At the core of a startup is a high growth. Let’s think about it: there are incredible university labs that develop state-of-the-art and first-in-class technologies but we don’t call them startups; you have your favorite bar or restaurant down the street that you visit (well, used to, at least before the Pandemic) frequently but you don’t call it a startup.  It’s not the technology, product, VC funding or anything else that qualifies startups to be startups but a high growth. Therefore, as a startup founder, you need to understand what a high growth looks like and know what to manage to achieve it.

Almost ALL founders tend to view their growth as a target number to achieve. This means they set a static target number for their revenues or active users (e.g., “our goal for this year is to grow our revenues 3x” and so on and so forth) and wants to achieve it.  If you’re one of those founders, good news is you’re not wrong as the sum of the revenues or active users is in fact the real indicator of your growth. You grew your revenues 3x YoY, that’s great! You’ve grown three folds!

The pitfall of such view however is that it is just very incomplete and it doesn’t tell you how to in fact achieve the growth as such an aggregated number of your performance is merely the outcome of your growth.  You want to grow 3x YoY and that’s a great marker to hit, but how are you actually going to achieve it?

The founders who only see their growth as an aggregated number of their performance results tend to also project their growth to be up and to the right in somewhat linear format.  Let’s say that there’s a company that did $120,000 in their revenues in the previous year and the founder aims to grow their monthly revenues to $30,000 every month for the next 12 months. It’s great that the company will have $360,000 in their revenues and it will grow 3x (if the founder’s right).  However, in a breakdown this approach is problematic because with this model the company won’t actually be growing at all in the next 12 months. Here’s why: the company brought in $10,000 in the last month and if they manage to bring in $30,000 in the next month, it is indeed a 3x growth. But what happens in the next month if the company again brings in another $30,000? Surprisingly the company hasn’t grown a bit because the net growth from the previous month is Zero (i.e., [{($RevThisMo)-($RevLastMo)}/($RevLastMo)]).  And when the net growth is zero, it usually means the company hasn’t yet figured out what they’re doing and if that’s the case such very short-term increases in the performance (revenues, number of users, etc) are usually of a one-time-off luck and not sustainable.

You Have to Set a Growth Velocity.

(Photo by Mathew Schwartz on Unsplash)

Instead of having a static number as your growth target (i.e., what number you want to grow to), you have to set your target growth velocity – how fast you want to grow. Velocity is a directional vector between the distance traveled (or the altitude climbed, if you will) and time. And setting the growth velocity as a growth target will allow you to map out the path to achieve the growth you’re supposed to achieve to be qualified as a startup.

Let’s pick the constant 3x YoY growth as a marker (in case you’re wondering why I’m using 3x YoY growth as a marker it’s because most successful enterprise companies have achieved or exceeded 5-year YoY growth velocity of 3x, 3x, 2x, 2x and 2x in their growth phase).  To achieve the 3x YoY growth, what you need to understand is that you’ll need to grow by more than 16% (~16.085% to be more precise) every month. This means, based on your Month0 revenues of $10,000, your Month1 revenues should grow to ~$116,086. Then in Month2, it should be ~$13,478, and so on and so forth after that to grow ~16% MoM.  With this model to grow at the growth velocity of 16%+ every month, you’ll reach or even surpass the $360,000 mark by the end of the year.

The key here is to set the target for the per-time-frame performance increase that’s to be compounded over time, and figure out how to achieve it (you may want to set a quarterly growth velocity instead of the monthly one but it just seems to work better when you manage it tightly than loosely in the early-stage high-growth mode and that’s why some of the best accelerators (e.g., YC, Techstars, etc) would even push you to grow 7% weekly).  Also, because such increases are compounded over time, now you should notice how the differences between two consecutive months become larger as you grow with a velocity. This is why experienced investors raise their eyebrows when they see a growth projection with a linear increase as it’s supposed to grow exponentially – not linearly, if you’ve figured it out or at least you knew you’d have to figure it out and apply.

What’s Your Success Formula?

Once you’ve understood that you’d have to grow exponentially, now is the time to figure out what a success looks like for you. This might vary (though not by far) from company to company but in general it’s the function of these three factors: 1) leads, 2) conversion ratio and 3) average value (i.e., ACV, ARPU, etc).

Success Formula = #Leads X %Conversion X $Average Value

You can tweak this base success formula and get it tailored to your company but at the end of the day what you need to do is to figure out how to manipulate and optimize one or more of the three factors so you can constantly achieve your desired growth velocity.

Startup = High Growth

Paul Graham of YC wrote this fabulous blog post while back about how growth is the only thing that makes a startup a startup and I think what he wrote nicely complements my points on the growth velocity and success formula as the market will ultimately decide the feasibility of such models. You can set to grow 25% MoM with an amazing success formula, but at the end of the day the market elements such as whether there are enough number of potential customers (#leads to be generated) and whether you can reach out to them (how to convert and make them use your product) and how much value you provide them with ($value) will dictate your success.

It is incredibly difficult and even painful to build something that a big market needs and grow at a double-digit percent velocity for many years, therefore they’d tell you that the probability of your success is very low. They’re wrong – the probability doesn’t matter but the chances do as your chances to succeed is indeed binary: you make it or you don’t. Manage your growth velocity as that’s what will make you grow exponentially and eventually make it.