How SaaS “growth at all costs” costs us all Image

How SaaS “growth at all costs” costs us all

This was originally published on FastCompany

My morning mental-health best practices include things to not check:

  • My phone
  • My email
  • My stock portfolio

If you’ve accidentally done the latter lately, you know things are very different than they were a few months ago for SaaS stocks. While the next few quarters will likely be painful in terms of the correction vis-a-vis market value lost, jobs cut, and startups shutting down, most people knew this day was eventually coming.

The last few years of “cheap money” from the U.S. Federal Reserve seem to have led to a mindset of “growth at all costs.” Since interest rates were near-zero, it made sense to spend every dollar possible chasing future growth. Because of this, young companies with just a few million dollars of annual recurring revenue became prematurely anointed as billion-dollar-plus-valued “unicorns.”

While the initial mental image of a “boom” is fun times, here’s how the “growth at all costs” mindset of overfunding can hurt every stakeholder in the long-term.

1. Customers end up not getting value and wasting money

Let’s start with the customers. That’s a big reason you are in business—to help your customers. Yet boom times often come at great cost to customers.

Over the last few years, I’ve seen vendors, having raised huge amounts of money and/or set overly-ambitious sales targets, face constant pressure to grow. So what do they do? They rush customers into deals before they are ready. They sell products that aren’t a good fit for the client. They build or buy into markets where they shouldn’t play at all. They overpromise and underdeliver.

What does the customer end up with? I’m seeing companies with many technology projects facing a discrepancy between their big dreams and the reality of the vendor’s offerings. They have egg on their faces for business cases that never materialized.

2. Teammates end up with mercenary and frenetic cultures

A big consequence of the most recent financial bubble has been the Great Resignation. On the surface, the concept looked great for employees. They got big raises. They were promoted at a faster rate than ever. They had the power over employers.

The other side of the coin is a bit darker. As the labor market tightens, many people who were promoted and raised beyond their experience level may be let go and have a hard time finding a job. They could have a lifestyle sized to a compensation level that they may not return to for a while.

I’ve heard from other executives that workplaces had started to feel more mercenary-like, with people talking about the job offers they are thinking about or the fortune they made trading crypto. Some employees even violated company policies, working at multiple firms at once, to earn even more.

And I’ve heard from some of the most dedicated employees about dealing with management teams trying to grow at all costs, throwing far too many projects and initiatives at the workforce. Focus was nowhere to be seen.

3. Investors end up holding the bag and hating their jobs

Someone must be making out well from these booms, right? Sure, many venture capitalists made ungodly sums of money in the last few years. But when the music stopped, many were left without a chair.

Investors who crushed it during the boom years raised bigger and bigger funds, leading to more recent vintages having poor prospects for returns. I’ve heard from many of those partners that they now stare at a gloomy forecast for the next few years. They may have hired too many partners and now have to go through the painful process of downsizing. Some firms just won’t make it.

Worse yet, the investors in those funds—limited partners like universities, pension funds, and nonprofits—experienced wild swings in their valuations and often lost out in the end.

And even those who made bank didn’t all love it. I’ve spoken to dozens of investors who hated the experience of the last few years. They had to make a decision on a 10-year investment without getting more than one meeting with a founder. They signed up for terms that they knew were bad for all involved because it was all about “growth at all costs.”

4. Companies end up having their futures mortgaged

I saw how the “get rich quick” mindset described above led to companies that were not “built to last,” but rather, built to cash out. Entrepreneurs focused so much on vanity metrics like venture valuations that they lost sight of the value they were creating in the world. Long-term investments suffered at the expense of short-term metrics. And corporate cultures atrophied with excess and ethical issues.

Even the most committed founders and leaders confessed that they couldn’t help but look at their peers who were now “decacorns” with envy. And envy often leads to poor decision-making governed by myopic perspectives.

5. We all end up gaslighted

Most leaders I spoke to knew it was too good to be true and it was going to end. Between NFTs and GameStop, it was obvious that the party would be over—people just didn’t know when. And no one wanted to leave too early.

Yet this left people with a feeling of being gaslighted—being “manipulated by psychological means into questioning their own sanity“: “Maybe I’m just getting old?” “Maybe I’ve lost my appetite for risk?” “Maybe the world has changed?” “This time it’s different?”

I believe there’s no way to win in a “growth at all costs” bubble. If you play the game, you destroy your future. If you sit on the sidelines, you look like time has passed you by. Let’s hope we learn some lessons from this before we start the next bubble.

From what I’ve seen, one thing’s for sure—companies with a durable growth strategy can be resilient and outlast any bubble because they are built for steady, efficient growth. And they are built to be around for a long time—not just for the boom times.