How fast should you grow your startup?
Startups and growth are two intermingled concepts. When you talk about startups, you are talking about growth. A startup is nothing else than a company designed to grow fast. Don’t confuse startups for new companies.
Requirements for growth
To be classified as a startup you need to be designed to grow fast, and to grow fast, you need two things: 1/ to address a large market and 2/ to be able to reach and serve those customers.
Regular companies can only do one of those two things. (Most) restaurants address a large market (everybody needs to eat multiple times a day — i know it is my favorite time!), but will be constrained by their physical capacity (or limited reach: would you travel 4 hours for lunch?).
An online service to learn Bambara (national language of Mali) will be able to reach all willing learners, but will be limited by the number of people interested in learning it.
A startup combines both: everybody wants to be entertained and Netflix can reach most customers through the internet.
So, how fast should i grow?
Easy, as fast as possible!! We just have to define what we mean by “possible”. Below is a list of factors to consider when looking for the perfect growth rate.
Growth is not free!
Unless you sold your last startup to Google, chances are that money is tight and so is your potential to finance growth. I know what you are thinking: let’s raise capital so you can afford it. Of course! First, read that. Second, venture capitalists will want to see high growth before they invest. What a nightmare! Don’t lose hope, you can still self-finance high growth if your business has high profit margin and/or a low asset-to-sale ratio. Keep that in mind when you are building your business model.
Economies of scale
Concurrently, startups have a strong incentive to grow fast if they are in a market with large economies of scale. Most technology startups fall within that category: the more users you add the more profitable you become (most costs being fixed: HR, infrastructure etc.). The more profitable you become, the more growth you can finance. After all, you are in it to change the world right?!
In the same spirit, if you are in a market with high network effects (social media etc.), where you can establish a standard (operating system etc.), or lock in customers (high switching costs etc.), you will need to grow at least as fast as your competitors. It is a race and there is only one gold medal. Being the leader will make the whole ecosystem evolve around you. You just build serious barriers to entry. Isn’t LinkedIn the only professional network in the US?
Depending on the type of customers you are serving, you might have to hit the brakes a little. If your market has a lot of “early adopters minded” customers, it is possible to go all in: they are okay with glitches and will help you fix them. On the other hand, if your clients are intolerant to glitches (think security, healthcare etc.), you might want to slow down and be sure about your products before releasing them.
If you haven’t read What does it really mean to be the CEO of a start-up?, you should do it now! I’ll give you 5 minutes… Okay, so now you know that startups are really messy. The faster you grow the more problems you will have to solve. Some founders thrive under heavy pressure. Others are great when it is more relax. Your ability to deal (rapidly) with problems will also put a bound on your ideal growth rate.
Growth is the essence of a startup. “Everything else we associate with startups follows from growth” — Paul Graham. But growth can be a dangerous thing. Growing too fast might be seen as an enviable situation. Except that it can kill your business — if your growth goes beyond what your resources can sustain (cash requirements for example) and/or beyond your capabilities. Your ideal growth rate should be a factor of your internal financing capability, the type of market you are in (economies of scale & scope, network effects), the type of customers you are dealing with and your own ability to manage stress.
Stay tuned, if you dare…