Growing a company can be exciting and fun. Launching new products, winning more customers and entering new markets is a real buzz for most entrepreneurs. For some lucky (or clever) individuals growth comes easy. They have an awesome product, customers find it, buy it and tell their friends. Boom – exponential growth.
However, for most of us predictable growth is a little harder and needs careful planning and consideration. Sure, the product needs to be great, customers must love it and be happy to pay and keep paying to use it. But there’s a whole bunch of other factors that need to be considered in order to set a realistic rate of growth.
So, what is a realistic and achievable rate of growth for your business? How big can your business be and how fast can you get there? What are the factors that affect growth potential?
Get some context
I speak to many tech company leaders who are beating themselves up – frustrated that they are not meeting their own, or their stakeholders, growth aspirations. They’ve read about XYZ start-up that achieved a zillion per cent growth, or have investors with a portfolio stacked full of hyper growth success stories.
But not every tech company delivers hockey stick growth. The media rarely front covers average performers. Not every investor will reveal their anti-portfolio of investment failures and mediocre exits. I’m sure you’ve also met investors who demand the sort of growth that the $1bn unicorns achieve, but simply don’t understand the level of capital required to scale.
Get real. Get some context. Do your research. Take a long hard look at what is a realistic rate of growth for your business, your market, your stage of growth and your team’s own drive and ambition.
1. Your objectives
So, what’s your plan? A friend of mine runs a business importing gourmet food ingredients from around the world. He turns down numerous approaches from super markets to buy in bigger quantities and frequent offers of growth capital from eager investors – but he just doesn’t need to hassle of dealing with bigger customers or someone else sitting at the Board table. His business is growing at a manageable rate, its profitable and he’s still in control. Perfect.
However, for those of us who are looking to grow a bigger business faster, we need to decide on a realistic growth objective. One that will achieve the desired goal over a suitable timescale. Be it a trade sale exit in 5 year’s time, an IPO by the time you hit 40 or simply a comfortable lifestyle within X months.
As a business owner, your appetite for growth is one of the most critical factors in your company’s ability to scale up. Build your growth plan to suit your own objectives and those of your fellow shareholders.
Dig in to what this means for everyone in your team – fast growth usually means less family time, more recruitment, increased focus on delivery deadlines and targets, more cash and continuous change. Slower growth may be less exciting but also less pressurised and more profitable.
It’s also worth considering which measures of growth are important to your business. Of course, sales revenues are often the most quoted metric, but profits, shareholder value, customer base, customer lifetime value, cash flow, working capital, employees, markets served, customers, units sold, product usage and many other factors are all measurable and reflect growth in different ways.
Shortlist the key metrics for your business and focus your team on delivering growth.
2. Market Maturity
Don’t under-estimate the importance of market maturity in affecting growth rates. For tech companies in particular, timing is everything. Being early is good but being too early can be disastrous. As can being too late.
We’ve all seen the bell curve, but where is your specific market? If you’re only getting interest from ‘innovators’ or ‘early adopters’, then your potential for growth is limited by the relatively small number of potential customers – at this point in time. Your strategy should be to preserve cash long enough for more customers to be ready to buy.
However, these pioneering customers can also be the springboard to rapid growth and happy to accept a less than mature product or service offering in return for flexibility and innovation. At this stage, you should welcome new competitors – it’s a sure sign that others are seeing the same market opportunity.
If you are gaining traction and more enquiries flood in, then prepare to scale faster. This ‘early majority’ stage is all about the land grab – capture more share, grow distribution, remove barriers to growth, follow the upward curve.
A later stage market, one that’s mature, means you’ll be competing harder for customers and you’ll need to focus more on differentiating your offering or displacing the incumbent market leaders. Often in mature markets, established vendors make switching difficult or expensive for their customers, so retain through pain.
Consider the ‘shape’ of your market opportunity. For some sectors, the market may take generations to mature whilst other opportunities might be a flash in the pan and be measured in months.
Where-ever your market is, just be very aware of the maturity of the market.
3. Growth Stage
It goes without saying that early stage businesses can deliver bigger per centage growth – it’s just the maths. Being smaller often means you’re more nimble and can address changes in customer demand quicker than larger, more established competitors. Many start-ups can make significant growth numbers work in their early life but slow down as they scale.
Looking at early and growth stage business growth benchmarks is difficult because the data is only publicly available for public or VC portfolio companies – and usually VC’s will only report their success stories.
It is also difficult to identify growth attributable simply to growth stage as opposed to business model, funding or other factors.
However, your strategy will evolve over the life of the business and be reflected in the growth numbers.
4. Business Model
Certainly, some business models are capable of scaling much quicker than others.
I’m currently working with an early stage tech company that is hitting 10% month on month growth without too much effort. I also have a SaaS client that is running hard to achieve 10% per year at a similar stage of their evolution.
They are both selling to businesses, but at very different price points.
Large deals to enterprises are typically more complex with several levels of approval required and therefore take longer.
Whilst longer sales cycles can be expensive and inhibit growth rates, these large companies take a longer-term view, commit to multi-year agreements and will stick around longer.
If the price is low enough, a customer or small business owner can simply use their credit card and get started. Great for acquiring large numbers of customers quickly, but these customers can often switch if another provider delivers more value.
Companies with user generated content (eg Stack Overflow, Yelp) or highly viral acquisition (eg Snapchat or Zynga) can also achieve scale and eye watering speed.
Where-as companies with professional services or some sort of manual intervention will inevitably have more bottlenecks to deliver their product to customers. So even if the customer demand is there, they have limitations on their rate of growth. Likewise, a product company may have limited manufacturing or supply capacity which will put a brake on revenue growth.
Consider how your company’s business model will dictate its potential growth rates.
The ability to grow is often a function of acquiring new customers, selling more to existing customers, entering new markets or launching new products or services.
Once a company has proven that it can acquire and retain customers profitably, its growth rate will largely have a direct correlation with its ability to fund its growth. For early stage businesses looking to scale up, identifying the cost of acquiring new customers will be critical to success. If customers cannot be acquired cost effectively, or there aren’t enough customers to acquire, then no matter how much funding is available they will struggle to survive.
However, once a customer acquisition cost is shown to be realistic, repeatable and scalable then companies can invest more reliably in growth. Removing funding as a barrier to growth is a critical step in achieving and sustaining predictable growth.
Companies that can accurately predict growth invest early in refining their value proposition to prove their acquisition and retention model. Mid and later stage funding rounds enable these companies to crank up the acquisition process, make it more efficient and lower risk.
There are many websites out there showing growth rates for different companies in various sectors. Each one is unique and must be used as an indicator rather than a rule. This article doesn’t aim to give you the numbers – merely to highlight some considerations. Do your homework – get real with everyone in your team.
As a business leader at the helm of a growth business, it’s not always easy to balance expectations with reality. Your stakeholders may need educating to ensure they stay aligned with each stage of your journey.
Growth is rarely a straight line or the perfect hockey stick that your early business plan portrayed. If not – don’t panic.
So long as you can continually balance the right type of growth for your business with the requirements of your key stakeholders – you’ll be cooking on gas.