News that Databricks crossed the $800 million annual recurring revenue (ARR) threshold last year was impressive, but more notable was its growth rate of greater than 80% during the same period. That’s a wild expansion pace for a company of Databricks’ size, and it backed up its CEO’s general vibe that his team could weather any change in market conditions regarding the value of software startups, provided that he keeps the growth flowing.
This is akin to noting that you don’t need more than one dart at the bar because you intend to hit the bullseye on your first go. Most folks aren’t going to manage it.
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So what about the companies with slowing growth in the startup market, especially those now contending with a changing market that is turning what used to be tailwinds into full-force headwinds? Well, the public markets are detailing an increasingly clear and perhaps bleak image for companies valued on growth more than profitability — which is to say, all startups and a good chunk of recently public unicorns.
It goes something like this: Your trailing results don’t matter, and if your growth forecast is even off by a hair, we’re going to trash your value and call you names.
Grow or die
Last summer, The Exchange jokingly said that cloud companies — software firms that deliver their products via the internet — were in a grow-or-die situation, comparing difficult results from Dropbox and Box with a few high-growth startups. From where we sit today, June 2021 might as well be a decade ago in terms of market conditions, but I raise the reminder to underscore that growth has always mattered; we’re not treading new water here.
What has changed, it appears, is that the bar for what counts as a good performance in earnings is weighted nearly entirely on forward growth. This is to say that good trailing results are expected as a matter of course, and stock price — corporate value — is predicated instead of future results. Which is to say, guidance.
For startups, the lesson here is that no matter how well you did in 2021, investor sentiment appears more tied to what you are projecting for this year than anything.
I’m not talking out my posterior. A few examples to make the point:
- Amplitude, a recently public software company in the digital optimization space, reported $49.4 million in Q4 2021 revenue. The street had expected $46.95 million, per Yahoo Finance averages at the time of reporting. But the company’s forward guidance came in light, with 51% to 54% growth in the first quarter, slowing to 35% to 40% for the year. The market had expected 43%. And so Amplitude’s stock tanked from around $41 per share to $16.66 by pre-market trading this morning.
- Others are in similar situations. Affirm got punched by the market after it reported better-than-expected earnings, thanks again to lower-than-expected forecasting. As we wrote at the time:
For its Q3 fiscal 2022, or calendar Q1 2022 by our reckoning, Affirm anticipates $325 million to $335 million worth of revenues. Barrons has Wall Street expectations at $335.5 million for the current quarter, so the company’s guidance is a miss by that benchmark.
- The market is also digesting Roku’s Q4 results this morning, which featured a double miss, with the company posting slimmer-than-anticipated trailing revenues and forecasting slower-than-expected Q1 guidance. Its shares are off 25% at the open today.
- Meta — Facebook’s parent company — posted Q4 earnings that beat expectations in revenue terms, but the company’s guidance for Q1 revenues came to just $27 billion to $29 billion. The market expected just over $30 billion in Q1 revenue this year. In response, Meta’s stock shed around $500 billion in value.
There are other examples of sharp reductions in corporate value that contain elements of the growth maxim, but that’s enough to make the point.
That growth matters is not new. But with the markets evolving in the face of a changing monetary environment, it’s worth considering how much weight investors are putting on future expansions today. Startups are going to need to hold onto growth rates for dear life. Which won’t be cheap — will investors be willing to fund expensive growth in a less risk-on market?
If not, startups will find themselves squeezed between stiff expectations for growth and a lower appetite for losses from the same parties. How many startups will be able to square that circle remains to be seen.
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