Jumping S-Curves: Building a High Performance Startup
One of the most important concepts for startup leadership teams to understand is the phenomenon of S-curves. An S-curve such as the one illustrated below represents the natural rhythm of growth, which follows a pattern of discovery, inflection, scaling, and inevitably decay.
This pattern is found in many contexts: relationships, careers, learning & development, phases of projects, stages of innovation, and more. Nothing that grows can do so indefinitely and eventually decline will set in. In this post, I will apply this framework to startups, defining how products go through different stages of the S-curve, and how the highest-performing companies are able to invest in new growth engines to drive durability over many years.
Early Phase: Finding Product-Market Fit
The early phase is filled with a lot of trial-and-error to find product-market fit. In order to increase the likelihood of success, a startup should start with an MVP to test a value hypothesis. A value hypothesis includes the features you need to build (what), the audience that is likely to care (who), and the business model that will compel your audience to buy your product (how). How do you know when you’ve reached product-market fit?
- Qualitatively: Finding a group of customers who are desperate for your product. If they aren’t desperate, it means there is likely a good alternative.
- Quantitatively: Retention curves that flatten. If members don’t come back to use your product, accelerating growth is meaningless…. you won’t be able to sustain it for long.
If you want more lessons on product-market fit, please read my post that goes into more depth on the topic.
Growth Phase: Leaning into the Core Growth Engine
When a company reaches product-market fit this means users are finding value in the product and are returning. This user behavior sets a foundation for a company to build on, but a product on its own will not drive growth. During this phase, it is time to lean into the company’s main growth engine to penetrate the market. Examples include:
- Performance Marketing: Facebook ads, Google ads, brand ads
- B2B Sales: Outbound and inbound sales
- Content: SEO, community forums, newsletters
- Virality: Word of mouth, referrals, invites
Companies often mistakenly move to the growth stage before proving out their value hypothesis. Don’t invest in growth before you have a solid foundation to build on or you will burn through capital. Retention is a silent killer and properly understanding the impact of retention requires a long-term view which can at times conflict with a team’s short-term goals.
Hyper-Growth Phase: Accelerating Investment in the Growth Engine
Once a company starts to demonstrate strong early traction and the engine is working, it becomes about leaning in heavily and accelerating growth. Companies that reach this stage and demonstrate a repeatable selling motion often are able to raise hundreds of millions of dollars in capital to invest in this growth.
Mature Phase: All Good Times Come to an End
As mentioned above, there are natural limits to growth. Products with weak retention will reach this maturity phase very quickly. But even products with strong retention will inevitably face headwinds that slow growth and make it progressively more challenging and expensive to grow at scale. Below are a few notable examples of forces that get in the way:
- Competition: Naturally, success breeds competition. If a company is successfully scaling, this will attract capital and competition to the market, making it more expensive to acquire customers.
- Technological Development: Platform shifts such as the one from web to mobile can shift usage patterns and consumer attention, changing the game on distribution.
- Saturation of Channels: The efficiency of marketing channels often erode as a company invests (e.g., Facebook ads) making it more challenging to acquire customers profitably at scale.
- Changing Preferences: COVID-19 is an example of how consumer preferences and buying behaviors changed rapidly in response to a systemic market shock.
- Lack of Prioritization: Organizations are often spread too thin across many priorities, and too many of them are ill-defined. This often leads to a misallocation of resources.
The Path to High Performance
The highest-performing companies are able to “jump S-curves” by investing in new growth engines early. Successful execution will cushion the decline of the core engine, driving sustained growth over many years. But starting to think about your next product generation when sales in your core growth engine are starting to flatten is way too late. Once gravity takes hold, it’s very hard to reaccelerate the growth of the business. Avoiding this “Oh, shit!” moment is easier said than done, though, as during the steep phase of growth it is common for leadership teams to feel invincible and be reluctant to allocate capital towards emerging projects that are unknown.
Some headwinds show up gradually while others might be more sudden. Thus, in addition to being paranoid and developing an S-curve strategy, it is critical to invest in leading indicators.
Examples of new growth engines include selling via new sales channels, expanding to new geographies, launching new products or business lines, upselling existing customers, or expanding up/down market, among others. Successful execution is due to many factors including timing, proper resourcing, responding with the right strategy in face of the particular headwind, and taking advantage of your company’s unique strengths.
Netflix is a perfect example of a company that has a successful history of “jumping” S-curves. Over several decades they have navigated technological change, changing consumer preferences, competition, market saturation, and more. Inevitably though, Netflix’s business will slow down again and they will need to find another growth engine. Maybe advertising? Gaming?
Common Failure Modes
S-curves are not intuitive but are hugely important for management teams to understand in order to navigate the complexities of company scaling. Here are several common failure modes to keep in mind:
- Don’t assume the hyper-growth phase will live on forever. In times of great growth it is most important to scrutinize your business and start formulating a second-act. Be your own biggest critic and develop a healthy sense of paranoia. The best companies are constantly thinking about this.
- If you notice growth slowing, there is a common tendency to reactively try to invest in the mature growth engine to re-energize growth. Often times, these efforts will be unprofitable. This is a common trap as this is the easiest path forward given the maturity of the engine.
- Don’t mistake “lubricants” and “turbo boosts” as growth engines. 1) Lubricants (e.g., improving conversion) don’t drive growth directly but instead optimize the efficiency of your engine. 2) Turbo boosts (e.g., events) are one off events that accelerate growth but are not repeatable. More on this topic here.
- Investing across too many new projects that require core resources can pull away from keeping the main engine running smoothly.
To avoid these failure modes, it is critical to develop a disciplined, patient, and nurturing culture, and one that is built on System 2 thinking. If your company culture is driven by instant gratification and is based on System 1 thinking, you will likely succumb to the forces at be.
Conclusion
In order to achieve sustained, long-term growth it is imperative to diversify across new product lines and markets. Hopefully with this framework, you can better understand your business and get ahead of the “Oh, shit!” moment.
Special thanks to several of my colleagues Kim Larsen, Sam Bauman, and Amit Bhatt for their contributions to this post. Kim has written previously on this topic, specifically on how marketing and retention directly correlate to this phenomenon.
