A good read about the pros and cons of a uber-fast growth strategy is an article published by McKinsey & Company here. Go ahead and read the article… I’ll wait…
The article lays a compelling argument for early stage technology companies pursuing a high growth strategy. It pretty much says it all in the title.
Im my experience as a B2B software startup entrepreneur and an expansion stage VC investor, I found about as many exceptions and nuances as the number of companies I’ve built and invested in (and more in companies I was not involved in).
Here are some thoughts that went through my head as I read this article…
I don’t believe that the choice is always between fast growth or slow death. I think it is more of a choice between fast growth and equity value. No startup would forgo high growth if it can achieve it. The question is whether it can in fact achieve it, with exceptional (or acceptable) equity value for all shareholders.
Take the example of Box. The company has raised (as of the writing of this post) over $400M in eight years to achieve billings in FY2014 of $174M which were 100% higher than FY2013. That is outstanding growth for a company that size. But it took $170M in sales and marketing in FY14 to generate an increase of about $90M over FY2013. That is uber expensive.
Peeling the onion, here’s a good analysis by Dave Kellog that makes the case for Box’s strategy of sacrificing capital efficiency for growth and market share. The idea is that Box’s customer acquisition cost, while high, is good enough to be deemed scalable. All it requires is lots and lots and lots of cash, which is directly proportional to the desired growth rate.
Box was able to raise that much cash because investors were willing to bet on that math. But underlying this investment strategy is a bit of the bubble factor… or if I may be so bold… the Ponzi scheme factor. I will bet a dollar that part of Box investor’s rationale is their ability to put the company on the path to a hyped-up IPO. Hyped-up IPOs in 2013 and early 2014 for B2B tech companies required an uber-growth story. Box investors are betting that the hype will create a big IPO exit for themselves… But does that leave the public market institutional investor with a ticking bomb if Box is not able to sustain growth or achieve profitability post-IPO?
But here-in lies a perfect example of the pros and cons of going big fast at the cost of capital efficiency. It is interesting to note that Aaron Levie had to give up the majority of his equity in the process. So don’t expect him to join the Zuckerberg, Ellison, Jobs, Gates Billionaire’s club. That is assuming that his IPO does goes through.
Now let’s talk about what it takes to get on the uber-growth track:
- You need a BIG market: you can’t grow fast for long if you don’t have a lot of customers that want to buy your product at a price that would sustain growth. And market size is not only critical for growth, but more importantly for sustainable growth. So before hitting the accelerator, make sure to figure out the basic equation of market sizing = Total number of addressable customers * percent of them that you realistically can acquire * your average sales price.
- You need an awesome complete product: the days of crappy software are over. In oder to acquire customer fast and at a scalable cost, your web presence and product experience must address your target market’s pain/desire precisely… and the service you wrap around your product must be exceptionally good to ensure renewal and upsell after the first year of subscription.
- Your sales and marketing process must be scalable: the more efficient and scalable your customer acquisition process, the more capital efficiently you can grow. And as you grow, make sure to invest in more and more experience sales and marketing management to reflect the growing complexities of your business.
- Raise the right amount of money at each stage of growth: nothing kills the capital efficiency of a startup than raising too much money too early in the company’s evolution. Make sure you are always in control of your enterprise and its scalability before you raise for the next stage of growth.
I could go on forever on this topic, but I suspect you’re getting tired of reading…