There has been a lot of good material written in the last few months about the impact of the topsy turvy fundraising market and the importance for entrepreneurs to shift their focus from growth to profitability. Some of the better posts over the last few months include Joseph Floyd‘s TechCrunch article and Bill Gurley’s The Road to Recap.

I agree with this sentiment to some extent, and have been preaching it with my entrepreneurs for many quarters as well.  I fear, though, that the pendulum is at risk of swinging too far the other way. That is, entrepreneurs are not appreciating or understanding the true value of growth and thus taking the slow road to building a big company. Right now, it’s fashionable to humblebrag about your startup that was a “15 year overnight success”. The problem is that the slow road to success doesn’t typically result in “venture returns”. And the entire VC-backed fundraising model is predicated on generating venture returns.

So What Are “Venture Returns”?

In order for a venture capital fund to be considered a success, they need to deliver on one of two metrics: 1. a cash on cash investment multiple of greater than 3 times invested capital, or 2. a net internal rate of return (IRR) of greater than 15%. You can quibble around the edges, but these are basic truisms of our business that have held true for decades. The reason for these performance milestones are related to the fact that the money is tied up for many years (i.e., is not liquid), and is considered riskier than many other types of investments. Thus, an illiquidity premium and a risk premium are required.

For a portfolio of investments to achieve 3x invested capital, though, the winning investments must achieve something like 10x or better. In any portfolio, you will have mostly losers – investments where you lose all your money or perhaps get your money back after many years of hard work. But a few large winners of more than 10x your money will make the entire portfolio a success. Fred Wilson wrote an excellent retrospective on USV’s first fund, Losing Money, where he cites the fact that they lost all their money in 40% of his portfolio companies in one of the best fund performing funds in the history of venture capital. Yet, they had five companies produce outcomes that were better than 20x, which drove their outstanding results.

What Does It Take To Achieve Venture Returns?

For a company to achieve a 10x or 20x or better return on invested capital, it needs to grow very, very fast.  To bring this to life, take a look at the table below. It represents a profile of three startup company examples that start at $1 million in revenue at “year 1” (note – to achieve its first in revenue often takes 2-3 years from inception). If you model out three different growth rates – 100%, 50% and 25% –  for the subsequent six years, then the fast growing company has a shot at achieving venture returns. It will grow to $64 million in revenue and, assuming a 6x revenue multiple (reasonable assumption for a company growing that quickly at that scale), it would be worth nearly $400 million. Assuming the company required something like $20-30 million in capital over the life of its growth – perhaps accumulated across two to three rounds of financing – and assuming the position of early investors is a post money valuation of $40M (again, reasonable assumptions based on my experience), then a 10x outcome is achieved.

Lastly, if the third company is growing at only 25% YoY, your firm will lose money–a lot of money. These companies, because they’re slow growers, maybe only be worth 2x revenue and so worth $7.6M, only 20 cents in return on each invested dollar in capital. Think about that for a minute – six years in a row of 100% growth, executed perfectly, and you get to 10x. But if you achieve “only” 50% growth over six years, which is still outstanding performance by almost any other metric, and have a revenue multiple of 4x (lower than the 100% growing company for obvious reasons), you have a company worth only $45 million in value and investors basically get their money back.

Now obviously this is a simplified example – growth rates change over time, often starting faster and slowing over time as markets mature and the base numbers you’re trying to grow from get larger. But the point is pretty clear:  there’s a reason venture capitalists and entrepreneurs are so focused on growth. To generate venture returns, VCs need companies to consistently grow north of 100% year over year. And if a few companies in a portfolio don’t achieve this, then no one generates venture returns. And if no one generates venture returns, the whole system breaks down.

This example also uncovers a structural tension between the VC and the entrepreneur. VCs are naturally going to push entrepreneurs to grow faster in order to be that one portfolio company that achieves the 10x result that makes their fund a success. The entrepreneur is going to be more cautious to grow at the right pace, without burning too much capital or burning out customers or employees.

