News that Databricks Crossing the $800 million annual recurring revenue (ARR) threshold last year was impressive, but more notable was the growth rate of over 80% over the same period. That’s a wild rate of growth for a company of Databricks’ size, and it confirmed the CEO’s overall impression that his team could weather any change in market conditions related to the value of software startups, provided he can sustain the growth. keeps going.
This is similar to the fact that you don’t need more than one dart at the bar because you plan to hit the bullseye the first time. Most people won’t make it.
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So what about the companies with slowing growth in the startup market, especially those now facing a changing market that turned what used to be tailwinds into full headwinds? Well, the public markets paint an increasingly clear and perhaps bleak picture of companies that value growth more than profitability — that is, all startups and a good chunk of the recent public unicorns.
It goes something like this: Your lagging results don’t matter, and if your growth prognosis deviates in the slightest, we’re going to destroy your value and scold you.
Grow or die
Last summer, The Exchange jokingly said that cloud companies — software companies that deliver their products over the Internet — were in a grow-or-die situation, comparing Dropbox and Box’s tough results to a few fast-growing startups. From where we are now, June 2021 might as well be ten years ago in terms of market conditions, but I’m reminded to underline that growth has always mattered; we are not entering new waters here.
What has changed, it seems, is that the bar for what counts as good performance in earnings is weighted almost entirely on forward growth. This means that good lagging results are expected as a matter of course, and that the share price – company value – is predicted rather than future results. In other words, guidance.
For startups, the lesson here is that no matter how well you did in 2021, investor sentiment seems to be more tied to what you’re forecasting this year than anything else.