Changing Investor Sentiment: Growth vs. Profitability

Earlier today, The Exchange dug into changing investor sentiment regarding growth and profitability. A new report from Battery Ventures ran the math on how investors are rewarding faster growth from less unprofitable companies — dare we say, profitable companies? — with the data indicating that, at least for now, growth is no longer enough to maximize corporate value.

A Shift in Priorities

The situation is good news for startups busy stacking new revenue with minimal burn. However, for companies that raised while money was cheap — and sitting on huge valuations predicated on yesteryear’s valuations — the news that profitability is in vogue again is far from welcome. Many unicorns are likely now trapped between changing investor preferences and a general compression of the value of software companies.

Why This Matters

Because many a unicorn was minted during the 2020-2021 era on the back of quick revenue growth more than anything else. And, as revenue multiples stretched to the sky during that time period, a great number of startups reached the $1 billion valuation threshold — or a multiple thereof — on the back of small, if quickly expanding, top line.

The Impact on Unicorns

If revenue multiples have come down, that’s bad news for unicorns. If revenue multiples have come down and growth is losing comparative luster to profits, high-burn unicorns that were once valued more for something else are doubly bound by changing market conditions. Even worse, Battery points out a few difficult facts about just how many unicorns might be able to go public in the coming years compared to how many unicorns there are in the market today.

The Math Behind the Problem

In the last 10 years, Battery counts 200 software companies that went public. In contrast, the venture firm notes that a whopping 1,500 to 2,000 unicorns have been created over the same period. This discrepancy raises questions about the long-term prospects of these companies.

A New Standard for Success

The report highlights a new standard for success: achieving profitability while maintaining high growth rates. Battery’s chart shows that late-stage cloud companies should aim to achieve the following metrics:

• ARR (Annual Recurring Revenue) increasing by more than 30% year on year
• EBIT margin above 25%
• Net dollar retention above 130%
• Gross dollar retention of 90%

The Magic Number

The magic number, a key tracker of efficient growth, sums up what investors want to see: growth, but not at any cost. This concept is crucial for founders to understand and prioritize in their business strategies.

How to Achieve These Metrics

The next question, of course, is how to achieve these metrics. Battery’s report provides guidance on this topic, which we will explore further shortly.

A New Era for Venture Capital

This shift in investor sentiment marks a new era for venture capital, where growth and profitability are no longer mutually exclusive goals. Founders and investors must adapt to this changing landscape to succeed in the competitive tech industry.

Related Topics

• Battery Ventures
• Cloud
• EC Cloud and Enterprise Infrastructure
• EC Market Analysis
• EC Newsletter
• EC Venture Capital
• Enterprise
• Startups
• Venture

Authors

• Alex Wilhelm, Senior Reporter at TechCrunch
• Anna Heim, Freelance Reporter at TechCrunch

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