Founders Guide: Prioritize Revenue and Profit over Growth
One story you could tell about the last ten to fifteen years of software development is about how people gave things away for free and ended up billionaires. It's a bit counter intuitive, but it's roughly the story of dozens of now-household names. Uber, Doordash, Airbnb, Figma, Dropbox, even Google, Amazon, Netflix — these are companies that pursued user growth at the expense of profit and revenue, and the bet paid off handsomely.
There were misfires. MoviePass is probably the most famous. For those who missed out, MoviePass was a company that allowed users to watch unlimited movies in theaters for the low price of $10. It was glorious, and I feel bad for anyone who didn't live in NYC at the time because my friends and I were all watching several movies a day while MoviePass was alive. Which, you know, it wasn't for very long. MoviePass ran out of money within 6 months, because each movie we watched cost something like $20 per ticket.
Matt Levine describes all this as the MoviePass Economy:
Another very important point about MoviePass is that, for a while, everything was like this. There was a period in the late 2010s when it was fashionable to think that the way to build a successful company was by losing money on every transaction. You would create a desirable product, offer it at an uneconomically discounted price, and get lots and lots of customers very quickly. This growth in customers — even money-losing customers — was the point. That growth would, for one thing, attract lots of venture-capital investment, because VCs seemed to care more about rapid customer growth than they did about unit economics.
But there was also a business case for it, which is why the VCs were interested. The theory was that there were a lot of new marketplace businesses with strong network effects and winner-take-all dynamics, so it was crucial to get lots of customers quickly. If you could do that, you would lock in a leading position in the business, and your customers would come to rely on you. And then you could work out the unit economics — most obviously by raising prices, though you could think of other ways. Perhaps you would achieve some economies of scale when you got really big. Perhaps you could strike some sort of deal with your suppliers to lower your costs. In particular, there was a popular view that customer data was really valuable — “the new oil” — and that if you ended up with a lot of data about a lot of customers you could find some way to make money with it. Sell ads to other money-losing startups, maybe.
This theory sometimes went by the name “blitzscaling,” and it was part of the bull case for big-name startups like Uber Technologies Inc. and WeWork Inc. It was particularly associated with the venture investments of SoftBank Group Corp. and its Vision Fund. But the name that I often used for it around here — which I borrowed from Kevin Roose at the New York Times — was “the MoviePass economy.” Not because MoviePass was the first or biggest company to use this model, but because it was the funniest and most obvious example. When you take an Uber, you don’t really know whether Uber is making or losing money on the transaction. When you saw a movie with MoviePass, you knew.
MoviePass was obviously stupid but I still hear founders talk about prioritizing growth over revenue, especially in the seed or pre-seed stages of a company's lifecycle. First time founders in particular seem to really buy into the winner-take-all marketplace dynamics. But I think that approach is wrong — it was wrong even ten or fifteen years ago, and it's especially wrong now.
First, let's think about the negotiation dynamics when you are trying to raise from a VC.
All things being equal, the best time to be at any negotiating table is when you can confidently walk away. The ability to walk away gives you a backstop, a 'worst option' of sorts. If you don't like what someone is selling, you don't have to take it! This forces the other party to determine how much they actually value the deal, which in turn puts the pressure on them to compromise.1 VCs in particular have a lot of pressure to actually deploy capital. That's their job. So for any given deal, a VC is probably more inclined to give you money than not. If you have the ability to walk away, the VC is forced to compromise.
On the flip side, the worst time to be at a negotiating table is when you need a deal to go through. In the startup world, this is inevitably when you are running low on capital and need money to keep the lights on. If the opposing party knows this — and entrepreneurship is a small world, they'll find out — they have you over the barrel of a gun. The VC can demand whatever terms they want, and you basically have to take them.
The growth story makes this dynamic worse. If you're losing money on each new customer, you are losing money on each new customer. That means your success is a massive negotiation risk. As you become more successful, you lose money faster, and you become more desperate for external capital injection.
VCs love to talk about hockey sticks and YoY growth, but they are also acting in their own self interest. Of course they want to talk to companies that have massive burning holes in their pocket — that's exactly where they can extract the best deals!
