Growth at Any Cost Is Out, Disciplined Growth Is In

The startup market has gotten significantly tighter lately, as market volatility and the looming possibility of recession weigh on investors’ minds. Tech IPOs have fallen to 2008 levels, and the dollar amount raised through IPOs is the lowest it’s been since the first dot-com boom (and bust) in 2000.

In this environment, venture capital is no longer easy to raise. But that doesn’t mean you can’t be successful. I’m a founder who raised venture capital early on, but then partnered with a growth-oriented, majority-control investor after that. My experiences are instructive in the current market environment, as pivots like ours could actually be a good thing for many businesses right now.

The beginning

I started my company ClearCare in early 2011, at a time when the fundraising environment was still challenging following the 2008 Great Recession. Like many entrepreneurs, my business idea arose from a personal pain point. I was watching my grandmother need increasing levels of home care, and I saw just how hard it was to get any transparency into the care she was receiving, let alone ensure that care was of the highest quality. I founded ClearCare with a goal of creating that transparency into home care for both families and the agencies. We quickly moved to add a full suite of business-management software for those agencies, who became our core clients.

I knew this was a huge market. Almost eighty percent of people want to age in place, according to AARP, and we are in a massive demographic transition to an aging society. The need for quality in-home care is huge, growing rapidly, and poised to continue growing. But when I started my company, we still struggled to raise the money we needed. Investors hadn’t yet caught on to the potential of the home care market, or to the idea of providing a full vertical suite of SaaS products to a single industry, rather than providing a single SaaS product to multiple industries. For VCs hoping to hit it big, our total addressable market (TAM) seemed too small. It was a struggle, but we were eventually successful raising a small amount of money.

Then our growth took off—and that was both a big success and a problem. We grew 300% a year for four years, then realized that we had already signed up four of the five biggest home care providers as clients. Having landed the largest enterprises in our space, we realized we wouldn’t be able to maintain that kind of growth going forward.

This problem turned out to be a blessing in disguise. It forced us to consider deeply whether more dilutive VC equity was the right path for our business. We started seeking out an approach that would deliver success for our VC partners and employees while laying the groundwork for the next phase of our business. With the help of an investment and some proven approaches we learned from our new partner, Battery Ventures, we began a transition to disciplined growth and profitability.

Our next horizon

To make the transition, we started from scratch and created an entirely new financial plan. We rebuilt our sales forecasts bottom-up, based on realistic—not optimistic—assumptions about sales performance, productivity, and industry growth. We also redid our expense forecasts bottom-up, for every dollar of spend, based on disciplined assessments of productivity and customer satisfaction targets across every functional area. We also rationalized our expense base by shrinking our Bay Area office and making strategic acquisitions in lower-cost markets to help build out functions like customer support, customer success, and engineering.

We invested in a world-class finance function by recruiting top-tier talent. This not only helped us get expenses under control and move quickly towards profitability; it also made our company a better place to work. Taking a hard look at finances helped us improve salary parity and set clear levels so people saw a career path in front of them.

We tracked everything. We got obsessive about tracking some 300-plus metrics. This instrumentation of the business created predictability for our teams so they knew what to focus on and created a virtuous cycle where we got better and better over time. The core business eventually ran like such a predictable machine, and with very strong financial performance, that it enabled us to dedicate executive focus and investments to acquisitions as well as new organic growth horizons that multiplied our TAM by orders of magnitude. This foundation enabled us to drive a re-acceleration of growth a couple years later—but this time, very profitable growth.

The transition wasn’t easy. The change from “growth at all costs” to disciplined growth affected every person at the company and evolved our culture. Some of our best employees were only familiar with a glamorized version of the Silicon Valley story; they didn’t understand what it means to build a real, sustainable business. As a company founded to improve care for those aging in their homes, not everyone understood the maxim “No Money, No Mission”—or, in other words, that every organization has to generate the means to sustain itself if it’s going to achieve its mission. We lost people that had been critical in the company’s early stages, who were extraordinarily good at what they did. That was hard. But remarkably, the team that took us through this next phase was even stronger, more resilient, and more mature.

We achieved profitability in six months. Ultimately, we had far greater impact in our original mission than we had ever even contemplated.

Three years later, we were acquired by WellSky.

What founders should know

Here are my key takeaways for founders:

1. Remember that equity funding is dilutive, but debt can amplify your investment.

Big VC funding rounds get all the glory, but remember that taking on new equity partners dilutes the value of your equity and the equity of your employees, early investors, and partners. Staying open to finding a partner focused on disciplined growth helped us get profitable and created the opportunity to use debt to finance acquisitions that create sustainable growth. And we achieved all this without giving up even more of our team’s equity to get there.

2. Just because your company’s growth isn’t VC-level huge doesn’t mean you’re not successful – or attractive to the right growth-minded investment partner.

Founders can fall under the spell of the VC-fueled success story: breakneck growth, followed by unicorn status, capped with a big exit. But successful exits can come in different shapes and sizes. Whether you dream of an IPO or an acquisition, the metrics you’ll be evaluated on will change once you’re heading towards an exit. There’s no reason at all not to be disciplined from the beginning in your approach to managing expenses and investments. Running a sustainable, profitable business pays off.

3. Keep an open mind.

In the typical Silicon Valley narrative, there’s only one approach to true success. But if what you ultimately care about is building a great business that clients and teammates love, and then creating a successful exit for you and your team, there are multiple paths to get there. Almost all of the successful CEOs and founders that I know charted a path to a mature, profitable business as part of their journey.

4. You can have multiple horizons of growth.

We achieved our largest growth and TAM expansion as a PE-backed, profitable company—and in a very sustainable, disciplined way. When you have the opportunity to transition from one horizon to another, know that you have more options than selling out to a strategic acquirer or taking lots of additional dilution. Strong profitability provides fuel and latitude for strategic investments that can take the company to new heights.

I would never have expected that my path to success would have included taking on a growth- oriented, majority-control partner as part of our journey. But today, knowing both the VC and private equity playbooks, I would never run a business without borrowing tactics from both worlds. This kind of story isn’t the simplistic one that is so popular in the press, but disciplined growth is a powerful strategy, and arguably the most rewarding way to deliver success for your employees, clients and all your stakeholders.

The information contained herein is based solely on the opinion of Geoff Nudd and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not, be relied on in any manner as legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity. This post mentions companies in which Battery has invested. For a complete list of companies in which Battery Ventures has invested, please visit here.
This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.
Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.