Startup Musings #4: Efficient growth is the new normal for B2B companies

The past two years were fairly easy for fundraising; by extension, they were like the wild west of spending. Startups had the money to spend. So we saw growth inflation across the board as more and more companies benefited. What we’re seeing now is a market correction.

Business-to-business companies, especially B2B software as a service companies, have been the subject of stories about the negative effects of the “growth at all costs” growth model. This is especially true right now, as news stories about layoffs from high-growth companies are coming out every day. Crunchbase reports that, as of early October, more than 42,000 U.S. tech workers have been affected by massive layoffs in 2022.

These mass layoffs highlight an important learning opportunity for B2B leaders: Efficient growth is the best path forward. Without an efficient growth mindset, B2B tech companies could be stuck in a cycle of hiring and firing employees, slashing and increasing budgets, and creating more challenges for teams to meet their aggressive growth goals.

Where leadership had been planning for a future where growth would be easy, they are now having to take a step back to evaluate. Companies’ success this year will largely depend on adopting an efficient growth mindset.

What's "efficient growth" in B2B?

Efficient growth is a simple concept. It relies on two main components:

1. Building a business that can support sustainable growth.
2. Building a model that can survive up until that point.

The truth is, some companies invest so much in growth quickly that they have to raise money to keep going. And when they can’t, or run out of cash runway, they start slashing budgets and rosters. This raises an important question that founders, including myself, must answer: Is the company growing in such a way that it needs to raise money to survive? If yes, that is not efficient growth.

As a co-founder and CEO, I understand the struggle of starting and growing an early-stage startup. From the beginning, we adopted the mindset that we would always strive to survive within our means. Growth shouldn’t rely on a raise, but a raise can be used to accelerate growth. The efficient growth mindset exists somewhere in the middle of bootstrapping a company and raising a lot of funds.

Which metrics matter for efficient growth?

Which metrics should leaders track to make sure they are on track for efficient growth? For me, it’s very straightforward. Our company aims for a burn multiple of one, which means that it costs the company a net burn of $1 to generate $1. However, there are other indicators that show whether you’re on a path of efficient growth that companies can evaluate.

• ARR, or annual recurring revenue, compared to how much money was spent.
• The so-called “magic number,” a formula that measures new ARR from sales and marketing expenses.
• Your sales attainment rate, which indicates whether your sales team is hitting its quota and if you have the wiggle room to hire more representatives.
• Monthly revenue per employee.

However you decide to track efficient growth, the goal is clear: getting back to efficient growth that is sustainable for the company, its employees, and its investors.

How can you maintain an efficient growth mindset as you grow?

After a successful fundraising round, the adrenaline high and external expectations often get leadership teams to think about growth at all costs. In fact, many startups have fallen into this trap and ended up having to make significant cutbacks on their budgets and growth goals. This is a hard lesson to learn.

When our company achieved a Series A raise, we were determined to keep pursuing high growth but always kept our eyes on efficiency. So, how did we maintain this efficient growth mindset after a big raise?

• Strive for high output, not a high number of employees. Don’t let headcount become a vanity metric for your growth. Put more value on the quality of output each employee can provide, rather than on the number of employees on your team.
• Track champion lifetime value. Customer lifetime value is a known metric, but you should also measure “champion LTV.” As a company grows, your relationships grow with it. And more people can bring your product and services to their next company. End users, decision-makers, and influencers are all potential sources of new business for your company. Tracking these sources of new business along with your individual champions when they change their jobs can be one of your most cost-effective channels for revenue generation.
• Set clear guidelines about when to spend and when to cut the budget. Right now, leaders are being forced to make such guidelines when they should have been using them all along.
• Accept the new reality and adapt your plans quickly. Remember, efficient growth is vastly different from growth at all costs. An efficient growth mindset means accepting that market conditions can change, and revenue goals can and should change with them. If there is a change in the reality of what “good” will look like for your company and your market, embrace the new reality, go back to the drawing board and adapt your plans as quickly as you can.

If the past two years were all about growth at all costs, the next two will be about efficient growth. Companies will be “going on a diet” to get leaner and more productive while focusing on delivering true value to customers.

Obviously, there is no perfect formula for growing a startup, and I don’t claim to have all of the answers. However, the approach I’ve outlined has helped my team grow through a funding round and economic downturn. Adopting an efficient growth mindset has allowed us to keep our eyes on the prize for long-term growth.