If you're a tech executive who has been paying any attention to the headlines recently, you probably have a little IPO envy.
Snap, Uber, Lyft, Pinterest--the names keep coming. If a major tech company isn't preparing for an IPO, they're shopping themselves to VC investors with aspirations of someday going public. But here's some perspective:
None of this is natural. Going public while you're losing hundreds of millions of dollars every year isn't sound business. IPOs aren't instant profit vouchers, and this isn't the only way to grow.
It's easy to feel like your company now has one path to success: raise money, raise more money, go public. And, as someone dabbled on the VC path, take it from me: There are other ways to grow your business.
If you're looking for a sustainable way to profit and build, here's what you should know.
Hyper-growth is not healthy growth.
The "go big or go home" mentality is pervasive in VC firms. I call it hyper-growth.
Ultimately, the firm's goal is to scale your business and prepare it for an acquisition or IPO. But here's what they don't tell you: 79 percent of startups fail to reach Series A funding. As the company grows, so do the issues and challenges.
This includes the customer acquisition cost to lifetime value ratio. The more money you spend trying to grow, the less returns you'll receive per customer. It's basic math, but it's often overlooked in favor of hyper-growth.
Bigger might equal better in the hunt for funding. But your business might just end up being a casualty.
Also, keep in mind that VC partners typically only invest in two or three companies per year, but they just need one success to counteract the other failed investments. One disgruntled founder was quoted by The Hustle last year, saying, "Some VCs would rather run you in the ground trying to make you a unicorn than entertain an offer under $100 million."
A steady pace wins the race.
On the other hand, a founder-led and funded company will have the opportunity to grow at a steady, reasonable pace. The founder is not working for the board, they're working with their company, with its employees and vision in mind.
In fact, traditional founder-led and funded businesses maintain an average yearly growth rate of 5 percent. Hyper-growth start-ups that begin with yearly growth rates of up to 32 percent quickly drop to 5 percent within five years, thus leading to exponentially higher operating costs and a significant reduction in returns. Troubling, yet not entirely surprising.
Hyper-growth does not equal profitability. It usually leads to financial hardship.
Unicorn culture is a myth.
VC-backers believe that company culture and vision are byproducts of an exciting high-growth environment.
You probably recognize modern start-up culture as hip and desirable. But what happens when the excitement of building and growing a business wears off in three or four years?
A whopping 70 percent of startups eventually hit a "cultural chasm" -- employee happiness drops substantially, the culture becomes toxic, and turnover rates increase beyond the yearly worldwide average.
This also leads to the non-trivial hiring costs associated with high turnover rates. It can cost up to 150 percent of an employee's salary to fill their position.
Without a strong foundational culture, the VC-backed startup will begin to lose its identity - and employees will notice.
Invest in culture and reap the rewards.
In a founder-led and funded business, the owner must intend to please employees and customers. Their reputation is on the line, and they want their business to live and breathe their core values.
They prioritize company culture and values. In turn, studies show that a 10 percent increase in employees' understanding of organizational values translates to a decrease in turnover and increased profitability.
Additionally, founder-led and funded businesses embody the founder's values. This affects all walks of the business, from hiring and PR to goal-setting and strategic partnerships. It makes a business more authentic and desirable.
It's a simple equation: Culture equals people carefully chosen, plus your values, plus time.
When there is a board to please, the company is no longer front-line obsessed. Instead, it becomes obsessed with pleasing the board. It loses its culture - if it ever developed one in the first place. And when you have no morale or profitability, you're left with no company at all.