Is Going for Rapid Growth Always Good? Aren't Startups So Much ...

I think I?ve read Paul Graham?s post on ?Startup = Growth? three or four times now. And of course on Twitter I?ve seen the Tweets, ReTweets and superlatives on what a great post it is.

Viewing the article through the lens of a venture capitalist there?s much to agree with under the mantra of ?growth!? And when you read the article carefully it allows for a period of discovery in your business. For example

?The growth of a successful startup usually has three phases:

1. There?s an initial period of slow or no growth while the startup tries to figure out what it?s doing.
2. As the startup figures out how to make something lots of people want and how to reach those people, there?s a period of rapid growth.
3. Eventually a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves.?

There?s an allowance for a period of time where there?s ?slow or no growth? while you?re figuring things out.

He also talks about the rate of growth and the need to pick targets, measure and question assumptions when you aren?t achieving your objectives. I spend a lot of time encouraging startups with whom I work to take measurement more seriously. I talked about some of that here.?So I like that bit, too.

He talks about making things that people want & going after a big enough market. Check.

He also nails the reason why venture capital is still necessary to grow large businesses quickly in a world where the costs of running startups have fallen dramatically

?Why do founders want to take the VCs? money? Growth, again.

The constraint between good ideas and growth operates in both directions. It?s not merely that you need a scalable idea to grow. If you have such an idea and don?t grow fast enough, competitors will.

Growing too slowly is particularly dangerous in a business with network effects, which the best startups usually have to some degree.?

This is a frequent theme of mine when asked to speak to audience about the VC industry. ?Lean? is great in the early days but if you discover an attractive market opportunity you need to get ?fat? really quickly or somebody else will.

As a person who spends much time thinking about the venture capital & startup community and who has seen good times & bad times across many economic cycles the article is well written.

Still.

I worry that many people will read this post and get the wrong message. And the wrong message is frankly strewn all over Silicon Valley.

Founders will continue to take the ?growth at all options? path that leads to privacy & trust creep at places like Quora. Startups will continue to be aggressive in spamming us in our Facebook timeline. Fooling us into downloading an app to watch a video and afterward feeling duped.

After all, growth equals high valuations and loads of venture capital! And headlines. And approbation.

But for every breakout that works are probably 10,000 that don?t. And many of these companies burn through cash too quickly trying. Or pivot too quickly. Or only go after markets for which network effects are possible.

And this is fueled by the VC culture in Silicon Valley.

I was recently talking to a VC about a business I was looking at and I was asking whether he found the business interesting, too. He said, ?I?m not really convinced. The company hasn?t really reached ?escape velocity? which means it must not be working.? Escape velocity. The speed needed to ?break free? from a gravitational field without further propulsion.

Reach it quickly or investors will look elsewhere. I know that some of the best businesses have seen this rapid acceleration quickly: Google, Facebook, Instagram, AirBnB and the like.

I think that our industry is too quick to believe that it?s ?up and to the right? quickly or it?s time to move on to the next thing. Investors seem to think this way these days. And so do entrepreneurs who are quick to pivot to new businesses or to sell in an acquihire.

And you can follow the craze for instant growth right up the value chain. LPs (the people who invest in VC funds) want to know what ?hot? deals you?re in. ?What exits have you had?? ?What, since ?09? If I exited those wouldn?t it sort have been a ?. failure? I?m shooting for 7-to-10-year exits.? Most LPs are not. They want to know that you?re in Twitter, Facebook, Square, Fab and the like.

Instant growth = huge valuation from follow-on investors = big VC mark-up on our quarterly reports = LP interest. Grow or die.

I don?t really think the incentives work well in this scenario. It encourages a bit too much FOMO (fear of missing out) and over-valuation in companies?and a desire to do huge financing rounds to be perceived as the ?knock-out winner.? How?d that turn out in the late 90?s? It?s been high tide since 2009 so an entire batch of entrepreneurs don?t know what low tide even looks like.

To be clear, growth is really important when I?m an investor. But I do wonder about a couple of things:

1. Some businesses take a bit longer to?percolate.?There?s a saying in startups that ?being too early is the same as being wrong? and that?s true. There are times where your solution should work but it just doesn?t. It might be for technical reasons or it might be for customer adoption reasons. I?ve seen this happen before where companies seems to be struggling with traction and one technology change at an industry level suddenly propelled them more rapidly. If you tried to build Instagram before the iPhone, for example, there was almost no way you could have seen their growth rate.

And the ?stay lean? argument isn?t only good for entrepreneurs, it can be good for VCs, too. In a pool of 25-30 investments in a VC fund the goal is to have 2-3 huge outliers, each of which return the total fund size. It is VC math, like it or not. Our partners have invested in more than dozen companies that became worth more than a billion dollars and that has disproportionately driven returns.

