Are "Unicorns" Built to Last?
Essay published on November 5, 2015
Note: this was originally posted on the Help Scout blog.
Growth can be a tricky metric. We’re in a cycle that celebrates and rewards growth at almost any cost. Companies that grow quickly enough even get this amazing label: unicorn.
Coined a couple of years ago to describe fast-growth companies founded since 2003 that are valued at more than $1 billion, unicorn status is the ultimate goal for many companies and venture capitalists. Fortune magazine even keeps a running list of unicorns.
While growth may rightfully be the most important metric for a business to focus on, sometimes it’s mistaken for the only important metric. When you adjust every lever to fuel growth, it’s inevitable that you lose focus on business fundamentals, product innovation, and most importantly, your customers.
In our pursuit to simplify complex business challenges and compare companies across rapidly changing markets, we pretend all questions can be answered and all performance judged by the almighty KPI. But let’s not fool ourselves; any metric can be hacked to make a situation look better than it appears.
How It Happens
Growth can be purchased, and therein lies the problem. Typically, unit economics such as lifetime value, gross margin, and churn dictate what you can spend to acquire a new customer, but in the current cycle, companies are incentivized to spend irrationally and capture the market opportunity faster.
For instance, you may look around and find it odd that the average unicorn private company has raised $516 million in funding. For comparison, Google raised about $26 million and Amazon raised $8 million prior to going public. Recently, Square filed to go public and posted an astonishing $154 million in losses last year.
At Help Scout, if we spend $500 to earn a customer and recoup that amount in five months, it would be a great investment. If we spend $3,000 to earn a customer, 30 months to recoup the cost is far too long. Many high-growth companies take so long to recoup their costs that the only way to keep growth going up and to the right is to lose a lot of money.
An all-too-familiar example of a company that shakes beneath the weight of an inflated valuation and irresponsible spending is Evernote. Despite being a celebrated unicorn, the company lost focus on the fundamentals of their business. Eleven rounds of funding and $290 million later, they’ve been forced to lay off 18% of their team and replace the founding CEO because the business is in big trouble.
Most of the people playing this game are extremely smart, and in some cases the economics work. However, I think we’re underestimating the impact of short-term growth on the long-term success of a business. This impact can’t be measured in a spreadsheet, which is why smart people are often missing it.
How We Think About Growth
Every founder has dreams for his or her company. My goal is for Help Scout to make a long-term impact on businesses around the world. I have no desire to be a serial entrepreneur or do something else. Success for me is to sustain this business for a very long time, which has forged an unorthodox path for the company.
Since my goals for Help Scout are long term, it significantly impacts our growth strategy. We attempt to grow as quickly as possible, but without risking long-term stability. We invest as much money as possible to acquire customers, but only when it’s recouped in a short timeframe. We prioritize quality of work over quantity so that our products can be reliable for years to come.
Most people would consider our fundraising path a bit abnormal as well, unless they understand our goal. Help Scout raised a little money from angel investors early on and was profitable in less than two years. Instead of raising more money, we spent two years as a profitable business so that we could better understand the path forward and the culture we wanted to build. We’re a much better company today for not immediately doubling down with more funding, and instead operating a profitable business.
In March, we raised $6 million from partners who have the same long-term goals as we do. The money enables us to invest in more marketing so that we can grow faster. Rather than recouping acquisition costs in two months it now takes us six months, but we’re still on a path to be profitable again within about two years of raising the money.
Without having clear milestones of profitability, it would be easy to get into a growth cycle that puts the business at risk of never being profitable in the long term. Those milestones keep us financially disciplined and ensure we remain in control of our own destiny.
Building a business for the long term also has a phenomenal impact on company culture.
We only require your best 40 hours every week and do everything possible to make sure your work/life balance is sustainable for the long-term. So far it’s been a win-win for both sides.
Does long-term thinking mean that we grow more slowly? Absolutely. Does it also mean we have a greater chance to make a long-term impact on businesses around the world? Yes, if we stay focused on the right things.
There’s truth to the old adage, “If it sounds too good to be true it probably is.” Growth is an exciting prospect for any founder or team, but don’t forget about the long-term success of your business. Be true to your business instead of merely chasing unicorns, and you’ll have the best chance to withstand any challenges that come your way.