Thread by @dunkhippo33

Time for another tweet storm! This one is about fast growth vs slower growth. And I'll start with a story about my friends.

Read on >>

1) In my sr yr of college, 3 friends got together to build an e-commerce co. In typical "noob entrepreneur" fashion (and I've definitely been there too!), they decided to start selling - call it product X - because they were just really passionate about prod X.

2) They didn't think about the COGs or margins. Or how wholesale works. Or sourcing. Or customer acq. They just knew they liked prod X. So they set up a website w/ a shopping cart. And started trying to buy product X in bulk and resell online.

3) Turns out prod X has really thin margins. And prod X is also a cheap prod - ~$3 to the consumer! So they would need lots of volume to make any decent $$. And would need to keep a close watch on margins.

4) Fortunately, my friends are super sharp & learned about business quickly & were able to keep a close eye on the margins. But they didn't have a great repeatable way to generating growth (the margins were too small to spend on anything)

5) Let's pause here. This was not a VC backable biz. The margins were low, so you couldn't take profits to re-invest in more growth. The value of the prod was also low, so even w/ repeat purchases, it would take a LONG time to generate a high LTV.

6) But is it a bad business? Ppl often ask me what I think of their biz, and I always have to clarify whether they are asking me if I think it's VC backable or if I think it's a good business just in general? These are 2 very diff things. Let's continue the story.

7) A yr or two goes by and it turns out they cannot support 3 ppl full time at decent salaries even though they have grown the business. 2 of them leave to get full time jobs doing something else for a couple years.

8) As an outsider, I was quick to erroneously assume, "Oh gosh. They are going to fold. How can they make this work?" Fast forward to today - 16 yrs later.

9) The 3 of them have rotated the CEOship over the yrs. They have all had a chance to pursue other careers AND all have been the CEO at diff times. The biz itself now generates millions in PROFIT per year. They have never raised external money.

10) The moral of the story is that if you build something ppl want & can get to unit econ profitable, in many cases -- even in the toughest of cases such as this -- you CAN make it work. But our typical frameworks usually prevent that. Now let's evaluate this.

11) My friends were able to rotate the CEOship & get to this pt 16 yrs later BECAUSE they took no outside money. VCs, in particular, are impatient & need to return capital to their investors on a 5-10 yr span. Many cos take 15+ years to really build.

12) VCs also are not able to do profit-sharing. Investing in an LLC would mean that we would need to profit share down to our LPs, and none of them want to deal with K-1s involving earning pennies every yr. But this team is able to profit share amongst the 3 of them.

13) So they don't need an exit. My friends have an annuity that is forever providing and growing as long as they do a good job. They also now have repeat customers who have been with them for a long time and are loyal.

14) Even if you cannot spend on growth (whether it's on hiring ppl or buying ads), there's still some level of baseline growth that will happen by sheer nature of just being around for a long time. And if you retain those customers (esp in subscription), that only compounds.

15) But again, not good for the VC model which is time constrained and format constrained. When ppl start their co, often the first inclination is to think "I NEED TO RAISE MONEY!" But really raising money - esp VC money - often removes optionality.

16) The right move is to figure out what is the lay of the land of the biz you have. If you are not happy w/ the growth trajectory potential after doing a lot of experiments, maybe you pivot to something that is potentially more VC backable (can have sustainable high growth).

17) But, if you like what you're working on & can see it solving a prob profitably - even if not fast growth, there's always a solve for how to pay yourself. Like how my friends rotated the CEOship. It's fun to come back to a familiar biz that is working when you are refreshed.

18) I think CEOs often throw in the towel too early. Because they're burnt out. Because it really does take a long time to grow esp w/ ltd resources, and when you're bigger & have profits, you can often get the flywheel going then & make it big. But it may take 15 yrs not 5.

19) Even if you have raised seed $, I think you can have an earnest chat w/ your investors about the next move. If you've tried everything & can't find high sustainable growth & are burning out, maybe rotating the CEOship is a good move? Take a break. Come back refreshed in a yr.

20) It is often much better to come back to something that is working (but not growing) than to start from scratch. This is why a lot of 2nd time founders prefer to buy cos and take them over instead of starting a new biz.

21) I think startup ecosystems need to be thinking about what is the alternative to high growth that we were bullish on at first but discover isn't there. IMO, finding high growth sustainable channels is often a LOT of luck. But we don't often have earnest conversations like this

22) The status quo is to just shut a co down if it doesn't find high sustainable growth. But I think we need to be creative - like my friends. The irony is if they sold, they would likely return the equiv of 50x over 15-20 yrs instead of 5-10. But it sure beats 0 or index funds