- Growth is the key indicator of product-market fit for a startup.
- Growth differentiates a startup from a small business.
- Profitability needs to be plausible and a compelling story needs to be told about how the business will be profitable at scale.
- Continually update the profitability model and consider real-world scenarios and edge cases.
- Focus on growth and demonstrate a clear story of margin growth over time.

Our new series, Versus, pits two competing concepts against each other. In this episode, Y Combinator Visiting Group Partner, Divya Bhat, explores the classic startup conundrum: growth vs profit. Divya helps define each and discusses how (and when) a startup should approach focusing on growth and prioritizing profit.

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Chapters (Powered by https://bit.ly/chapterme-yc) - 
00:00 - Growth vs Profit
00:23 - Why is growth important?
00:54 - Growth in startups vs small business
01:17 - Always show growth
01:28 - Plausible Profitability
02:01 - Seed Stage
02:42 - Summary
02:54 - Profitability - Ask yourself the hard questions

Hey everyone, I'm Divya and I'm a visiting partner here at YC.

I'm a two-time YC founder, so I've done 2 startups, been through YC twice over the last 16 years.

And today I'm here to talk a little bit about growth versus profitability.

Feeling really good about the nature of the profitability for this company.

Growth is the only true signal that you have product-market fit.

There's a million other things that you can point to and say, this might mean we have product-market fit, but until you have growth, no one's gonna really believe it, right?

Growth means that you've made something that a lot of people want and that people want to pay for.

Once you have those things, you're going to grow.

More and more people are going to buy your product and that's what product market fit looks like.

Growth is in and of itself what differentiates a startup from a small business.

Small businesses, they have a few happy customers, they make some margins, the owners are getting paid, the employees are getting paid, everyone's got a roof over their head, and they can chug along for a while.

A startup is something that is consistently growing, consistently making revenue, and is able to reinvest those profits into innovation and continuing to keep their growing user base happy.

At any stage of your company, you need to be demonstrating growth.

You need to have a track record for growth, and nothing can be a proxy for showing growth.

Profitability doesn't work exactly the same way.

At any given stage of your company, your profitability needs to be plausible.

You need to be telling a compelling story around how your business is going to be profitable at scale.

What this specifically means is, don't just assume scale is gonna fix margins.

Demonstrating profitability means showing how that's going to happen.

So I think, you know, the hand waving and saying, and when we're at scale, our margins are going to work.

So any work you need to do to get your story a little bit crisper than that is worth investing in.

And at a seed stage, maybe this means some back of the envelope math, taking into account some real world scenarios, maybe a couple of real world simulations that you've run.

Maybe it's profitability in some subset of your user base.

You want to have some examples to show how you can be profitable and how you will scale it.

But you don't necessarily need to continually invest in increasing those margins at every stage of your company.

As you grow, that burden of proof is going to become higher and higher.

Derisking your story about profitability is very important and becomes more and more important as you approach an IPO.

Growth is critically important to demonstrate product market fit and to demonstrate that you've built something people want.

On the profitability side, ask yourself the hard questions.

If you need to, find someone else to ask you those hard questions.

We poke holes and we say, nope, that's not gonna work that way.

Find someone that's done a business like this before.

Ask them what goes wrong and build that into your profitability story.

Continually update that model And don't just have a blindly optimistic view toward what profitability looks like at scale.

Make sure you're taking into account all the messy real-world edge cases and what-ifs that might come up.

And if you have a clear story that shows margin growth over time.

Focus back on growth for the rest of your resources.


Speaker 0: Hey everyone, I'm Divya and I'm a visiting partner here at YC. I'm a two-time YC founder, so I've done 2 startups, been through YC twice over the last 16 years. And today I'm here to talk a little bit about growth versus profitability. Startup is all about growth. Feeling really good about the nature of the profitability for this company.

Let's compare the 2 things. So why is growth important? Growth is the only true signal that you have product-market fit. There's a million other things that you can point to and say, this might mean we have product-market fit, but until you have growth, no one's gonna really believe it, right? Growth means that you've made something that a lot of people want and that people want to pay for.

Once you have those things, you're going to grow. More and more people are going to buy your product and that's what product market fit looks like. Growth is in and of itself what differentiates a startup from a small business. Small businesses, they have a few happy customers, they make some margins, the owners are getting paid, the employees are getting paid, everyone's got a roof over their head, and they can chug along for a while. That's not a startup.

A startup is something that is consistently growing, consistently making revenue, and is able to reinvest those profits into innovation and continuing to keep their growing user base happy. At any stage of your company, you need to be demonstrating growth. And that needs to show in your numbers. You need to have a track record for growth, and nothing can be a proxy for showing growth. Profitability doesn't work exactly the same way.

At any given stage of your company, your profitability needs to be plausible. You need to be telling a compelling story around how your business is going to be profitable at scale. What this specifically means is, don't just assume scale is gonna fix margins. Demonstrating profitability means showing how that's going to happen. So I think, you know, the hand waving and saying, and when we're at scale, our margins are going to work.

That's not going to work. So any work you need to do to get your story a little bit crisper than that is worth investing in. And at a seed stage, maybe this means some back of the envelope math, taking into account some real world scenarios, maybe a couple of real world simulations that you've run. Maybe it's profitability in 1 market. Maybe it's profitability in some subset of your user base.

You want to have some examples to show how you can be profitable and how you will scale it. But you don't necessarily need to continually invest in increasing those margins at every stage of your company. As you grow, that burden of proof is going to become higher and higher. Derisking your story about profitability is very important and becomes more and more important as you approach an IPO. So to summarize, growth wins.

Growth is critically important to demonstrate product market fit and to demonstrate that you've built something people want. There is no substitute for growth. On the profitability side, ask yourself the hard questions. If you need to, find someone else to ask you those hard questions. We do this all the time at YC, right?

We poke holes and we say, nope, that's not gonna work that way. Are you sure that's gonna work that way? Find someone that's done a business like this before. Ask them what goes wrong and build that into your profitability story. Continually update that model And don't just have a blindly optimistic view toward what profitability looks like at scale.

Make sure your assumptions are sound. Make sure you're taking into account all the messy real-world edge cases and what-ifs that might come up. And if you have a clear story that shows margin growth over time. That should be enough. Focus back on growth for the rest of your resources.

You

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Should You Focus on Growth or Profit?