Why VCs care about growth above all else, plus a checklist of seven things to work on that can increase the growth rate of your company
A thousand years ago, when a startup I’d founded was about to IPO on the NASDAQ and the London Stock Exchange, I built a chart of the company’s monthly sales since launch, and saw the classic curve—gently rising for a while, and then rising a lot faster. Looking for an inflection point, I tried to figure out what had changed the company’s trajectory. But at the month where the curve seemed to change most sharply, what had we done differently? Nothing that I could remember.
Once the chart’s y-axis was switched to a log scale, the mystery was solved. Because then, the sales growth line became almost magically straight. Turns out it was a simple case of exponential growth: we’d simply grown at a constant rate each month, and the magic of compounding had taken effect.
I can’t remember whether the sales grew at 20% or 25% a month, but the result was that the business grew in size by 100x or 200x over two years. After the IPO, that increase translated directly into shareholder value: a seed investor who had put in $100,000 later sold his shares for $21m.
Here’s why this should matter to you if you’re running a startup. It may be an exaggeration to say that growth is the only thing that matters in a startup, but not much of one. And that’s why smart VCs give disproportionate weight to growth when deciding where to put their money.
It may be an exaggeration to say that growth is the only thing that matters in a startup, but not much.
For a powerful example, look at the brief investment memo written in September 2005 by Roelof Botha to the partners of Sequoia Capital recommending an investment in YouTube. The memo (made public in a later court case) includes a chart showing that YouTube was growing really fast. Only a few weeks after launch, itwas bigger than Vimeo and DailyMotion, its top competitors.
Botha wrote his memo on a Friday afternoon, recommending the Sequoia partners to make the company a financing offer the next Monday, and that’s what they did. According to Miles Grimshaw, Sequoia invested $10m in YouTube. Thirteen months after the memo, Google bought YouTube. Sequoia’s share of the proceeds: $480m.
When VCs say they like your business but “want to see more traction”, that’s French for “no”.
When VCs say they like your business but “want to see more traction”, that’s French for “no”.
If your business is growing fast, by contrast, they beat a path to your door. One CEO I coach recently raised a big Series B, and had his choice of five inbound term sheets from investors. That just may have had something to do with the fact that his company’s sales grew 2.3x during the period when he was fundraising.
Most startups are in a very different place. They’re growing, but not fast enough to be at a point where investors will want to put in more money by the time they run out. The result is that things look promising on the product front, but the company doesn’t have the resource to keep the current team working on it. Or to put it another way,
The grass is growing, but the cow is dying
If your reaction to this is to say that the focus on growth is unfair, some quick arithmetic may convince you why the investors are right. If your business grows 5% a month, then in two years, it will be a bit more than 3x bigger — impressive. But if it grows 20% a month, it’ll be 79x bigger. And if it grows 25% a month, it’ll be 212x bigger. Either of those latter two outcomes is likely to deliver what the VCs call a “fund-returner”, ie a single investment whose profits cover the investment cost of their entire fund.
This article can’t tell you how to achieve those growth rates, nor what’s wrong with your startup. To steal the first line of Tolstoy’s Anna Karenina,
“All successful startups are alike. But each unsuccessful startup is unsuccessful in its own way.”
But based on what I’ve seen on companies where I’ve invested, sat on the board, or helped by coaching the CEO, I can offer some clues as to what you need to do to change your startup’s trajectory from slow growth to fast growth. There are seven things on the list.
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1. Build a product that people really want.
This is where it all starts, and it’s harder than anything else. You know that you’re not there if you’re selling to businesses who say they “don’t have budget”, or if your have a consumer app that people download but then stop using. Product-market fit is like love; once it hits you, you’ll know. To find it, you need to talk relentlessly to customers actual and potential. You need to look at how people use your product. You need to understand what job they’re trying to do.
2. Raise enough funding to pay the team you need.
It’s certainly possible to build a $1bn tech startup without outside funding; Basecamp, formerly known as 37 Signals, is just one of the companies who’ve done it. But there aren’t many of them. To make your business grow, you need the right number of people with the right talents. If you have to pay for those people out of cashflow — ie out of profits from your customers — then the trajectory will be much slower. A rule of thumb might be that to build and start selling a SAAS product for midsized companies, you need to pay three guys for six months. For AI-driven medical software, you may need ten people for 18 months. For an ad-supported consumer app, where you need 10m or 100m users before you start to make meaningful ad revenues, you may need to pay a team of 50 for five years. You can do the arithmetic to figure out what that means in funding — funding that has to come either from investors or from customers. Your choice.
3. Hire people with a commitment to swift scaling.
Facebook’s slogan, “Move fast and break things” (ie grow so fast that you start getting outages and problems with your service) has caused people to disagree about what things it’s OK to break. Some say just about anything; others say you need to be more careful, especially with users. But what’s clear is that whatever your tolerance for breakage, you need to move as fast as possible consistent with that. And your team need to want to move fast.
