To see a real-world example of a young company balancing growth and profitability, look at YipitData, a New York-based company founded in 2013 that specializes in analyzing billions of data points every day to provide reliable insights to investment funds and corporations so they can make better decisions. YipitData has more than 400 investment funds as customers and has been a Norwest portfolio company since 2019.
Eric Lesser, the CFO, explains how the company manages the balance between growth and profitability. (As a private company, YipitData does not report financial results, but Lesser says it is growing rapidly and running break-even on a cashflow basis.)
To what principles do you attribute YipitData’s ability to grow efficiently?
We have 10 key cultural values that are the basis for decisions we make every day and how we treat each other, our clients, and our partners. One of them is “Efficiency,” demonstrating that we care about being efficient. Another is “Protective,” which means we care about protecting the company and our resources.
Our product team is encouraged to figure out how to be more efficient. Each product owner has insight into not only how much their products generate in ARR but also what the underlying cost structure is. The product team even offers awards for people who create the most efficiency in a given month.
For any major new investment, we build a model that captures the upfront investment, the ongoing investment, and the expected ARR. We do this to ensure there’s a short payback period, a strong ROI, and to hold ourselves accountable for hitting those numbers over time.
What are the most important KPIs you track, and why are they so important?
We are in a stage where we are primarily driven by ARR expansion, so our top KPIs are ARR, free cash flow (FCF) margin, and net and gross retention rates. These enable us to track how fast we are growing (ARR growth), if our current products are adding value to our customers (gross retention rate), and if we are successfully creating new products that our existing customers want to purchase (net retention rate).
What policies significantly contribute to stronger profitability?
Like many companies, we produce a monthly analysis of budget vs. actual cost that we share with all budget owners. This requires a full finance team effort to make sure the numbers are published quickly and accurately, and then uploaded to our Adaptive planning software. We also started to include efficiency metrics in Adaptive such as ARR per headcount so that managers can get a better understanding of where we are today and where we want to be in the future.
In addition, we decided to offer many different departments and leaders the opportunity to manage their own budget in order to get that level of visibility. Even though we are just over a 500-person organization, we have nearly 50 managers who receive this access and insight. It means more work for accounting to prepare more detailed numbers, but it helps further enforce the culture of efficiency and protectiveness.
We measure investments over time and track how they are performing, so that we can test our assumptions and help ensure we are using realistic forecasts moving forward.
What have you done to make everyone contribute to making the company profitable?
Our finance team started publishing a “Cost Scoreboard” every month that shows how much we are spending as a business, what our EBITDA margin is, and how we are tracking vs. our goal by the end of the year. The scoreboard shows what costs are driving under/over-performance and highlights recent cost savings we have made.
The Cost Scoreboard helps incentivize everyone to help make the company profitable. First, by having a savings goal and a target, we demonstrate that savings are something we want to aspire to. People are motivated by beating that target and want to figure out ways to help.
In addition, in the Scoreboard we highlight and recognize people who have identified cost-saving opportunities. These won’t make or break our profitability, but we want to emphasize that every bit helps and it’s a full team effort.
Of course, we also explain that additional revenue can make a significant difference in our profitability, so people remain incentivized to continue to grow ARR.
What specific strategies or action steps would you advise CFOs of startup and young companies to take to achieve or improve profitability?
When you’re a young company you tend to focus on fast growth vs. profitability, which is often the right decision. However, I’d advise companies that it’s still worthwhile to build the culture of efficiency early. Emphasize its importance, show managers what profit margins look like, and give insight into how expenses impact the bottom line.
Even though you generally want managers focused on top-line growth vs. expenses, by giving them insight you can at least start to lay the groundwork for thinking about how to grow with greater efficiency. And when the business starts to scale, it will become much easier to figure out how to become profitable.