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The Mailchimp Model
5 lessons of this global camel powerhouse
Story originally appeared on my Forbes column here.
Seemingly every day you see a news announcement of another unicorn (billion dollar startup), or another round led by Tiger Global (averaging 1.3 venture capital deals per day, often minting a new unicorn), or a new fund. In real terms: if the growth of unicorn count were a company’s revenue line, I’m sure it would itself soon be a unicorn – as of Q2 2021, there were 491% more newly minted unicorns than a year prior (136 vs 23).
That’s what makes the recent Mailchimp deal so memorable. Mailchimp was purchased for $12b by Intuit. They built this business without ever taking venture funding.
What this means in practice for fintechs (and all startups):
1. Sustainable unit economics should be the foundation for growth:
While some would say that “growth is the only metric that matters”, I would say “humbug!” It may be the metric that is most rewarded today, but over the long-term, growth alone is a false prophet.
It may also be one of the reason some IPOs have faltered in recent years. Public markets have not rewarded unsustainable unit economics. And when growth slows, combined with poor unit economics, the bottom falls out.
Sustainable unit economics means: a reasonable cost of acquisition compared to lifetime value of the customer, and a reasonable payback period. It means a burn rate and employee cost base that is commensurate to the size of the company.
These fundamentals ensure that your business works. You can then add growth spend to accelerate (capitalized by venture capital if you wish). But it starts with the strong foundation.
2. Keep the founder not cash needs in the driver’s seat
Mailchimp never took venture funding - they could have, but chose not to. Other companies like Qualtrics took venture capital, but only a decade after starting the business (in their case for secondary, to sell shares of existing stockholders). Others like Grubhub GRUB +0.9%, built their business with it, but took it only for specific reasons and when they needed it.
Matt Glotzbach, the CEO of Quizlet, a billion dollar business, once explained his philosophy for growth investment (and why they raised venture capital) : “This is where we make calculated decisions and have expectations for the investments where, if we’re right, we grow significantly, and if we’re wrong we won’t suffer significantly.”
Venture capital can be a powerful tool to scale (full disclosure, I am a venture capitalist). But with unsustainable growth, venture capital becomes the default. It is impossible to switch off the treadmill of Series A then B then C if you’re burning mountains of cash. Simply put, in this scenario without venture capital, the project withers away. But with a stronger foundation, built on the power of sustainable unit economics and a manageable core, founders build businesses. They can take venture capital when they want it and for specific purposes. The business does not depend on it.
As Matt explained it: “The risk of getting overextended with high expectations and the infusion of capital earlier on might not have been able to accelerate the business fast enough to meet those expectations. Like so many startups we would have over-promised and under-delivered.”
This is not meant to suggest slow growth. Camels can and do scale rapidly, but at the Founders discretion. It is a mindset shift from where venture capital is the default and growth at any cost is the only way.
3. Have insurance for tough times
We are in a great market. But we will not be in this market forever. And arguably, without the unprecedented government stimulus, we wouldn’t have been in this position at all with Covid.
Camels offer an insurance policy to businesses, with an increased likelihood of survival, of resilience when times are tough. As Mike Evans once reflected to me on his Grubhub journey: “It took us ten years to IPO. We could have shrunk that to eight by prioritizing growth over profitability. But we would have increased risk seven times. We chose sustainability.”
We may have more unicorns today - and in fintech there are more unicorns than any other category. But startups should not lose their discipline. What we can learn from camels is that growth should be based on a foundation of sustainable unit economics. Venture capital can be a powerful catalyst but should not be the only or default option. A business should be prepared in case the tides turn one day.
Ask yourself, what animal would you like to be?