So, yes, let’s make sure we’re building real companies that are generating real value, and over time, real profits. But let’s not forget that to get there, our companies need to grow very, very fast over a consistent period of time. Remember that the next time someone tells you to slow things down.

Every year around this time, I get asked by First Growth Venture Network to do a tight, 10-minute presentation on the Search for Product-Market Fit as an introduction into a panel on the same topic, drawing from material from my HBS class, Launching Technology Ventures.

This year, I was joined on the panel by Beth Ferreira and Zach Weinberg, both of whom know a lot about the topic.  They both have a tremendous amount of experience searching for product-market fit from (in the case of Beth) Fab.com, Etsy and (in the case of Zach) Flatiron Health, Google and Invite Media.

Below are the slides I shared, which hopefully will be useful to folks. I find that I have to update the slides each year with good thinking from many people, as well as new experiences and thoughts I have from teaching and living the material.

Not captured in the slides is the issue of investor-founder fit. At the presentation, I told the story of two entrepreneurs of mobile consumer start ups – one who received funding from a “growth-focused” seed investors and one from an “engagement-focused” seed investor.

The entrepreneur with the growth-focused hit every engagement milestone across hundreds of thousands of users, but couldn’t raise the series A because their investor didn’t feel like their growth rate was fast enough – something they weren’t even aiming for! Without the financial support of their seed investor, the company was unable to raise their series A and sadly had to shut down.

The entrepreneur with the engagement-focused investor iterated and iterated against fewer than 1000 users, improving the product – and the associated key performance indicators – thoughtfully and methodically. This entrepreneur impressed their engagement-focused investor so much with their learning and experimentation process that they raised a terrific series A – pre-emptively.

The moral of the story? It’s not just about optimizing your search for product-market fit. It’s also about making sure you have seed investors that are aligned with the way in which you go about your journey.

Here are the slides – enjoy (and feedback welcome!):

Fgvn 3 31-2016 search for pmf from Jeffrey Bussgang

(this post was originally published in Harvard Business Review and is co-authored with Nadav Benbarak of Okta.)

Growing revenue and profits is a core objective of most companies, and it is the responsibility of every function to contribute to the pursuit of this goal. Yet, in recent years technology startups have embraced a new role, Growth Manager — alternatively Growth Hacker, Growth PM, or Head of Growth — that focuses on it exclusively. By viewing product development and marketing as integrated functions, not silos, leading tech companies like Facebook and Pinterest are rethinking their approach to driving growth and achieving breakthrough results.

Yet, the Growth Manager role remains poorly understood, especially outside Silicon Valley. As part of an entrepreneurial research effort for Harvard Business School, we interviewed more than a dozen Growth Managers at fast-growing startups and explored what they are doing to design a growth function within an organization.

The Growth Manager function typically lives at the intersection of marketing and product development, and is focused on customer and user acquisition, activation, retention, and upsell. The Growth Manager usually reports either to the CEO, the vice president of Product Management, or the vice president of Marketing. They work cross-functionally with engineering, design, analytics, product management, operations, and marketing to design and execute growth initiatives.

As for responsibilities, the Growth Manager’s job has three core components: first, to define the company’s growth plan, second, to coordinate and execute growth programs, and third, to optimize the revenue funnel.

But before any of these things can take place, the Growth Manager needs to make sure the right data infrastructure is in place.

Data is the fuel of the growth function and growth teams invest a significant share of their resources to create the infrastructure that enables analysis of user behavior, scientific experimentation, and targeted promotions. While many growth teams have special requirements that compel them to build their own custom data infrastructure, many choose to work with commercially available SaaS products. These include everything from analytics tools like Adobe Analytics and Google Analytics, to A/B testing tools like Oracle’s Maxymiser and Optimizely.

Growth Managers are typically responsible for selecting and integrating these products into the company’s analytics framework and working either on their own or in partnership with the analytics team to provide dashboards and testing tools as services across the organization.

