Is the Pendulum Swinging Too Far? From Growth at All Costs to No Growth

Nearly every company I’ve heard pitch in the past six months has said, “We expect this to be the last round we raise before we are self-funding.”

Honestly, I don’t believe them. And, I’m generally—but not completely—OK with that.

Why am I generally OK with it? I’m mostly comfortable with their claim of approaching profitability because the world of growth at all costs is gone, and I’m happy to see founders acknowledging this by focusing on reaching the cash flow breakeven point.

From One Extreme To The Other

So, why am I generally but not completely OK with it?

The issue is that companies are presenting a bare-bones model with little to no investment in growth areas to show a faster path to profitability. It feels like the pendulum is swinging too far from investing in every potential growth area to investing in none. Of course, we all know that funding a company with a massive cash burn is not at the top of many investors’ lists right now, but it is an oversimplification to assume investors don’t want you to invest in growth at all and that you must reach profitability as soon as possible.

Investors and founders need to relearn how to communicate about where and when it makes sense to invest in growth and how to prioritize incremental spending. Starting with the bare-bones financial model is helpful but should only be the anchoring point of additional discussions about potential spending to fuel growth. We’re in a more dynamic world. The solution is not to grow at all costs, and it’s also not to conserve at the cost of all growth.

A Three-Step Approach To Growth And Profitability

So, how do founders approach this new environment where both growth and a path to profitability are important? Here is a three-step process I recommend.

Step 1: Know your financials and your business cold.

This means creating an informed, detailed financial model. This can be hard in the early stages of a company.

Remember: The cost assumptions are generally known. In other words, you know your hiring plan, rent costs, cost of goods sold, etc., with some specificity. If you don’t, be conservative.

The revenue piece is harder to predict. Again, be conservative. Utilize any historical information as a basis to inform your assumptions. And, if you have access to benchmark data, incorporate it. Don’t assume you’re much different from the median/mean. For example, if tripling revenue at your stage is considered best in class, it likely isn’t prudent to assume your revenue will quadruple.

Step 2: Create various financial scenarios.

Again, utilize historical data, if available. If each sales rep you added last year cost you an average of $250,000 and brought in an average revenue of $1,000,000, create scenarios where you add more reps this year and assume the same ratio. Naturally, this will affect your burn rate in the near term because sales reps do not reach full productivity on day one. Therefore, you’ll be carrying more short-term costs without the benefit of short-term revenue. However, in the medium and long term, the investment makes sense.

Do the same scenario analysis for marketing spend, R&D investment, etc. When you feel confident in your scenarios, align with your management team on prioritization. Agree on where you would spend an incremental dollar if you had it, and understand how that affects your company’s cash runway.

Step 3: Have clear and open communication with your current and/or potential investors.

Investors are typically data-driven people. They understand the cost/benefit analysis of increasing growth often means increasing burn. Ensure they are on board with your analysis, and present your desired financial plan. Do not simply assume your investors only want you to maximize your cash runway. The optimal plan likely isn’t the one with zero investments for growth. Expect questions and debate. Remember: Gone are the days of assuming that you’ll be able to raise capital cheaply and quickly. Each dollar spent counts.

The end result is that the Goldilocks scenario of optimizing growth and cash runway will be different for each company. It will depend on a number of factors including: current cash balance, investor ability to support in future financing rounds, conviction in the potential areas of growth, etc. Growing 40% year over year and achieving cash flow breakeven in nine months may be the right answer for one company, while growing 120% and achieving cash flow breakeven in 20 months may be the right answer for another.

The key takeaway here is that investor focus has shifted. The entire focus is no longer simply on the growth metric; it now includes the cash flow breakeven estimate. But, be careful not to swing too far and only solve for becoming cash flow positive. Growth still matters.

A version of this article originally appeared on Forbes