This isn't a new idea, Paul Graham was talking about this back in 2009 with his famous Ramen Profitable essay:
The main significance of this type of profitability is that you're no longer at the mercy of investors. If you're still losing money, then eventually you'll either have to raise more or shut down. Once you're ramen profitable this painful choice goes away. You can still raise money, but you don't have to do it now.
The most obvious advantage of not needing money is that you can get better terms. If investors know you need money, they'll sometimes take advantage of you. Some may even deliberately stall, because they know that as you run out of money you'll become increasingly pliable.
But I want to take it further and say that it's important to build a sustainable business beyond just ramen.
Which brings me to the second point: revenue is a stronger signal than growth.
When you're sitting across the table from a VC your job is to prove two things.
That the business you're shilling can grow to massive multiples of the original investment;
that you have a route to that outcome.
Very broadly, you can round this off as growth and revenue. The growth story can be made of castles in the sky, especially early in the game. Growth is high dimensional and complex, people will join your platform for all sorts of reasons, and growth hacks are called hacks because you can use them to juice numbers enough to tell a certain kind of story. But revenue is much more straightforward. Do you have any? Is the number going up?
On face, it seems that many VCs are willing to delay looking too deeply at revenue. But it's a lie — taking any kind of institutional money kicks off a clock for your company. VCs are mentally calculating how far along they think you should be based on how much they gave you. So if you're not focused on revenue enough, it'll come back to bite you at the next raise.
This is especially true in 2025, a full 8 years after the crazy days of MoviePass. Since then, we went through a pandemic, a supply chain crunch, and an increase in interest rates. The VC raising environment is, uh, a bit different now. There isn't that much capital for Series C and D deals, which in turn means there's a lot more scrutiny being put on series A and B deals, which in turn means there's a meaningful shift in how VCs think about early stage companies. The revenue conversation is just waiting in the wings, you can't avoid it.
This may just be my personal bias, but I always felt it was easy to tell a good growth story when you have a lot of revenue. You can pump that money back into building more features, growing your TAM, targeting more users. Hell, you could even deploy an entirely separate product, if you were making enough. On the other hand, I always felt it was quite hard to tell a good revenue story even if you did experience a lot of growth. Unit economics are hard, and sometimes the growth is fake, and sometimes you literally can't sell the thing you're selling for more than it costs (cough moviepass cough). It's easy to lie to yourself with small growth numbers early on. Revenue is always signal, growth is often just noise.
Finally, third, you should seriously consider whether you want to be building in a winner-take-all market that benefits from massive amounts of over-capitalization. Even though Levine is making fun of the MoviePass Economy in his quote up top, there is some truth to the idea that software markets have strong network effects such that one player ends up mostly or entirely winning. This is obvious with something like Amazon or Google, but it also applies to (for eg) Doordash or Etsy. But that's not all companies. There are approximately a million SaaS companies that do something boring like dashboards for customer data, and they are all printing money.
The problem with operating in a space with strong centralization potential is that your ability to execute matters less than someone else's personal network. Or, put another way, the VC industry ends up choosing winners and losers. If the market dynamics of your industry are driven by price, you win only if you have the largest war chest and are able to subsidize the customer cost more than your competition. You see this play out in grocery delivery, in rideshare, and, yes, in AI. Sorry, if you raised $15 million dollars, and your competitor raised $150 million dollars, you're not gonna make it. It's not your fault! You just didn't know the right billionaires!
I could be naive, but if I'm going out as an entrepreneur I want to win based on my own merit. So I want to pick industries and problem spaces accordingly.
Smart VCs know this, by the way. Sometimes you'll get a VC who gets stars in their eyes and just wants some kind of exposure to the current hot thing. But really smart VCs will evaluate how much of the market you'll be able to capture against a well capitalized opponent. Which is why these boring customer data dashboard companies keep getting funding, keep doing well, and keep getting acquired.
All of this is a long winded way of saying: focus on your revenue! Make money! Don't fall into the trap of pumping wait-list numbers and user counts at the expense of the much harder work of separating cash from wallets! And for the love of God stop telling new founders to prioritize growth over everything else!
I've seen my mom pull this off while haggling too many times to count, I know it works.