Recently I received an email from the CEO of GameChanger Media, a NYC based start-up where I’m an investor and board member, that indicated that the business was embarking on whole new growth trajectory. It was a great email to receive and got me thinking that growth is rarely good enough in the world of technology.
In the technology market everyone is growing – it’s the status quo. The reason that growth is so important is that the technology market moves so quickly you have less time to reach scale and build a category leader. As you grow there are economies of scale and network effects to tap into meaning that you should accelerate further away from your competitors.
But moderate growth is not enough and by that I means anything under 50%. The market is just moving too quickly and if you’re growing by less than 50% in those early years you will almost always be falling behind.
What you need is ‘hypergrowth’ if you are really going to build a big business. By hypergrowth I mean anything over 100% a year for a sustained period – doubling in size every year is a powerful show of strength. If you look at any successful technology business out there they will have gone through several years of hypergrowth. If you don’t believe me check out the fastest growing US software companies on the ‘Inc 500’ or the Techtrack list in the UK. In these lists you’ll see all the top companies with growth rates of more 100% a year.
So how do you generate growth at this level? Of course you can expand into more and more markets and do it through customer acquisition alone. But I think it’s easier, and more likely to deliver results, by pushing for multi-dimensional growth. Combining at least two growth drivers together is the best way to make sure you are out-running your competition. I saw it at MessageLabs. It’s definitely what has unlocked the GameChanger business and I think it rings true for most of the technology leaders out there.
As an example, if you have 100 customers paying you $2000 per year and you grow your customer base by 50% annually, then your revenue also grows by 50% from $200,000 to $300,000. That’s reasonable growth but usually it’s not enough. If you increase both your customers and your ARPU (average revenue per user) by 50% then your revenue increases by 125% to $450,000! It seems fairly obvious but I think all too often start-ups are too focused on one-dimensional growth and therefore never really ignite their business.
I saw this first hand at MessageLabs – the business was set-up to provide a cloud-based, anti-virus service and growth was reasonable over the first couple of years. Viruses had worked out how to piggyback on email and we were seeing more and more of these email viruses being released such as the Lovebug. As a result more and more businesses were seeing the benefits of our solution, despite some reservations about outsourcing their email delivery. However, it wasn’t until 2003 that the growth really stepped up.
We had been working on an anti-spam product for some time realizing that our technology could be applied to spam in the same way as viruses. In 2003 the level of spam within email went through the 50% mark and this seemed to push people over the line in terms of realizing they needed to do something about it. Suddenly we had two services rather than one and bundled them together into what we called our ‘Email Protect’ bundle. Customer growth continued at a good rate and then we added almost a 100% increase in our ARPU with the introduction of the spam service. This led to a defining period for the business of more than 100% annual revenue growth and we never looked back.
I can see the same early signs of this at GameChanger. The company provides web-based scorekeeping tools for amateur sports and is principally focused on baseball. The idea is that the scorekeeping tools are free but then fans of the teams can pay to subscribe to see the live scoring, statistics and lots more. The growth in the number of teams has always looked solid and they ended last year with more than 30,000 active teams on the platform. But it always seemed that there was so much untapped value in terms of bringing on more fans who would love to have access to this content. The team has been really focused on this over the last few months. This resulted in developing better tools for scorekeepers to reach out to fans and, more importantly, to the introduction of much more simplified packages and price points for fans to subscribe to. The results so far have been amazing. Year on year fans have increased by 215%, revenue per fan by 38% and, by combining these two dimensions together, revenue is up an incredible 339%.
Now that’s what I call hypergrowth! Of course GameChanger now has to sustain this, but the main point is that they have combined multiple dimensions to generate hypergrowth in their business. This sets the business on a whole different trajectory and is such an exciting time to go through.
Increasing your ARPU doesn’t have to involved introducing new products either, if you are worried about losing your focus. It can simply mean changing the way you price, position and bundle your products together that can make all the difference.
The technology industry is lucky in that there is generally a honeymoon period when investors will value and evaluate you based more on growth than profits. This is because good investors realize that growth is more important in the early stages. It means you are outpacing your rivals and moving faster towards the promised land of sc
ale, network effects and market leadership. If you get there then the profits will come and you are likely to have a very valuable business.
I would urge entrepreneurs to make the most of this honeymoon period. Growth is usually not enough. Aim higher than that if you want to build a really big business.