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A Summary of

The New Rules of Growth vs. Profitability

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NfX
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There are new rules for building a business.

The key is balancing growth and profitability.

Examine your cash position

  • For companies that are cash-constrained:
    • If taking losses, reduce burn and extend runway
    • Early-stage startups that can’t cut costs must invest in growth instead
  • For companies that aren’t cash-constrained:
    • Achieve profitability in unit economics
    • Reach a strong CAC/LTV ratio with a payback period of less than 3-6 months

Take advantage of a crisis

  • A recession tests your product-market fit, greatest companies are forged during crisis periods
  • Set a cash floor and exercise extreme frugality to become cash neutral/positive
  • Iterate on product to identify profitable streams and scale business so revenue matches cost

Growth vs. profitability

  • Growth is generally valued more, but only if there is a visible path to profit
  • It’s a false dichotomy: you need both
  • Startup should “glide” toward moderate growth and profitability as business matures

Startup path

  • Early-Stage: Seed to Series A
    • First find a product-market fit 
    • Then achieve 3-5x annual growth
    • Unit economics is more important than overall profitability
  • Mid-Stage: Series B & C
    • Create conditions for optionality
    • Have efficient, scalable customer acquisition
    • Launch in adjacent markets, expand market share in existing markets
  • Late-Stage: approaching IPO
    • Growth is still more important than profits
    • Business model will determine how market reacts to rate of growth and profit
    • Weaker network effects = less tolerance for losses
    • Too much capital is a risk

Blitzscaling requires a network effect

  • Only then does capturing market share result in defensibility
  • Companies without network effect lose when they blitzscale
  • Regardless, environment is turning against blitzscaling
  • Value efficiency and ingenuity over pure growth

Takeaways for founders

  • Keep a cash runway to survive
  • Focus on improving position and capturing market share
  • It’s important to maintain profitability but don’t let that stop you from taking growth opportunities as they arise
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