Editor’s note: This is post 1 of 3 for the new Growth Series. Teaching Startup by Joe Procopio is published on Tuesdays. Procopio is the founder of teachingstartup.com. Joe has a long entrepreneurial history in the Triangle that includes Spiffy, Automated Insights, and ExitEvent. More info at joeprocopio.com.
DURHAM – In order for your business to survive and successfully thrive, it has to grow. Constantly. But most entrepreneurs doom themselves by mistaking a fast metabolism for a steady high-growth diet.
In over 20 years of building startups — some from the ground up, and others from a solid foundation to a lofty next level — a common misconception I find myself fighting is that high-growth automatically means rapid growth.
Joe Procopio
Entrepreneurs will sometimes associate high-growth with outsized risk, outside investment, and a bloody battlefield littered with overvalued failures and discarded ethics. That dystopian vision is almost always the result of a combination of rapid growth and bad planning.
Speed kills. So let’s talk about how you can build a high-growth company without driving the whole operation into an embankment.
What is high growth?
A high-growth company is, simply, a business without a ceiling. In other words, all of the limitations that might keep a company local, niche, or otherwise constrained are considered and addressed at the outset.
In the beginning, high growth is more of a function of not applying those limits in the first place, or not letting limits grow around your business. To use a dumbed-down example: Don’t put your city in your company name.
Now, apply that thinking to everything you do.
As the company evolves, high-growth means continually expanding by using your success to test new features, new products, new markets, and new revenue streams. Think of it as a three-step process:
Get very good at one thing.
Find the next most profitable thing most related to your successful thing.
Get very good at that thing too.
Repeat.
What’s the difference between high-growth and rapid growth?
Rapid growth is a means to an end. The starting point is usually a proven idea, a scalable business model, and a well-developed execution plan. The end point is lots and lots of revenue. The means to get to that end entail iterating on that execution plan, repeatedly and quickly, fueled by a catalyst.
Sometimes, a startup or product takes off right out of the gate, due solely to an internal catalyst like a killer marketing plan or even word of mouth. But this is rare. Most of the time, like almost all the time, the catalyst for rapid growth is external money in the form of investment.
High growth is growing from 1x revenue in year one to 100x revenue at some point in the future. Rapid growth is doing the same thing in three to five years.
In order to hit that timeframe, growth needs steroids, so to speak, in the form of outsized risk and outside investment. Rapid growth doesn’t automatically lead to discarded ethics and overvalued failures, but it makes the conditions far more ripe, if you get my drift.
Do you have to take on rapid growth to get to high growth?
If you were expecting a resounding “no” here, I’m going to disappoint.
The truth is, sometimes, to get to high growth you do indeed need rapid growth. Not all the time, but sometimes. The trick is knowing if and when rapid growth will help your business, save your business, or destroy your business.
Start with this thesis: All startups need to be high-growth. Let’s leave out the small businesses, although, when applied correctly, the concepts of high growth can only benefit a small business.
- Get good. 2. Find the next thing. 3. Get good at that.
A startup that isn’t playing by the high-growth handbook will undoubtedly struggle and stagnate. The evolution of business just happens way too fast for slow-growth concepts to bring a startup to a sustainable plateau. You used to get 10 or 20 years before the protective moat around your successful business dried up. Now you maybe get a year or two.
However, you don’t have to get to high growth right away. In fact, you shouldn’t. A number of failed startups have made this mistake by applying high growth strategy to their business before:
- They had a proven viable idea.
- They verified the scalability of their business model.
- They developed an execution plan.
When to apply rapid growth
I’ve gotten very good at answering the two questions every entrepreneur needs to ask themselves when considering investment for rapid growth.
- Is this company investable?
- Does this company need investment?
They seem similar, but they’re completely different and mutually exclusive. The first question is answered by reviewing the high growth strategy concepts above: proven viable idea, scalable model, execution plan.
The second question needs to be asked the moment the first question is answered, and then asked again at every major milestone that follows. Any high growth startup can get to 5x revenue in three to five years, some can get to 10x.
Does the company need to get to 100x revenue in three to five years?
That answer depends on answers to some other questions. Does the business case only make sense if the company grows quickly? Are business trends or competition drying up that protective moat at an uncomfortable rate? Has one of those “next things” the company has uncovered a no-brainer for revenue at high margins and only achievable if the company strikes quickly?
How rapid growth increases risk
There is no question that taking on a rapid growth plan, especially one fueled by outside investment, dramatically increases business risk for the company.
Venture capital, or any outside investment for that matter, is a treadmill, and it immediately gets set to the sprint setting. While most entrepreneurs who get on that treadmill want to get off as soon as possible, they also know that they’ll have to raise again soon after the funds hit their bank account. In a lot of cases, startups close one round and immediately begin planning the next. In fact, there’s usually talk during early deal negotiations about how the current round will lead to future rounds and when.
The pressure of rapid growth comes from simple math. If I own 100% of my company and it’s a million-dollar company, that’s my million dollars. Once I start carving the pie into smaller pieces, everyone wants their millions of dollars. The company HAS to hit much higher milestones for everyone to be satisfied.
Pressure and speed usually result in errors in planning and measurement. Pressure and speed also contribute to the lack of mitigation when those errors start to repeat themselves. Then the death spiral begins.
How you de-risk high growth and rapid growth
Conventional wisdom will tell you that you can avoid risk by growing slowly or taking less money. And while I agree that both of those things are true, I’ll also stress again that growing too slowly and not having enough money become problems pretty quickly. Risk is inevitable.
That said, you don’t need to raise money for high growth. You don’t even need rapid growth for high growth. But applying a high-growth strategy correctly can de-risk a rapid growth plan.
It starts with an obsessive focus on margins and trends in revenue, and ties that back to an understanding of who your customers are and why they buy. Once you can measure increases in revenue that correlate to increases in margins, and tie that back to customer behavior, high growth is just execute, refine, and repeat.
But again, ALL businesses should be doing that.
When you add rapid growth, you de-risk by employing an obsessive focus on your burn rate. All that money you raised isn’t revenue and it isn’t margin. It’s part of the burn, regardless of how much a catalyst that money is for your growth.
If you can level your burn rate as you grow, and create reasonable expectations for increases in revenue based on increases in burn rate, you’ll at least keep that treadmill at a constant breakneck speed, and you won’t get thrown off.
