By, Vineet Chauhan, Enabler, Espark-Viridian, India
You own a startup and it did well this quarter vis-a-vis the last one. You are proud of it and at the same time confident of its growth. This must signify it’s doing well according to you. However, there is still a quandary. A basic question that an entrepreneur must ask himself: is this growth good enough? Are we growing at the right pace, that is sustainable? Or is this just a flash in the pan?
While this question may spell gloom, it must not belittle your achievement. It should only serve as a means to put things into perspective. Lest you get carried away with your success. Rapid growth is no guarantee that there won’t be a sudden demise. Especially if that growth is obtained by burning through funding too quickly.
Measuring the startup success:
The growth rate primarily ascertains the success of a startup. If a company is failing to figure it out, it may be heading towards the doldrums. It is of prime importance that a startup focusses on improving its growth rate and has a fixed value attached to it. If there is any activity that helps increase the growth rate, keep doing it! The kind of growth that outstrips your funding is simply bad long-term management. With a constant growth rate a startup can see where it will be, say, a year down the line.
Let’s say for example, A company “X” growing at 1% a week will grow 1.7x a year, whereas a company “Y” that grows at 5% a week will grow 12.6x.
You may now be thinking, growing at 1% a week is still growing and that shouldn’t be bad. Well, it isn’t. But what company “Y” will achieve in 4 years, you will in 19 years. At that rate, sustaining the company for 19 years seems illogical. Hence, 5%-7% growth rate is considered optimal. If you can pump it up to 10%, that’s golden. (Source)
According to an analysis by Equidam, an average company forecasts a growth rate of 120% in revenues for their first year, 83% for the second and 60% for the third. Growth rates for startups, however, vary widely by industry, country, and stage of development of the venture. It is comparatively easier for a smaller company to make a run for higher growth rate than larger ones. Since it is easier to grow a smaller number.
There are by and large three phases in a Startup Growth:
The Uncertainty Period: Here startup tries to figure out what it wants to do to increase its revenue. Hence, of minimal growth.
The Epiphany Period: Here, the startup has figured out what it needs to do to reach the masses and be liked by them.
The Cashing in Period: Eventually a successful startup will grow into a big company. Growth will be slow. Partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves.
It is the second phase that defines how well a company may be doing. If it is successful in reaching the masses and is liked by them, then it is just a matter of time before it sees the crests in the growth charts and starts reeling in the money.
According to Paul Graham, (Co-Founder Y-combinator):
A startup is a company designed to grow fast. The only essential thing is growth. Everything else we associate with startups follows from growth.
Below is the pictorial representation of data pulled from Internet and software IPOs since 2010 and the historical growth rates for about 70 companies (like Groupon, Workday, LinkedIn) for the four years before they went public and the year of the IPO.
Hence, if everything is fundamentally associated with a Growth Rate in a Startup, how does one know whether it is good enough?
Keep in mind the following points:
-The chart above shows, smaller companies (between $0 and $25) grow faster and show tremendously high growth rate. Hence, you should be growing faster (by Percentage), the smaller you are. A median company with revenues between $0 and $25 million grew at a mammoth rate of 133%.
-Successful companies have High Growth rate, Low Customer Turnover, Predictable and Multiple Revenue Streams and High Gross Margin.
-Mostly, the companies successfully making it to the IPO were the ones with a steady growth rate of at least 20%. The Growth rate should not drop drastically after the IPO or any Funding round.