Hi friends 👋
Hope you've had a great week! Here are some of my best reads this week:
- Startups that chose profitability over growth at all costs
- PLG principles behind Freshworks' success
#1 Startups that chose profitability over growth at all costs
We hear a lot about unicorn-valuation startups going public, having raked billions of dollars of losses over decades but very little about amazing, bootstrapped, profitable companies like Buffer or Atlassian. Let's take a look at these two approaches.
VC fund economics: Extreme growth at the expense of sustainability
The "traditional path" of VC financing and fast growth tends to create companies that accumulate losses and always need to find new investors at a higher valuation to continue fueling their operations. While it is economically disputable, this model yields (for now at least) good results to both founders and investors, assuming the risk appetite of the market doesn't diminish in the years to come.
- VCs aim for immediate and extreme growth because it's the only way to safeguard their investment (they can expect great returns on basically less than 10% of their deals).
- Due to the pressure put on growth, VC-backed companies like Uber or Airbnb spend millions or billions on acquiring new users & increasing transaction volumes – at a loss. Over the years, Uber has accumulated over $21B in retained losses while its valuation reached a high of $75B+ in the private market. As of 2020, Uber's business model was still unsustainable.
- However, the private investors who backed Uber actually made money on their investments at IPO – even if the company itself never did.
The road less traveled: Companies that chose profitability over growth at all costs
The road less traveled is slower and, at times, probably much tougher. Without the comfort of regular cash infusions, bootstrapping is a difficult endeavor where financial awareness and business savvy are paramount. It will, however, put you in a much better position to decide how you want your startup to evolve and where you want to go.
- Buffer. Buffer refused the growth at all costs traditional way of building a startup. It has only taken in $4M in financing and grown slowly over the years. After ten years of operations, Buffer "only" makes around $21M in ARR with a healthy profit margin of 25%. They make around $5.0–6.0M in profits each year while paying good salaries and incentivizing employees with options. They also put their money where their mouth is and bought out their Series-A investors to focus on profitability and slow down growth.
- Atlassian. Atlassian was profitable from the start and never sought external investment for growth purposes. Accel invested $60M in Atlassian in 2010 through a secondary offering so that their employees could cash out, and they never took venture capital again. Atlassian went public in 2015 and, ignoring the non-cash expenses related to a complex financing instrument, has been profitable ever since. Its current market cap sits at $51.5B.
- Some other examples of companies in this category include Qualtrics and Revolve.
#2 PLG principles behind Freshworks' success
Freshworks set IPO terms on Monday, September 13 that would value the company at $8.9 billion. Freshworks Founder & CEO Girish Mathrubootham attributes Freshworks' success to being unconventional from the beginning. A big piece of that was pioneering a product-led growth strategy targeted at an underserved part of a large market.
Focusing on users, not just buyers
- Existing vendors have designed their products for executive buyers and often suffer from complexity, feature bloat, and complicated user interfaces requiring extensive and ongoing user training.
- Freshworks challenges this by focusing on their users rather than executive buyers: frontline employees who interact with customers every day have come to expect consumer-like experiences similar to what they used in their personal lives.
Being found organically when folks are solving a pain point
- Freshworks focuses on being found 'organically' (i.e., via free or low-cost channels like SEO & WoM) rather than with expensive paid marketing and outbound sales efforts.
- In addition, they have a marketplace (that features >1,000 pre-built apps to quickly customize Freshworks – perfect for reaching high-intent, long-tail users who have specific requirements in mind), an academy (where they courses and certifications around using their products and upleveling customer service skills), and a community forum (great for user-generated content).
- They've also amplified word-of-mouth through guerilla marketing tactics: Freshworks actually flew a #Failsforce blimp over Salesforce's Dreamforce conference that was meant to highlight 'bloated' legacy products, and the campaign generated a good amount of PR and social engagement.
Making it easy to get started without talking to a rep
- Freshworks then puts its money where its mouth is, making it simple and easy for folks to trial the product and quickly onboard users. There are 21-day free trials for nearly every Freshworks product. The company also offers freemium editions of flagship products like Freshdesk (generous free editions, too, with unlimited agents) and a suite of free sidecar products.
That's it for this week. I'd love to know what was your favorite read this week!
P.p.p.s. Connect with me on LinkedIn and Twitter! (Warning: I mainly post memes and rants about marketing, but if that's your jam, let's be friends. I'm also Head of Growth at an EdTech startup and a freelance consultant for B2B SaaS startups, but honestly, I'm more into shitposting than personal branding.)