For startups, the message is clear: Grow fast or die

For startups, the message is clear: Grow fast or die

News that Databricks crossed the $800 million annual recurring revenue (ARR) threshold last year was impressive, but more notable was its growth rate of greater than 80% during the same period. That’s a wild expansion pace for a company of Databricks’ size, and it backed up its CEO’s general vibe that his team could weather any change in market conditions regarding the value of software startups, provided that he keeps the growth flowing.

This is akin to noting that you don’t need more than one dart at the bar because you intend to hit the bullseye on your first go. Most folks aren’t going to manage it.

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So what about the companies with slowing growth in the startup market, especially those now contending with a changing market that is turning what used to be tailwinds into full-force headwinds? Well, the public markets are detailing an increasingly clear and perhaps bleak image for companies valued on growth more than profitability — which is to say, all startups and a good chunk of recently public unicorns.

It goes something like this: Your trailing results don’t matter, and if your growth forecast is even off by a hair, we’re going to trash your value and call you names.

Grow or die

Last summer, The Exchange jokingly said that cloud companies — software firms that deliver their products via the internet — were in a grow-or-die situation, comparing difficult results from Dropbox and Box with a few high-growth startups. From where we sit today, June 2021 might as well be a decade ago in terms of market conditions, but I raise the reminder to underscore that growth has always mattered; we’re not treading new water here.

What has changed, it appears, is that the bar for what counts as a good performance in earnings is weighted nearly entirely on forward growth. This is to say that good trailing results are expected as a matter of course, and stock price — corporate value — is predicated instead of future results. Which is to say, guidance.

For startups, the lesson here is that no matter how well you did in 2021, investor sentiment appears more tied to what you are projecting for this year than anything.

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