I’ve read a couple of pieces recently on growth and they reconfirmed my sense of its importance. One was a piece of research by McKinsey showing how growth trumps all. The other was in the Harvard Business Review talking about the need to invest in high growth firms rather than just small businesses generally.
The McKinsey report studies thousands of software and on-line services companies through their history. It really is fascinating and the conclusion is that growth trumps all. Nothing contributes to the valuation of the businesses like growth. Perhaps the most compelling data point in support of this is that high growth companies (more than 60% CAGR at $100m revenues) offered a 5x greater return to investors as compared to medium growth companies (20-60% CAGR).
The report also breaks down growth into three distinct phases – the prelude, act one and act two making the case for companies needing to know when and how to transition to the next phase.
The HBR piece comes at it from a slightly different angle. They make the case that our obsession with start-ups in terms of a key driver of our economy to be nurtured and supported wherever possible is actually misplaced. It’s a persuasive piece and says that growth companies, as opposed to start-ups, are the key driver of the economy and that they can come from a variety of sources. Start-ups are inherently risky and that only when they reach a point of growth are they really contributing to the economy in any meaningful way. It concludes:
“To use a transportation metaphor: it is futile to jam the on-ramp of our economies with startup traffic without well-paved fast lanes, high powered cars, skilled drivers, good police, and lots of exit opportunities.”
I strongly believe that growth trumps all. I think if you can find a way to grow fast (100% in the early stages and 50-100% once reaching say $50m in revenues) then you are in such a strong position and everything else will follow.
But there are a couple of caveats. You need a business model that delivers high gross margins – ideally over 50%. Growth is kind of neutralized without good margins. This is taken as a given in the software/SaaS world that i work in but not necessarily in other sectors.
You also need to have a costs of acquisition that delivers a return within a sensible period of time. If you are spending on average say $5000 to acquire a customer and your ARPU (average revenue per user/customer) is $1000 per year then that would take more than 7 years to pay back (assuming a 70% gross margin) and that is clearly is far too long. I think you want to see a return within a year at the latest. Anyone can sell $10 bills for $5 but it is not a great business!
Once you have a decent margin and some control over the costs of demand generation then growth has to be the overriding priority. Why would you priorities anything else above it? It has to be – ‘What is my path of least resistance to generate massive growth?’ Nothing else will be so highly valued.
What’s really interesting is to actually think through how this might influence your decision making and priorities? Here are a few of my thoughts:
1. Prioritize growth over profits– this may run counter to the main purpose of most businesses which is to make money but i think it still holds. You need to make sure you don’t run out of money and I would always suggest that a new investment round lasts at least 12-18 months. But beyond that why sacrifice growth to anything else? It is the biggest driver of value. It also give you the momentum in the market and an ever increasing customer base to drive word of mouth and cross sell opportunities.
2. Market segmentation – be disciplined about your market segmentation in terms of relentlessly focusing on the markets that respond best to the current version of your product. To spend time in lower priority markets will slow you down and impact your growth.
3. A repeatable product– try to minimize product customization wherever possible. You need to be disciplined about selling the same version of the product to every customer which means you establish a well worked process and generally create more efficiency and speed in the sales and implementation process.
4. Make growth a central strategic objective of the business – this seems obvious but I have rarely seen it as one of the top strategic goals of a company. To say ‘we are going to grow by more than 75% for each of the next 3 years’ or something along those lines makes everyone focus on this as a priority across the business. Then everyone one every department can break that down in terms of what it means to them. Marketing needs to generate 75% more leads, sales department 75% more sales, client services implement and retain 75% more customers etc. It gets people living and breathing growth, asking themselves ‘how far are we up on the same period last year?’ Growth is definitely the key ingredient to being in control of your destiny and building a really big business.