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Why Grow? w/ Danielle Morrill (Mattermark) — The Startup Tapes #028

Why Grow? w/ Danielle Morrill (Mattermark) — The Startup Tapes #028


– Come on in. – Yeah, this is so nice. Have you been in this
office for a long time or? – Yeah, over a two years now. – Nice. – Yeah. – It’s really kind of funny, I always discover new areas for startup, I feel like startups expanding everywhere in the city, and I remember I used to only come here for cannolis or something like that, and now I come here, and it’s
gonna be full of startup, like Unity, or AngelList, or wherever, it’s gonna be right there. We can just sit right here, I think. – Here, okay, sorry. – Yeah, let’s do it right here. – This is perfect. – Yeah, this so nice, and so,
you’ve been doing this thing with Mattermark for a while
of looking at companies, and looking at kind of
the data behind companies and really trying to understand all that. I find it’s an attitude
that is actually very Silicon Valley-esque, right? Everybody wants the data,
everybody wants to look at the data, or at least they say so, but I find a lot of people
don’t necessarily understand that very, very well about Silicon Valley from the outside, and just
the very basic precepts of Silicon Valley are not very understood. And so one thing that I really
kind of wanted to dive into with you is you is this idea of growth. And growth is kind of central
to a lot of things we do, whether we’re a VC or we’re a startup, or you’re looking at the data, but I think it’s something a lot of people outside Silicon Valley even
if they do startups don’t really quite understand. And so why is growth so
central, I guess, in a way with everything like
startups, and companies now do in kind of the new economy? – Yeah, no, it’s a great question. So you know, growth is really interesting because it didn’t used to be
so objectively measurable. – Right. – Like we say data is important, but even when we started
Mattermark in 2013, I think a lot people were really like, no, you can’t measure startups with data. It’s an art, it’s a gut feel. And growth can feel like
that, too, in the beginning, but the reason it’s so important is people are buying the future, so you get a valuation from an investor, you raise a bunch of money, you’re not just being
valued on the business as it is today, you’re making a promise about here’s what we’re going to do, here’s what we’re going to prove out. If you’re getting a
$100 million valuation, the idea is someday your
company’s gonna generate a hundred million dollars of revenue. – Right. – And until then, you’re gonna be valued at some multiple of the future. And so growth is about proving
that you’re gonna get there. – Right, and it’s been
that kind of flight towards that idea of future returns, right? And like, in the early
stages of investment, you were just happy to
put money into a company that was selling goods,
then you were gonna get some returns on that margin of
the good that were produced, and now I think so much of
it has obviously turned into a little bit of forecasting, a little bit of trying to figure out where are gonna be the big opportunities, where are you gonna get bigger returns. And so, essentially what people are doing, whether it’s right here in Silicon Valley or in Wall Street is
kind of taking the risk of maybe this company
isn’t gonna grow that well, or maybe it’s even gonna
go down completely, but if it does grow at the
current rate or faster, then I’m gonna get a really
good share of returns, right? And I think that’s kind of a big shift that’s been happening. But so, let’s talk concretly
about what that means. Would you say right now that
growth is the top thing, or one of the top things a
startup needs to worry about, or where does it rank in terms
of the order of priorities for startups these days? – Wow, well, I think to
grow, you have to have something to grow, so I
think product generally ranks as the number one priority
for most companies, and then some companies
figure that out very quickly, and they’re fortunate to
find product market fit, and then from there they can
focus a lot more on scaling. But generally product market
fit is not a binary thing, it’s more that you get it for
some portion of the market, and then you get to a certain point, and then you need to get it again with some new set of customers. So, it’s kind of this
iterative product charges ahead into the future, builds things, then you grow, then product
has to then do its next act, and then you grow again, and you don’t just see this in startups, you see this in huge
companies like Salesforce. – Right. – And so I think product
and product market fit and growth, it’s more
like knowing where you are in that cycle. – Right – And I think what happens is
a lot of people get confused about where they are in the cycle, and that has a huge impact on things like when to fundraise, how much to fundraise, all these other questions, but primarily it’s about product, and when we say product market fit, that’s almost become like