Once data is available, the Growth Manager must help the company define its growth objective, typically by answering two core questions. First, at which layers of the funnel should growth initiatives be focused? For instance, should resources go to user acquisition or to combatting churn? Second, the Growth Manager needs to help the company to quantify and understand progress against goals. This task is accomplished through the selection of key performance indicators, and the development of reports on these metrics for consumption across the organization.

Growth Managers also provide customer insight, by blending data with a deep understanding of user needs, habits, and perceptions developed through targeted interviews, usability studies, and customer feedback. Growth Managers utilize the data they have to answer some of the troubling “whys” that a company may have. For instance: Why are users dropping out of the sign up experience? Why don’t users come back to the application after the initial download? Why aren’t users responding to special offers? These insights are then fed back into the product team to help prioritize product priorities, which impacts the product roadmap, as discussed below.

Furthermore, the Growth Manager is responsible for prioritizing growth initiatives and product changes. Ideas for initiatives to create growth originate in virtually all functions in the organization. The Growth Manager is the catcher and champion for product requests from outside the growth team. Further, the Growth Manager must implement a framework for prioritizing growth-specific product improvements, and organizing the testing rhythm.

Sean Ellis, founder of Growthhackers.com and former vice president of marketing at LogMeIn, proposes a simple framework for prioritizing project ideas via ranking on three core dimensions:

1. The impact of the change if it is successful
2. Confidence that the test will yield a successful result
3. Cost to execute the test.

Taken together, these three elements can help to negotiate priority across the pool of ideas.

With a clearly defined growth objective, and a prioritized roadmap of ideas to test, a Growth Manager turns their attention to designing and implementing tests. If the test is to be conducted within the product, the Growth Manager leads a product development process to implement the change. The process often begins with a Product Requirements Document (PRD) or a summary slide presentation that articulates the product changes needed. Next, the Growth Manager works with a cross functional team including engineering, analytics, design, marketing, and product marketing to execute the test.

So what makes a good Growth Manager?

If data is the fuel of growth, then analytics is its engine. The Growth Manager must master statistical reasoning, understand how to design effective experiments, and develop a quantitative intuition for interpreting user experience data. Effective Growth Managers are conversant with data analysis and the best tools for retrieving, manipulating, and visualizing data including tools like MySQL, Excel, R, and Tableau.

Growth Managers also need to be fluent in the full spectrum of acquisition channels at their disposal. James Currier, founder of Ooga Labs, identifies three general types of acquisition channels:

• Owned Media: Email, Facebook, Craigslist, Twitter, Pinterest, Apps
• Paid: Ads (Mobile, Web, Video, TV, Radio, SEM, Affiliate), Sponsorships
• Earned Media: SEO, PR, Word of Mouth

Each channel has its own advantages, trade-offs, and idiosyncrasies. An intimate and specific knowledge of the channels that are most effective in reaching a product’s target audience is critical.

The Growth Manager also needs creativity, strategic thinking, and of course leadership. The latter is particularly important since the Growth Manager must align all market-facing functions to a shared growth objective without direct authority, and must build a growth team whose culture is suited to the challenging and experimental nature of the work.

Experience at numerous growing tech firms confirms that Growth Managers are getting results across all parts of the user journey and at all levels of the funnel.

By comparing behavior of retained users versus those users who churned, the early Facebook growth team determined that a key driver of new user retention was finding and connecting with at least 10 friends within the first two weeks after signup. With this insight in hand, Facebook developed features to allow users to quickly see and connect with friends who were already using the service.

The growth team at Pinterest was able to increase new user activation by more than 20% with an improved flow for new users. By changing the on-boarding experience — from a text-intensive explanation of the service, followed by a generic feed of the most popular content, to a visual explanation and personalized content feed based on a survey of user interests — the team was able to better explain the value proposition and train the user, which ultimately led to better conversion.

Expect the Growth Manager to become a standard function in the coming years. As with many organizational innovations, what begins in startups migrates to larger organizations that wish to operate in an entrepreneurial fashion.

Today, we are announcing co-leading a $1.8m seed investment in Sentenai, an exciting machine learning company based in Boston, alongside our friends at Founder Collective, Project11 as well as a new local seed fund, Hyperplane.

