Startups need this super simple growth-profit chart to be in the right direction

Photo caption: Pexels.

Growth or profit? For tech startups, it’s the million-dollar (and sometimes billion-dollar) question. If you want to expand your business, you generally have to spend money. But how much is too much? When does growth at all costs become a reckless strategy? How do you find the optimal balance between growth and burn?

In the tech world, particularly in SaaS, this all came to a head back in March 2014 when Silicon Valley darling Box filed an S-1, indicating it was ready to IPO. For years, Box, which offers content management software in the cloud to enterprises, had been achieving impressive growth. Investors were willing to overlook the massive amounts of money the company was losing, citing its long-term potential.

But something unexpected happened. The markets shifted and investors hunkered down. Whispers spread that Box’s “unit economics” weren’t working. So, the company waited nine long months before finally going public.

The new attitude: Growth was important, but companies needed to be profitable or at least show a clear path to profitability, too.

So, what’s the optimal ratio between these two fundamentals?

Exploring the rules of growth and profit

There’s no shortage of rules of thumb out there for assessing whether you’ve got the growth-profit balance right. The now famous Rule of 40, for example, suggests that a successful SaaS startup’s growth rate plus profit should add up to 40 percent. If you’re growing at 60 percent, you can afford to lose 20 percent, for instance.

But I’m highly visual and started wondering if there was a way to express this dynamic graphically. Thinking about Hootsuite’s own trajectory, I find this super simple chart helpful:

This isn’t a new or revolutionary concept. Everyone from BCG to VC Tomasz Tunguz have used graphs like this to assess businesses. It’s very basic but, at a glance, it should let you know if your company is headed in the right direction.

Unpacking the matrix

The bottom left quadrant here is the one you generally don’t want to find yourself in. With few exceptions, you don’t want your startup to be losing money and not really growing. That’s a sure sign that you haven’t mastered product-market fit yet.

The top left quadrant is where most promising startups start their journey. It’s definitely where our company was in its early years. We were losing money, but for all the right reasons: burning through our investments to grow fast. In retrospect, this approach let us gain a huge early lead on our competitors in the social relationship platform space.