Stop Chasing Unicorns — Build Profitable Businesses
I saw a headline this week that Compass (NYSE: COMP) is laying off 10% of their workforce. First of all, I feel awful for the employees who were impacted. The good news, there are still plenty of jobs for top talent. However, this should not be terribly surprising. In their most recent quarter they lost $188 million on $1.4 billion in revenue. The days of running a “technology” company at a loss are gone, as they should be. I use technology lightly in their case because they are really a real estate brokerage. Their margins certainly don’t indicate they are a SaaS software company. Despite their claim to be exactly that in the S1 they filed before going public.
For those of us who have been around for a while this is just another bump in the road. We have seen this play out before in 2000, 2008, 2020 and now again in 2022. In each of these instances there was panic, the world was coming to an end and bread lines were in our future. Of course, that never happened and I doubt it will now. This is nothing more than a recalibration for the tech industry and our broader economy. The days of running businesses that cant make a profit are gone. If your customer acquisition costs and operations are predicated on massive spending to achieve top line revenue growth, you have a problem.
I am going through the process now of raising capital for my startup. Working through massive amounts of financial models, staffing plans, growth forecasts, customer acquisition costs and more. The basis of these models is built on one guiding principal, building a profitable company.
The problem with the traditional VC approach to growth is you are teaching founders the wrong things. Spending as if there will be endless amounts of cash and growing without tracking the health metrics of your business. I know most startups track metrics but they are almost always forward looking. In five years we will do x, y and z. We have lots of “unicorns” but most of those who have gone public recently are hemorrhaging cash. Compass is a good example of that. This is not a sustainable approach.
Those of us who take a more traditional approach are often ridiculed for not illustrating a path to becoming a unicorn. The challenge with this model is that every time we see a downturn, the unicorn ecosystem is forced to change. Shifting gears from hyper-growth at all costs to building real businesses. Unfortunately, many of them die in the process. I would argue building a $25-$50 million business with healthy metrics is more attractive than a faux valuation based on unsustainable growth.
We have seen this movie before and know how it ends. Everyone is chasing the elusive unicorn in hopes of massive returns for LP’s. The challenge is the unicorns we are breeding aren't healthy. A better approach is building a portfolio of healthy, growing and profitable businesses. Organizations that are attractive to the public market and enterprises looking to make acquisitions. This would create greater long term and sustainable value for investors.