As a former entrepreneur, I have always viewed venture capital as a service business. That’s a funny line for many because, historically, VCs are viewed (and at times reviled) as judges or overlords. When we started Flybridge over thirteen years ago, we developed a firm mission statement that we would treat early stage founders as our valued customers and have lived by this mission throughout our history.

With our fourth fund, launched last year, we are thrilled to continue pursuing our mission of serving brilliant founders during the critical, formative stages of creating their world-changing startups. As part of our work leading into the new fund, we went on a listening tour – talking to founders about what they want and need from their venture capital partners.  We heard a consistent set of themes:  treat them with respect, bring real expertise to the table, and have an investment approach that is consistent with the new world of the capital-efficient startup.

Over the last few years, the needs of founders have changed dramatically. The advent of the cloud, open source development tools and lean startup practices have led to a different evolutionary pattern for startups. They need very little capital to get started and run value-creating experiments, yet require a lot of capital to scale. That’s great news for early stage investors such as ourselves, because it means our entrepreneurs can get more runway with our early stage dollars.  It also means they love our approach as an activist seed investor – supportive throughout the company’s entire lifecycle and fully engaged despite the small dollars – not a “spray and pray” passive investor.

What has not changed is that the best founders want experienced guidance, support and value-add, but not interference from their investor partners. And with all the blogs, books, courses and case studies out there about entrepreneurship, the bar for delivering value-add has gotten even higher.  In our experience, great entrepreneurs don’t want to be hatched, incubated, promoted or optioned. They want a VC to be a company-building partner to coach them throughout all the stages of growth and an investment partner who has a deep understanding of the market opportunity they are targeting. That’s the firm we have tried to build at Flybridge, and we’re proud of what we’ve created and the amazing entrepreneurs we’ve had the opportunity to work with to build large, valuable companies.

So what opportunities are we focused on with our new fund? A number of years ago, we identified a few core investment themes which we still love, including:

• The advent of the cloud as the next application platform, in combination with the rise of the grassroots developer as the driver of IT decision-making – our “developer-driven” investment thesis – which includes MongoDB, Crashlytics and Firebase, among others.

• The explosion of data, leading us to be awash in information but starving for insight, leading to a massive opportunity for machine learning-based applications to emerge, applying “programmatic thinking” to numerous business problems, similar to what DataXu, Mattermark and ZestFinance are doing, among others.

A few emerging themes that we are excited about going forward include:

• The next generation approach to enterprise computing, which is “outside in”, resulting in IT requiring new security models and a “control plane” paradigm to monitor, manage, scale and secure the disparate cloud applications and infrastructure – examples in our portfolio include BetterCloud, BitSight and NS1.

• The rise of the “urban millennial”, a savvy, Net native consumer who views her smartphone as the remote control for her life – examples include Omni and Raden.

• The globalization of startup talent yet the magnetic appeal of the US, resulting in many founders coming to the East Coast from all over the world. Israel has been a particularly exciting source of entrepreneurial talent in the areas that we focus (e.g., cloud, big data, security, machine learning) and we have increased time and energy sourcing deals from there, building off our work at tracx.

The new fund is smaller and more focused. We expect to partner with 20-25 companies, as compared to the 45 in our third fund.  Our average commitment per company is now in the $4-8m range, when allocating enough in reserves to support companies during their growth years.  Our geographical focus continues to be centered around our offices in New York City and Boston. Our team is small and senior – David and Victoria in NY and Chip with me in Boston, our new venture partner David Galper in Tel Aviv, alongside a group of over a dozen advisors who provide subject matter expertise and value add for our companies. Matt is leaving us to join Wellington Management Company and enter the world of late stage investing. We wish him well in his new endeavors.

We had an exciting 2015 – we made eight new investments out of the new fund and have a ninth that is closing this month (see our fun Year in Review):  Jibo, NS1, Omni Storage, Raden, Redox, SmackHigh and two stealth companies. Based on the inspiring people we are privileged to invest in, 2016 is already shaping up to be another exciting year!