I remember a board meeting with a CEO I’d backed where we were discussing how to get sales growing faster. The product was one that she felt needed to be shown to clients at their work, and her starting market was two districts of central London. She argued back against demos by videocall, insisting that her sales people would do better to visit in person. Each demo should take a bit less than an hour, she said. But when one investor suggested the team should target six meetings a day, since the travel time within districts might be short if meetings were well-planned, the CEO pushed back. “No,” she said. “I think three meetings a day is a reasonable target.” Three years later, the business is still alive, but only just.
Examples of people who can’t move fast are old-economy managers who need help with their email, and intellectuals who suffer from ‘analysis paralysis’. Examples of people who can are common in Israel, where the IDF trains its military that if they can’t get in through the door, they should abseil down the facade of the building and break in through the windows.
I’ve written a separate piece on how to hire senior people.
4. Find a way to get strong unit economics.
One company I know has monthly costs of $50,000, an average transaction value of $200, and does 200 transactions a month. The contribution margin it makes on each transaction is $5, so its customers are contributing $1,000 a month to its fixed costs. That’s miserable; the company will need to grow its sales by 50x to cover its costs today, let alone the costs of the bigger team it would need to grow.
One way to get unit economics right is to raise prices. Another is to deliver your product more efficiently so your costs are lower. But whatever you do, it’s valuable to have a quick payback on the cost of acquiring a new customer. If your payback period is three months, then $1m raised from investors and spent on marketing can be recycled four times a year. If your payback period is a year, then you’d need to raise $4m in venture capital to get the same level of sales.
5. Built your technology in-house, not with an outsource dev shop
First-time entrepreneurs are often tempted to get an agency to build their minimum viable product. This usually doesn’t work out. Products are rarely right first time around, especially if they’re built using a waterfall rather than agile approach. To get to product-market fit, you should expect to make lots of changes, as frequently and incrementally as you can. An agency whose business model is to make its margins on the ‘amends’ to the initial specification they quoted on isn’t going to help you do this.
An agency that makes its margins on the ‘amends’ isn’t going to help you iterate your product
And they’re not likely to be available either at the speed you need. That’s why it’s worth giving a chunk of equity to the CTO who will build the first version of the product, and will be have a good reason to take your call at 10pm on a Friday night if something urgently needs fixing.
6. Set objectives and key results
People overestimate what they can achieve in a short time and underestimate what they can achieve in a long time. When you’re bogged down in the detail of day-to-day problems with your business, it’s easy to forget what’s important. That’s why it’s so valuable to set objectives for the month, the quarter, the year; and to identify, for each objective, a number of ‘key results’ (I recommend three) that are specific, measurable, actionable and realistic and that will demonstrate you’ve hit the objective when you have done them.
Objectives are like the stars in navigation: you look up into the sky, and they tell you which direction to head in. Key results can translate into actions that you put in your diary and block out time to do each day before anything else. At the end of each period, you can look back and see what percentage you hit. This helps you adjust your ambitions for the next period. I’ve written a separate piece on how to review your OKRs.
7. Commit to experimenting.
When startup founders talk about their ‘runway’, they usually mean the number of months of they have left before running out of cash. But the best way to measure your runway isn’t by time, it’s by number of experiments. Most startups don’t hit product-market fit, and are still trying to find it when they have to close down.
Most startups don’t hit product-market fit, and are still trying to find it when they have to close down
Yet the experiments themselves aren’t what costs the money. Salaries and rent account for more than half of most startup costs. So if you can find a way to get twice as many experiments done in the same time, that’s like doubling the length of your runway.
One way to do that is to brainstorm a list of potential improvements to all parts of your business. Set up a method to rigorously test them, treating the potential improvement as the challenger and the status quo as the control. Run the tests as quickly as you can consistent with getting good data, and make immediate changes based on what you learn. A successful challenger becomes the new control.
If you’re a seasoned startup founder, many of the things on this list may seem obvious. But if your startup isn’t growing as fast as you would like, you may find it valuable to look back and force yourself to admit how many of the things on the list you’re really doing. Any that you’re not doing, you can start tomorrow.
And if you doubt the potential of these things to be transformative, here’s a back-of-the-envelope example. To increase your business 100x in two years requires 21.2% growth each month. If each month you increase by 5% the number of people who see your product, the percentage of those people who give you contact details, the percentage of those who buy, the frequency with which they subsequently purchase, and their average basket size, you can more than hit that 21.2% number.
Obviously you’ll need to make adjustments to this funnel for the nature of your business, but the point is there: small changes across many parts of your business, executed diligently over time, can turn a low-growth startup into a high-growth startup.
I’m Tim, and these articles come from my work coaching Series A and B CEOs backed by VC firms in Europe, America and Asia. Since 2013, I’ve run a seed fund out of London that invests in SAAS, platforms, marketplaces and tools. I’ve backed 50 companies, sat on 19 boards, founded a startup, and taken it to an IPO on the NASDAQ. Before that, I worked for The Economist and the Financial Times and wrote business books.
About this publication
This is one in a series of blog posts covering nine of the most important skills I’ve seen in founders who successfully scale their companies. If you’d like to read more of them, please follow; if you’d like to review a copy of my forthcoming book, let me know in a comment or DM. And if you think you know a CEO who might find these ideas valuable, please give a few claps or share:)
Photo credit: Chang Qing