BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

February 18 2015
by Todd Hixon

Every Great Startup Needs A Growth Explosion

[This post first appeared at blogs.forbes.com/toddhixon on February 18, 2015.]

We know start-ups need to grow fast. Most people would say that doubling every year (100%/year) is great growth. In my experience, 100%/year doesn’t do it. In its first few years a great start-up needs a growth explosion that takes it to a significant scale, say $10 million of revenue. From that point, merely “exponential” growth (in the ballpark of 100%/year) gets you where you need to be: to $100 million in 3 or 4 more years.

Without a growth explosion, 100%/year takes too long to get to enough scale for a good exit. Say your business starts with $100,000 of year 1 revenue, as many do. Then if it grows 100%/year for 5 years, it has $3.2 million of revenue: very limited resources, probably burning a lot of cash, and not big enough to be interesting to acquirers.

A visual depiction of the growth of the universe. Graphic via NASA.

A visual depiction of the growth of the universe. Graphic via NASA.

You might think: “I’m doing well, with another 5 years of growth at 100%/year I will get to about $100 million”. But at that point the business is ten years old. It has probably lost some of its uniqueness. The entrepreneurs and investors are getting tired. 100%/year is difficult to sustain for ten years. If growth slows to 50%/year in the second five years, revenue gets to $25 million. At that point, you probably have an exit opportunity, but the business is no home run.

How do you get a growth explosion in a business? I have seen these strategies work:

•  A big, early customer (or two) boosts the business to scale. This is hard to pull off and comes with risks, e.g., customer concentration. Teams are often able to navigate these problems, however, and enjoy the benefit of a much bigger base from which to grow.

•  The product goes viral. We all know examples, and they can be magic. They are rare, too, and hard to spot in advance: viral potential is asserted hundreds of times for each time it actually develops. Many savvy investors spend their time tracking candidates for viral growth and aim to jump in fast when the growth starts to manifest, as Sequoia did with WhatsApp.

•  The company finds a powerful channel partner who pulls through a lot of volume fast. This can work but it is risky: channel partners are hard to motivate and manage, they may demand exclusivity which cuts the value of the business, and they can be fickle, moving on to their next corporate priority in a couple of years.

•  The company builds the strength of its value proposition and brand rapidly, until it emerges as the leader, users flock to it, more resources let it build its value prop ever stronger, and then the game is over. This approach seems idealistic, however, it’s a good description of the early days of Google, which built a much better product and emerged from obscurity in a previously crowded field. The risk here is the long period of uncertainty: investors, employees, and early customers may lose faith before the growth explosion happens.

This problem has a counterpart in nature: the growth of our universe. The universe began at microscopic scale. Today it is enormous. How did it get so big? Cosmologists (people who study the development of the universe) believe there was a period of explosive growth, which they call the “inflationary period”, in the first micro-nano-nano-nano second* of the life of the universe. During this brief explosion the universe went from microscopic to a scale comparable to it’s size today, about 100 billion light years in diameter. The picture above, from NASA, illustrates this.

Every great start-up needs an inflationary period; without it you are unlikely to have a winner. And every start-up CEO team needs a strategy to make that happen.

*More accurately, the first 1/10³² of a second.

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