But 98% of VC exits in our industry are sub $100 million. So investing $3-5 million in a company and taking a year to 18 months to see how it develops before adding more fuel can often be the right course of action. Pile on huge VC money behind you and you have the same problem entrepreneurs have when they raise too much money.

As I?ve looked through our own returns I see many 5-8x returns that contributed greatly to our financial results. Fred Wilson talked about this too, in his spot-on post about ?the fallacy of bi-modal returns? which is worth reading for anybody interested in VC math.

2. Some entrepreneurs can make a dent in a smaller world. I think the one thing that niggles me that most is reserving the word ?startup? for only super-growth, Silicon Valley style businesses. I think we should encourage an entire generation to think about building startups. But ?my definition of the word is much broader. Business that are innovative. That leverage technology or drive change. Businesses that are probably on a rapid growth scale by historic levels but would prove very bad investments for venture capitalists.

Has Silicon Valley really become so elitist that it wants to reserver the word ?startup? for companies only with the ambition of hyper growth?

I started talking about this 3 years ago to audiences where I encouraged (and still do) most people NOT to raise VC. And I?ve talked openly about why many services businesses should not feel product envy and chase the commensurate growth rates.

3. Are we not subtly convincing too many people to ?go big or go home?? I don?t love that culture. I love it in a subset of people & businesses. I love it in the companies in which I invest. Still, I think many entrepreneurs are done a disservice by buying into this mantra.

Why? Many entrepreneurs would have / could have built successful businesses that changed their lives, enriched their careers, provided value to customers and made money for those involved. Perhaps I feel this way because it?s my story.

I built two companies. Neither achieved the kind of growth rates associated with Silicon Valley but both grew significantly faster than traditional industries and both were innovative.

My first company was used to manage workflow & share CAD drawings and plans on the $16 billion refurbishment of the London Underground. It was also used as a project management tool & document storage system for the largest private bank in Europe who even stored images of their bank vaults on our servers. We worked with police departments, the ministry of defense, many of the largest utility companies in Europe and a ton of contractors, engineers, architects, developers and suppliers.

In revenue terms our first two years of sales were $2.1 million and then $5.9 million.

We sold the company when we hit $36 million in bookings and $16 million in SaaS GAAP revenue. Not Google. But a tremendous experience for everybody involved.

Many people made money. Not Eff You money but money that changed ?lives forever.

And many people?s careers were launched.

David Lapter?our CFO & the best one I ever worked with. Now he?s CFO of Fab.com
Stuart Lander, who was the President & COO is now helping run Internships.com
Ryan Lissack is the CTO of Maker Studios
Tim Barker is the CPO of DataSift?(and prior to that headed European marketing for Salesforce.com)

I?m pretty sure all of these guys feel that they worked at a ?startup.?

And many more employees parlayed their experience working with us into careers at Google, Microsoft, Oracle, Salesforce.com and elsewhere.

And it launched this author?s career and taught me everything I know about sales, marketing, hiring, firing, fund raising and so on.

I don?t know how you can call that experience anything but a startup.

Our second company was bought by Salesforce.com. It?s now the foundation for Salesforce Content. Used by millions of users.

No tiny islands were bought with the proceeds but every member of our team earned more money than we had seen in our lives.

I could look back and say we should have tried to be Box or Dropbox. But we didn?t. And I don?t believe any of the team members have regrets about the outcomes of their lives or the experiences they have had since.

So before we rush to define startups as a Silicon Valley, go big or go home, grow at all costs, succeed quickly or move on culture I think we should reflect on the encouragement we want all future entrepreneurs in this country to have.

I know that Paul Graham never said you had to be high-growth startup. I read his post carefully enough to know that he really just described the?phenomenon?that we uniquely see in Silicon Valley and that drives many VC businesses and some of the fastest growing companies in our industry.

But I believe that without presenting the other case to my definition of startup entrepreneurs who want a different path and who are young & impressionable they might read into Paul?s post a certain religion of going for instant, rapid growth. Just the same way that ?pivoting? in lean startup terminology initially talked about launching features and pivoting your product as customers gave you feedback and morphed into ?it?s ok to start by doing subscription commerce and if it doesn?t work relaunch as a mobile payment platform business.?

I want the definition of startup back. To be used by anybody who is willing to take the risk to quit their corporate job and go out and try and built an innovative, disruptive, tech-enabled business that tries to change the way things work in the world.

It?s ok to build a company that stays small, has a few million dollars in revenue and builds careers, bank accounts and enriches client experiences.

It?s also ok to raise venture capital and try to build a monster business. But know that if you don?t go ?up and to the right? you might find yourself abandoned (unable to raise more VC) or even ousted (to bring in a CEO who can show rapid growth or die trying) in the name of growth & returns. It happens more than is reported.

It?s also ok not to raise venture capital. To aim at changing a small corner of your world or industry. Or your life.

And I applaud all of you who try.

Source: http://www.bothsidesofthetable.com/2012/09/22/is-going-for-rapid-growth-always-good-arent-startups-so-much-more/

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