What is hyper-growth?
The word hyper-growth was first coined by Alexander Izosimov in a 2008 issue of Harvard Business Review to describe, “the steep part of the S-curve that most young markets and industries experience at some point, where the winners get sorted from the losers”. Later, the World Economic Forum quantified hyper-growth as more than 40% CAGR for more than 1 year.
Hyper-growth is definitely the holy grail investors and startups are looking for.
How can a company hope to achieve hyper-growth?
Achieving hyper-growth involves getting several aspects right, including:
- Vision and mission of the founders to guide the large and quickly assembled/ disassembled teams
- Product-market fit including MVP validation and market validation of initial growth / revenue KPIs
- Large addressable market to establish that the maximum demand / revenue the business can generate is potentially very large
- Mentors to bring in the wisdom to protect from pitfalls of steep growth
- Angle and venture capital investments to fund and fuel the growth with no security or collateral
The success stories of hyper-growth include Google, Facebook, Amazon. However, typical success rates among startups are 10%. Why is that so low? What factors lead to death traps among startups?
There are a plethora of systemic issues with hyper-growth that might manifest as a failure. Some of these pitfalls are:
- Lack of clarity on the value proposition of the product / service to the client
- Excess funding leading to over-burn due to carpet bombing the product / service through discounts and promotions
- Inconsistencies in business decisions such as pricing, vendor selection, outsourcing certain activity
- Single minded focus on top-line and low or negligible focus on bottom-line or performance efficiencies
- Growth leading to loss of nimbleness – the basic differentiator of a startup compared to a large corporate
How do we then make a hyper-growth startup sustainable?
But first, what is a sustainable business?
The recent definition of sustainable business has ascribed new meanings including social and environmental sustainability. The fundamental definition remains that the business is repeatable. Andrew Savitz coined the word triple bottom line to describe sustainable business, a balanced focus on people, profit and planet. Some of the companies that fall in this category include IBM, IKEA, Unilever etc.
Sustainability however demands certain tradeoffs which might slow down the growth in revenue due to the hard choices made by the businesses. For instance, Harley Davidson differentiates itself in terms of superior product, style and customer service whereas, Walmart on the other-end differentiates itself on the basis of cost leadership. Walmart might be able to target premium customers if it wants to. Harley Davidson can come up with an affordable bike range if it intends to. But Both the companies don’t mind losing some customers in short term by sticking to their respective differentiators. This very tradeoff helps them sustain in the long term.
Excess funding with 5 to 7-year exit expectations puts immense pressure on startups to carpet bomb customers with any product that sells rather than having a razor-sharp focus on their differentiator that can sustain them in the long term. Oyo is one such example closer to home.
Making the shift from volume to value
While Angel / VC investors in general prefer exist with a multiple in 5-7 year of their investments, they have realized in the recent past that there is a need to focus on scale rather than growth. Simply put, scaling is achieving more throughput or efficiency with the same establishment, costs, people, products etc. While this sounds simple, it can get quite tricky as well. In a growth company with constant expansion, it is quite difficult to actually assess if the increase in top-line is due to increase in sales budget and size of the team or if there is actually an improved sales per employee.
Investors have increasingly started insisting on a staggered growth strategy with stabilization periods in between. This approach provides some time to assess the scalability factor before infusing further funds and heading on to the next hyper-growth phase.
Achieving sustainability while managing investor growth expectations is an art which requires fine balance. An art which expects the founder to know when to accelerate and when to pause. An independent evaluation and assessment of the scale factor of the start-up from time-to-time can save the startups from their death-traps.
What it takes to make this shift?
A hyper-growth company and its employees tend to have higher focus on:
- Top-line growth
Whereas, a growth / sustainable company demands focus on the following parameters:
- Clients servicing
- Risk mitigation and
So, to slow down and become sustainable, the hyper-growth startup needs to steer the focus of their teams from:
- Spending to branding and building culture
- Funding to operational efficiencies
- Partnerships to client servicing
- Technology to risk management
- More sales teams to more efficient sales teams
- Hyper-growth to higher endurance
Covid-19 is an unexpected blow to the hyper-growth startups. It almost brought us all right from 5th gear to a sudden halt. Who will sustain and who will perish depends on the indispensable positioning that the startup has gained in the minds of their clients. It is definitely a time to conserve cash and survive this pandemic as further funds are hard to come by in the next 1-2 years. Maybe it is time to introspect and make the volume to value shift!