I find these two statements so contradictory and fundamental that I don't know which statement to believe:
There is a reason to save growth for last. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. Here is the problem. Growth that can never translate into long-term positive cash flow will have a negative impact on a DCF model, not a positive one. This is known as “profitless prosperity.” - Bill Gurley
If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. - pg [0]
There's a contextual cue that's missing between the two, but a strong hint is in the, "Growth that can never translate into long-term positive cash flow...", statement. That context is growth for what duration and what investing purpose.
If I'm investing into a business for the longer haul, like a pension fund might or maybe looking at a company to take a senior position in and stay in a job for years and years, etc. the viability of the business as a business becomes more important than if I'm investing for an exit 2-5 years down the road. If I'm a VC or similar looking for a relatively quick turnaround, in short two to five year window the company might become recognizable enough or have a popular technology etc. that the long term viability of the business qua business becomes less important than does who might want it for reasons other than current revenue or profitability.
Once you get the context, the quotes aren't so much contradictory as much as referring simply to different goals.
An interesting counter point, VC's as an industry average significantly lower ROI than the boring old S&P 500. One way to look at the VC industry is to realize VC's can make millions even if there portfolios have negative ROI. What they need is to manage lot's of money and being in on the ground floor of the Next Twitter buy's lot's of credibility.
In that context, a company that reaches 50 billion in 30 years is far less valuable to a VC than a company that hit's 10 billion in 3 years and then goes bust in 10 years.
The VC industry, like many others, follows the power law. The top ~5-10 firms(Benchmark, Sequoia, A16Z etc) will realise 95%+ of the returns for the entire industry.
If 'they'don't at least return the fund, and just coast on management fees, 'they' will never be able to raise another one.
The point is that not all growth is created equal. The more you pay to achieve growth, the less valuable it is, and the lower the profit that comes with the new revenue from that growth, the less value it is.
Bill essentially covers this in section 9: Organic Demand vs. Heavy Marketing Spend.
There's a whole slew of factors that need to be taken into account here: customer acquisition cost (and how it changes - e.g. does it go down as you grow, due to network effects or virality?), the lifetime value of a customer (which should be discounted appropriately), cost structure (particularly fixed vs variable), cash flow profile (i.e. when do you actually start receiving revenue from a customer?), and working capital requirements are (e.g. are you a company with negative working capital, like Groupon?).
They do sound a bit contradictory, but I think what is being said is that:
- Rapid growth is a good sign, but not on it's own (i.e. without profit).
- VCs like startups because they show a rapid amount of growth (but the risk is also higher due to a potential lacking model for profit in the startup).
There is a reason to save growth for last. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. Here is the problem. Growth that can never translate into long-term positive cash flow will have a negative impact on a DCF model, not a positive one. This is known as “profitless prosperity.” - Bill Gurley
If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. - pg [0]
P.S. - Dang can you add the (2011) tag?
[0] - http://www.paulgraham.com/growth.html