Thoroughbreds and Roller-Coasters: How a VC Looks at Consumer Startup Growth Rates

Ryan Metzger
May 21, 2018 · 6 min read

“How does my growth rate compare to other companies?”

That’s a question I get asked often in the course of my job as a growth advisor working at a VC firm and until now lacked specific benchmarks to answer objectively. Many times, I had to resort to anecdotal feedback. As someone who prefers data-driven answers, I aim to do better and am excited to share the results of a recent project.

I had two goals:

  • determine bands for year-over-year revenue growth relative to when a company began
  • put that growth in perspective by comparing it to the capital used to achieve it

The data set I put together spanned 28 companies all of whom sell to consumers and have taken venture capital investment. Some have gone public or been acquired, while others remain private. Some are part of Madrona Venture Group’s portfolio, while many are not.

I came up with 5 observations from this data set:

#1: Expect to Come out of the Gate Swinging

The data showed that the median year 1 to year 2 revenue growth rate was nearly 700%!

That number is inflated since many 1st year companies do not sell for the full year, but growth was still impressive in the years that followed:

Source: internal study of 28 venture-backed consumer startups

Want to be in the top quartile in year 3? Then you’ll need to grow over 300%. Get to work!

#2: Revenue Growth Rates Can be a Roller Coaster Ride

Revenue growth among consumer companies was volatile from year-to-year. As this chart shows, there was not a clear pattern when plotting one year’s growth against the next:

Source: internal study of 28 venture-backed consumer startups

Rory O’Driscoll from Scale Venture Partners performed similar analysis on SaaS companies and saw a different pattern. Rather than the volatile growth of consumer companies, growth rates among SaaS companies decayed in a fairly predictable way. In his study of ‘best in-class SaaS companies’, the growth rate for any given year was between 80 percent and 85 percent of the growth rate of that same company in the prior year (with an R² of .51 compared to .07 here).

Despite the overall data set showing volatility, there are some companies in our set with more predictable revenue growth. When that occurred, it’s often at companies with an Amazon-like obsession over customers. Cohorts are measured and stronger than competitors. NPS is high and the brand is meaningful and consistent in the eyes of its customers. Even when those elements exist, however, it’s likely growth will be much choppier than many other sectors. Buckle your seatbelts, investors and operators, you could be in for a roller-coaster ride!

#3: Revenue Growth Acceleration is Possible (and Common!)

75% of the companies in our data set had at least one year where the revenue growth rate accelerated from the prior year. These weren’t one-time anomalies either, as over half of the companies in our data set had two years of revenue growth acceleration. Scale’s report on SaaS showed that re-acceleration was far less common. In that report, less than 35% of companies had at least one year where revenue growth accelerated. Two years of re-acceleration was even less common at 10%.

With the shorter sales-cycles, fewer decision-makers, and digital transactions in consumer businesses, it’s much more realistic for growth rates to accelerate relative to other sectors like SaaS. Want that to happen at your startup? That’s what I think about everyday — send me a note and let’s talk!

#4: Year Five is When Challenges Often Arise

Blue Apron, Groupon, and Zynga all went public within 5 years of their formation. Each experienced extremely fast growth in the earlier years that ended up being difficult to sustain by year 5:

Source: internal study of 28 venture-backed consumer startups

The reasons for this vary by company. Slowing growth at Blue Apron is sometimes attributed to rising CAC at the same time cohorts were weakening. Groupon struggles included international weakness and consumer fatigue with its daily deals model, while Zynga faced headwinds in a few areas, including challenges diversifying from a reliance on Facebook.

The fact that each saw growth rate declines shows how difficult it can be to sustain best-in-class growth when selling to consumers.

Again, the best solution I know to avoid this fate is to have an obsession over customers. Redfin (from our portfolio) and Netflix were two who were better able to sustain above the median growth beyond 5 years. What do they have in common (besides the color red)? Industry-leading NPS as spoken about here and here.

#5: Be Aware of Capital Efficiency: How Long Does It Take for Revenue to Surpass Capital

I measured capital efficiency as cumulative revenue by year divided by cumulative outside capital. Individual companies were volatile in this measurement as large capital injections often cause the numbers to fall. The overall pattern, though, was consistent and the median showed cumulative revenue surpassing capital by year 3 (as evidenced by a ratio greater than 1).

Source: internal study of 28 venture-backed consumer startups

Achieving this milestone earlier leads to a clearer path to success and we have a few examples where that was the case. Three notable companies in our data set achieved this milestone sooner: Dollar Shave Club, Stich Fix, and zulily (where I used to work). Each had a different go-to-market approach that contributed to this impressive achievement.

Dollar Shave Club launched with a very successful video that got massive uptake right out of the gate. They paired this with targeted and effective PR and were off to the races. Stitch Fix did little paid marketing and relied on word-of-mouth that was often amplified by bloggers. Zulily likely utilized more paid marketing early on than either but was founded a few years earlier when ad inventory was more affordable. Consumers were excited by the daily deal model and emails could be acquired affordably in several large channels. The company could then effectively convert ‘members’ to long-term valuable customers.

Beyond acquiring customers, all three of the outliers mentioned also exhibited impressive repeat rates relative to their industries. This allowed them to grow revenue through both new and existing customers and do so without the capital that would have been needed if they were more reliant on customer acquisition.

I see a pattern of industry-leading repeat rates often in successful companies and believe it’s one of the key indicators of a company that can grow quickly, maintain that growth, and do so without extreme amounts of capital.

Are you trending down this path?

Get smarter at building your thing. Join The Startup’s +745K followers.