relentless growth can create a working environment of inefficiency and instability.
I’m hoping to see a new startup ethos emerge, one that calls for growth and profitability. It is possible to achieve both.
Just look at Zoom, a company that’s managed to turn a profit even as it’s become a unicorn with hyper growth at significant scale. What sets Zoom apart from Lyft and so many others is a sustained focus, at the leadership level, on building a scalable business model, and investing time and resources into efficient processes.
Zoom is by no means an isolated example. In Seattle, Tableau (just acquired by Salesforce) recently achieved $841 million in annual recurring revenue, with fourth-quarter net income of more than $52 million. And there are smaller Seattle startups driving notable profits as well. Seattle-based ad automation startup Advangelists, for instance, maintained profitability without outside funding until its acquisition in May, while education technology company DreamBox Learning has posted profits since early in its development (it recently raised $130 million in funding from The Rise Fund).
I also know from personal experience that growth and profitability can coexist, because it’s the model we follow at Nintex. From day one, Nintex has been profitable and self-funded, and we’ve successfully maintained this balance over a decade of growth.
The primary reason it’s worked is that we approach our business from an “honest broker” standpoint, both externally and internally. Externally, we market what we actually sell, rather than project an idealized picture of our offerings. We do the same internally, working to build and maintain a transparent culture of continuous improvement — one in which great employees want to stay and grow.
We also take a partner-centric approach to business where we approach partnerships, acquisitions, and platform improvements with an eye toward strategic growth and value to our customers. Our partnerships — with Microsoft, Salesforce, Adobe — and our hundreds of active co-selling partners worldwide have brought opportunities that turn into lasting engagements. Our acquisitions — most recently of process mapping provider Promapp and robotic process automation provider EnableSoft — have broadened our platform to include industry-leading process management and which complement our workflow and document automation capabilities. And we’ll continue to enhance our platform to serve the needs of our customers.
Following this playbook won’t always land flashy headlines. But it will create a business that can grow without sidelining profitability and operational efficiency.
And in the long run, you’ll be better off for it. A profitable growth mindset creates a disciplined approach that increases the odds of creating a business that is built to last, which benefits all constituents.