this weird placeholder, like people aren’t thinking. Link the two words in there. Product, the thing you’re making. A market, people that you’re
talking to all the time, hopefully, getting their money. So I think those two things are usually kind of like a yin yang of
what’s the most important, and then everything
else is orbiting around. – Right, it makes complete sense, like breaking those kind of three things, of having a product, having that fit, and having the growth, and it’s really, really
interesting what you said about realizing where you are. I think there’s a couple
examples maybe we can go into about what that means, so, I’ve seen a lot of
companies, for example, that arguably had a product
and were pursuing growth, but didn’t really have product market fit in the sense that they
weren’t making money from it. And then Facebook in the early days, kind of an example of that
where you pursue growth maybe in the user acquisition sense and kind of audience sense, but you don’t really have
the product market fit in the traditional sense of like, these people are paying
you money directly, but in the end, it kind of works out, but that’s maybe the edge case, right, that confirms the rule. And then conversely, I think
there’s also a lot of companies that have very strong product and very strong product market fit, but then the market’s too small. And so, their growth is capped. Even if they were to keep
growing at the same rate, they would eventually own all the market and wouldn’t be able to
generate enough money. – Right. – So I think, yeah, it’s
very kind of well put to kind of break that down
as those three concept. And so, ideally, you’re
right, you find yourself in one of the phase of your company where you have a product
market fit on a market that’s big enough for you to actually grow and grow faster and faster, and that’s kind of the typical, almost stereotypical, struggle, that a startup has on an average day where the CEO is like,
how can we grow faster? – Right, I mean, if it was easy, there probably wouldn’t
be an opportunity there, so that’s part of it. Most of the easy opportunities, easy is all relative, right? But whatever becomes easy,
it’s picked over quickly, so the bowling pin strategy of going into several different markets is generally difficult from an
execution risk perspective, which means, if you
achieve it, it’s valuable. – Right. – And so, there’s definitely that balance of some of the hardest
things to execute are the most valuable if you get it right. In a way, what Facebook
did was the hardest. – Right. – To execute on acquisition
and then put off revenue long enough where you’re taking, I mean, you’re taking a huge bet
that you can aggregate enough interest, and not just that, but the execution risk
of being able to deliver the ad business at the end of that, Twitter is a great example of maybe, I mean, they’re still
making billions of dollars, but maybe they haven’t
executed quite as well, yet they still have this huge audience, and you can see the difference in terms of how these
two companies get valued. – Of course, yeah. – So I think in the consumer space, that’s both the easiest and the hardest. It’s easy in the sense
of you get to put it off, but it’s the hardest in terms of, you’ve loaded all the
risk on the back end. – Right, and I guess
most startups kind of do a different version of that balance where maybe they don’t trade off to the extreme that Facebook did of just saying we’re gonna get users and money will come some way, but they’re trading off
profitability for growth. And that’s an example that we
in Silicon Valley are like, of course you do that, and
you never kind of question, but that’s not traditional economics, and a lot of people maybe
wouldn’t understand that, that you’re saying, it’s better
for me to grow my revenue even if I have zero profits. I’m not actually kind of turning a margin because that helps me kind of
get more customers onboard, that helps me kind of move
the revenue curve higher, and at least for a while that
was kind of the case it seems in some of the startups,
but maybe you disagree. – I mean, I just, first of
all, I think I don’t know enough about consumer businesses to say, to be super honest. I think in most businesses,
margin does matter all the time. Gross margin is one thing. Software businesses are
wonderful in that sense. Operating margins being
negative for a long time, I think all these startups do that, but I think, I believe fundamentally your opportunity’s a function of a combination of your market and the business model. So if the business model
allows like a software margin of 80% gross margins at Mattermark, and then your market is every
businessperson in the world, you can do a lot of crazy things because, you’re like, well, long term, there’s enough out there. In the beginning, when we
were just focused on VC, the market was really small, and the gross margin wasn’t quite as good because the service level that was expected needed to be higher. – Right. – So then you make different choices. So I think, it’s a
