Michael Butler nag-retweet
The Ugly Teenage Phase of Profitable Growth
This is a phase that companies that were once high-growth, high-burn companies (that are typically transactional) go through as they try to get profitable.
Phase 1: You start with high revenue growth, high burn rate. Then you realize due to market conditions that you need to get profitable.
Phase 2: You drive for operating leverage:
- You cut operating expenses - inefficient marketing spend, headcount, etc.
-All out focus on enhancing gross margins - pricing, COGs, shipping, etc.
Phase 3: You focus on improving working capital dynamics.
-renegotiate with vendors, suppliers, manufacturers, etc. to enhance payment terms to improve cash.
Phase 4: You clean up the balance sheet
- Optimize inventory, renegotiate/refinance debt, try and solidify cash, etc.
During these four phases, revenue is declining YoY (sometimes materially) because you're comping against prior quarters with heavy marketing spend. This is why this is the "ugly teenage phase" - it looks ugly if all you're looking at is the top-line. But, there are usually good signs:
-marketing and sales efficiency is improving
-all opex lines are decreasing as a % of revenue
-EBITDA and/or OCF is growing
Phase 5: Revenue is declining YoY, but you have achieved profitability (EBITDA and/or FCF).
At this phase, you are still ugly to the world because revenue is declining, but the end of the teenage years is on the horizon.
Phase 6: Maintaining profitability and returning to YoY revenue growth by investing some of your own cash flow back into growth.
This happens typically in 4 steps:
-step 1: sequential Q/Q gross margin growth
-step 2: sequential Q/Q revenue growth
-step 3: YoY gross margin growth
-step 4: YoY revenue growth
The revenue growth comes from first from delivering real customer value and then:
-efficient marketing spend
-introducing new products
-expanding new channels
-reactivating churned customers
-pricing
-defending the base of loyal customers
The challenging part of this journey is the ugly period can last a long time. From Phase 1-5, you don't get much of any credit. It's not until you hit Phase 6 that outsiders will believe in the company again. But, those close to the company can watch as each phase is cleared and know that the company is going in the right direction. However, to be fair, until you get to Phase 6, you haven't reached the ultimate end goal.
**For the sake of clarity, this is a general observation across several different companies in different contexts many of which I'm not involved with. This is not an observation or prediction related to any specific company.
English
