Databricks’ achievement of $800 million in annual recurring revenue (ARR) last year was spectacular, but its growth rate of more than 80% over the same period was even more so. That’s an incredible rate of growth for a business of Databricks’ size, and it backs up the CEO’s belief that his team can weather any shift in market conditions surrounding the value of software companies as long as he keeps the growth going. This is similar to mentioning that you just need one dart at the bar since you want to hit the bullseye on your first attempt. Most people aren’t going to be able to do it.
So, what about startups who are seeing their growth stagnate, especially those that are now dealing with a shifting market that is converting what were once tailwinds into full-force headwinds? Well, the public markets are painting an increasingly obvious and possibly gloomy picture of companies that choose growth above profitability — that is, all startups and a significant portion of recently public unicorns. It goes like this: Your previous results don’t count, and if your growth projection is even a smidgeon off, we’ll destroy your value and call you names.
Last summer, The Exchange joked that cloud companies — software companies that offer their products over the internet — were in a “grow-or-die” predicament, contrasting Dropbox’s and Box’s struggles with a few high-growth startups. In terms of market conditions, June 2021 might as well be a decade ago, but I bring it up to emphasize that growth has always been important; we’re not treading new ground here. What has changed, it appears, is that the bar for what constitutes the performance of a solid profit is now almost completely based on forward growth.
This means that good trailing results are expected as a given, and stock price — corporate value — is based on past performance rather than future results. That is to say, direction. The takeaway for companies is that investor attitude looks to be more related to what you are expecting for this year than anything else, regardless of how well you fared in 2021.
