What’s the least believable part of this startup financial projection chart?
Hint: It’s not the hockey-stick revenue growth.
100% YOY revenue growth is not common, but it happens.
The crazy part of this forecast is the profit number.
Fast growth and accelerating profits almost never happen in growing software startups at the same time–whether the companies are funded or not.
But we see this all the time in funding pitch decks and startup financial forecasts.
“We’re going to grow fast and then we’ll be wildly profitable in years 4 and 5.”
I know, your spreadsheet almost dares you to make profits go wild in later years. How could you possibly spend that much?
But I have yet to see high profits + high growth happen in a software company in growth mode, including in my 25+ years scaling software companies.
Here are a few reasons this profit forecast doesn’t make sense to experienced investors and leaders with scale-up experience.
1) Startup founders just can’t imagine what they could spend so much money on when they double revenues each year. Won’t everything just get easier as you grow and scale?
Nope. More development = more engineers. More leads and marketing and salespeople. More accounting. More office space.
Fast growth eats cash fast. Even faster as you grow.
2) Usually your avg. customer acquisition cost (CAC) drifts up as you grow, despite internal efficiencies, because of competition and increasing marginal costs.
Sales and marketing expense at profitable SaaS companies is 30-40% of revenue, but that means not growing so fast.
Fast-growing software companies often spend 60-80% of revenues on sales and marketing, which means they are unprofitable and have raised investment to grow much faster.
3) Your 1.0 product may work now, but you’ve probably spent less than 10% of what you’ll spend on development, testing, hosting, engineers, testers, designers, integrations, globalization, security, and more. It just happens that way.
A product that can fuel a SaaS company with $25M ARR has a lot under the hood. The product fun never stops. R&D is usually 15% of revenue forever.
4) For startups seeking funding, this high-profit chart begs the question: “If you will be so profitable, why wouldn’t you spend those profits to grow even faster and be worth more? Why would you hold back your growth?”
Revenue growth is the game to increase your company’s value, so why aren’t you growing as fast as you can? Doesn’t make sense.
5) I do actually know many software companies that have 30% profit margins that are great for their founders/owners. But these are efficient businesses with steadier, slower growth where the founders didn’t raise investment funds. Profits > revenue growth for these companies.
Have you seen any examples of software companies with 100%+ revenue growth AND accelerating profits?
These are rarer than tech unicorns.