Thoughts on Growth

An increasingly prevalent model for growth, especially in the tech / startup world, is:

  1. Spend (and lose) a lot of money to buy users

  2. Monopolize the market by outlasting all other competitors (who are also losing a lot of money)

  3. Raise prices

  4. Profit

At least, that’s the theory. In practice, there are a lot of risks:

  • What happens when historically easy money flows dry up? How much growth is “real” vs the result of what are in effect artificial subsidies from investors to customers? What is the “real” price of an Uber or enterprise SaaS plan if these companies are forced to be self-sustaining? What effect does that have on customer acquisition costs and lifetime value, and are the “unit economics” still attractive in this self-sustaining world?

  • How easy is it for a company that has historically had no cost discipline to suddenly instill it? How easy is it to change established company culture, and what effects does this have on employee productivity / morale?

  • How sustainable is the competitive advantage once a company becomes dominant? Google, Amazon and Facebook have clear network effects that allow them to maintain high margins with little threat from competition. Most other businesses do not, and face greater competition and minimal switching costs.

  • Even if a company does become dominant, how likely is it that governments will allow companies to extract outsized profits, especially if this comes at a detriment to broader society? (See here and here)

Another big wildcard is technological change. The rich valuation of many profitless, “growthier” companies is premised upon spectacular profits 10-20+ years in the future. Will the platforms and technologies these companies are built upon even be relevant at the end of that time frame?

Here are some products that didn’t exist 20 years ago:

  • Apple iPhone

  • Amazon Web Services

  • Spotify

  • Netflix

  • Facebook

  • Digital newspapers / magazines

  • Twitter

  • Google (~23 years ago)

Many of them completely upended established business models and dethroned powerful incumbents. Their successes were difficult for most people to foresee.

Bill Gates once argued that “the multiples of technology stocks should be quite a bit lower than the multiples of stocks like Coke and Gillette, because [tech companies] are subject to complete changes in the rules.” He also said that “when the Internet came along, [Microsoft] had it as a fifth or sixth priority.”

Many investors also believe that the pace of change is increasing exponentially, and this idea is fundamental to some popular investment strategies. But if this is true, then it seems even riskier now to rely on uncertain profits far into the future.