little harder in consumer because you basically don’t know what your gross margin is, and you can do a lot of things
to try to figure that out, but ultimately you have
an operating margin, and you don’t really know what your cost of sales is gonna be, and so I think it’s a very
hard world to operate in. I honestly just don’t feel like I know. – Right, but even in B2B, I
feel like there’s a similar kind of tension, right? I mean, I’ve worked in many
enterprise software companies that still don’t have a profit, and I’ve become public now, and they’re still kind
of operating at a loss, and I think that’s kind of a typical, still kind of startup gambit, of saying, no, we’re gonna
recruit these customers, and eventually, we’re
gonna lower our cost, we’re gonna increase our margin, and we’re gonna get to profitability. But even that, it seems like the public markets still
have more of an appetite for growth,
– They do. – Than they do for actual profits. – Well, they want return, right? So if they think that the management of the company believes that it would be better
to hold on to the money than to invest it in the business, then why should they invest
in the business, right? So there’s a signaling issue there. People talk about signaling risk, that never goes away, that’s existing in the public market, too, so there’s almost like this sweet spot of losing just enough money to show that you’re continuing to
invest in the business, but not losing so much that you’ve created some kind of existential threat. But yeah, I think that that is the bet any technology company is making, is that it’s going to become much more valuable in the future, and that we’re at the beginning of a very long wave. And then of course when
other companies try to act like tech companies, public or private, generally they find that they
don’t get the same valuation or same kind of investor sentiment. – Right, and that can be really tricky. It seems now that that reconciliation between the private market
and the public market is kind of interesting, and you
have a series of blog posts that’s really good about ARR, for example, annual recurring revenue, and kind of how that’s changing between public and private market, and that keeps changing
and remaking itself, but I think even the
growth story has changed quite a bit where I
think in the olden days, at least the stereotype used to be, you were this kind fast, kind of playing it loose company, and then you became public, and then it was about
getting to profitability, and doing all that, but now it seems like the story for you to IPO and to kind of be successful
post IPO is to still stay on that growth curve and
still kind of go far beyond kind of the benchmark of a Fortune 500 or Global 2000 stodgy old company. And so it seems like growth
is kind of a central theme, even past your early series
A, series B, series C, and into private funding
and public markets, so what do you see as
kind of a future trend? Are you seeing that
we’re gonna stay in that and see another year of growth. Do you think people are starting to look at other metrics as a key thing? What do you think is gonna be
the future, I guess, for that? – I mean, it depends on the time horizon. I don’t think growth is actually a true imperative for companies. It’s an imperative for investors, and so, if you have investors, then that imperative exists. There’s a couple of reasons. It’s not just because
investors want a return. It’s also because investors
have LP’s who want a return. LP’s have underlying constituents, and also, we just have lifespans. Like, that’s a huge problem, actually. (laughs) So I think one thing you’re gonna see is you’re gonna see growth becoming less of an imperative for some companies and more of a choice. You’re seeing a lot of companies like fashion brands trying
to act like startups. I think, unfortunately, I don’t expect that to play out very well. I don’t think you get a
10x valuation multiple from making wool shoes. I think they’re really cool, but that’s just a difficult racket. The margins on shoes are
just the margins on shoes. They have been for a really long time. I think there’s a growing
degree of literacy though, across just the entire ecosystem. I think investors for a long
time held the asymmetry. They had a lot more
understanding of the market than anybody else did, and I think founders
and other participants in the ecosystem are getting smarter, so we’re just gonna see
markets, super long term, just be more rational
and be more realistic, which will mean some people
won’t make as much money, but also means other people
will make a lot more, so it continues to kind of
all move towards the truth. – Right, and so maybe
instead of being kind of the monoculture, that startups slash VC, high growth model is gonna become one of the many models a startup can use to kind of build itself and to grow. – Absolutely, and maybe
there will be companies that we don’t call startups
that will go public. – Yeah. – Which actually would
be a wonderful thing. – Yeah, that’d be nice. Thank you so much. – Absolutely, thank you.

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