👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.
It’s easier to cut than reaccelerate
A fact we don’t like to admit: Running the company for profit is done more often out of necessity, rather than choice.
Yes, the goal of business is to make money. But how hard and when you yank on that profitability lever, vs aggressively reinvesting into activities and resources that could drive further growth, is often dictated by the market and your competitive positioning, not chosen by execs.
As the tweet above points out, reaccelerating growth is really hard to do - think of Sisyphus pushing the boulder up hill. Gravity is a bitch.
Cost structure, on the other hand, is more immediately in your control. I like to say that finance teams can impact revenue growth, and they can control costs. There’s a subtle, yet powerful difference.
So if you have to solve for Rule of 40, not all levers are created equal.
I recently looked at a cohort of Security and Infra companies we track to measure their revenue endurance scores - the speed at which they decelerate as they get bigger. Only two companies actually reaccelerated year on year, with scores over 100%.
What’s the point? If you’re an operator pulling together a five year plan, do a sanity check at the end to test your sequential changes in growth rates. Investors are very likely to ask questions about any year that goes faster than the previous one.
For example, a friend recently asked me to give his operating plan a quick glance. It said they would go from 50% to 65% growth year on year. For context, they were in the $10m ARR range today, with no net new products coming to market in the next year.
As my friend Duffy likes to say:
“That dog don’t hunt.”
And everything we’re talking about is linked - cue the Matthew McConaughey True Detective gifs - if you build your cost structure expecting accelerating revenue growth, and you prove unable to move the boulder up the hill, you’ll have to unwind costs even more aggressively to get back in balance.
It’s better to stay honest now to avoid deep cuts later.
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