Why VCs Wrongfully Undervalue Inorganic Growth
Consider the following question.
Which option is more valuable?
1) $10M of annual revenue added organically (non-acquisition-based growth)
2) $10M of annual revenue added inorganically (acquisition-based growth)
In our experience, it’s common for investors to view option one as higher-quality growth. Why? The logic is often that a business with strong product-market fit shouldn’t need inorganic growth. Inorganic growth is often viewed as a crutch to organic growth, a secondary option.
While we understand the logic and have held this viewpoint in the past, our thought process at Volition has evolved. Organic growth is capital allocated to sales and marketing to acquire customers, and inorganic growth is capital allocated to corporate development to reach customers. The critical question for us is which is a better use of capital?
To answer this, considering asking questions like…
How much did it cost to acquire those customers?
What if I told you that the $10M of annual revenue earned organically in option one cost $50M in sales and marketing spend to acquire? What if I said that it only cost $10M to acquire the $10M of annual revenue in option two?
When looking at organic and inorganic growth, it’s critical to determine the capital required to add those acquired customers. You might be surprised; it may be significantly more capital efficient to grow your customer base inorganically.
What is the resulting lifetime value of those acquired customers?
What if I told you that the customer base acquired inorganically was historically poorly serviced and under-monetized? Perhaps the $10M of annual revenue acquired inorganically could easily be optimized to $15M under your leadership.
What if I told you that the revenue acquired inorganically is from a complementary product that can be integrated into your core platform and offered across your existing customer base as an upsell? Maybe the $10M of revenue acquired inorganically means $1M of additional upsells to your entire existing customer base.
Never underestimate the power of inorganic growth and ensure you’re asking the right questions when analyzing its impact. It may turn out to be the better use of capital.