Growth or Profitability: What Are Investors Actually Looking For?

You did it! You slashed spending, reduced your team, and stopped all your marketing initiatives for 2023.

You listened to everyone saying that investors want to see brands that are prioritizing profitability and you are reaching back out to show them your newly found sense of capital efficiency.

The responses start to come back…and it’s the same as before when you were in your growth era…pass, pass, pass.

To quote one of my favorite philosophers, “Congratulations, you played yourself.”

Out of this, a core question for founders arises; how do you balance growth and profitability?

Raising capital in any environment is difficult, but it does seem almost impossible right now given the macro landscape. It becomes even more difficult given the fact that the entire market is telling you one thing (we want to see profitability), while still caring about their previous thing (we want to see growth).

Investors are still deploying, but are more focused on supporting their current portfolios during this time instead of investing in new companies which makes it difficult to court new investors to your cap table.

Due to this cash constraint, a brand new concept in the startup ecosphere has emerged, one that very few have ever heard of, and it has shaken all of us to our core; profitability.

Obviously, I say that a bit tongue in cheek, but not fully. We are having a market reset and companies that are able to show a pathway to profitability are all the rage, but where does that leave growth?

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I am not an investor, but I do talk to hundreds of brands each month, and I kept hearing this conundrum come up across our brand partners, asking where they should focus their attention when it comes to raising.

I wanted to confirm what I was feeling in the market, so I decided to reach out to some of the top investors in the space.

“In the past 18 months, every brand has heard from the investor community that they must prioritize profitability over growth. This advice is many things: generic, broad, directionally right, precisely unhelpful,” said Kiva Dickinson of Selva Ventures.

With this advice swirling in the CPG space, brands responded all in a similar way, they made deep cuts and they made them quickly. Many did this without a process in place to justify which cuts they should prioritize over others.

These cuts included everything from team members, online marketing, services, and trade spend. If it wasn't deemed necessary and you had 5-6 months of runway left, it was getting cut. Not only because you were concerned about your runway, but because you constantly heard that it’s what investors wanted to see.

These cuts might have been prudent, but if they are coming at the cost of growth, then it’s not actually accomplishing anything in the eyes of potential investors, Kiva added, “It is true that investors who once looked past a brand’s burn if it was growing fast enough are now concerned; that does not mean they are now any more interested in subscale profitable brands that aren’t growing quickly.”

There are pros and cons to making these cuts. A lot of brands and startups were bloated with incremental monthly costs that were adding to their burn and simply not showing any type of ROI. On the other hand, many brands have paired down so much that although they might be profitable now or moving towards that, there is no growth story to be had.

You can’t hack away at your spending and team, while keeping sales flat, and present that to investors as a scalable plan. You have just proven that the company can work at that level with less, which is great, but that is a lifestyle story and not a growth story.

“Profitability is good, but we are seeing some brands overcorrect in this environment. Velocity growth and margin growth in a big addressable market is still the most important thing to us in early-stage investing,” said James Pelligrini of Goat Rodeo Capital.

James continued, “Profitability gives a brand control over its future, but from a venture standpoint, if that future isn’t pointing to a large outcome it can be a healthy business but the math won’t work out for investors.”

I want to make this point, there is nothing wrong with lifestyle businesses. If you can take your time, and build your company, to support you and your team, that is an amazing accomplishment. It’s just not one that the venture community is going to support.

This is for brands that have taken on or are looking to take on investor funding, that have been told to simultaneously grow, and show that you’re being mindful of profitability. What are those brands to do?

The truth is you have to balance both. You want to be fiscally responsible internally while still portraying a growth story externally. That growth story has to create FOMO with the investor, but then when they get under the hood during diligence, you have to show an understanding of fundamentals and capital efficiency.

Nathan Cooper from Barrel Ventures outlined, “Most CPG companies aren’t going to be profitable early, so we want to see how efficient you can be with your cash and what type of return you're getting on it. If you’re spending $1, how are you getting $4 or $5 back on it.”

Cash efficiency spent on growth is much more important than just cutting your way to profitability. You have to take the time to look at each line item, measure the ROI, and go deep on the initiatives that are working.

This was echoed by Kiva, “The best way to balance growth with profitability is to reorient KPIs towards efficiency, prioritize unit economic profitability, control burn to give time to hit key milestones….and then try to grow as fast as possible within those constraints.”

Framing your profitability plan to investors as thinking about how every dollar supports growth and putting a monetary value on what every dollar out equals coming back in, is a better process than just cutting at all costs.

Also, understanding that growth doesn’t just mean new store growth is critical.

If you can show that you're doubling your business without increasing door count, that is a scalable story and significantly more impressive than just adding new doors. It is also one that you can act on quickly and accomplish that balance between growth and future profitability much more directly.

The macro level shift happening right now can seem difficult to navigate and unsettling as a founder, but ultimately it can be a positive for the industry moving forward.

I think exorbitant spending and free cash, especially during covid enabled brands to mask true product-market fit by simply optimizing for CAC (customer acquisition cost). As we move forward, forcing founders to scrutinize every dollar, balance growth and profitability, while still pushing towards their end goals will lead to better future outcomes for everyone involved.

This reset was summarized well by Kiva, “Investors require exits, exits require scale and either growth or profitability (preferably both); profitability alone is not enough to attract their capital. The silver lining: the goalposts they have shifted are now in line with what is a healthy business anyway, fixing a major misalignment of the past 5 years.”

I just mentioned the end goal and I want to wrap by pushing founders to have a clear understanding of their desired outcome for their business. We all read the headlines of the fast-growing brands that take over our Linkedin feed, raising massive rounds every 6-12 months, and announcing new retail partners weekly. This is not a realistic outcome for every brand.

Success is not binary. You don’t just win big or lose big. There are exits happening all the time that are not nine figures and there are plenty of brands that are building to sustain free cash flow for years to come, with no intent to sell.

Success is what you want it to be and having a clear idea of that north star is critical.

As Nathan put it, “Founders have to think about what they want the outcome to be. There are only so many Olipop and Liquid Death-size brands. If you can be capital efficient, you can preserve your optionality.”

Optionality as a founder is a superpower. It unlocks everything for you and optionality comes by striking this balance between growth and profitability.

I for one am excited to see the next batch of CPG startups that truly understand this balance and control their brand’s destiny.