Chasing Growth – pursuing the right metrics at the right time

Everybody loves growth! Faster the better? – the first and foremost metric an investor looks to know about and arguably the biggest driver of startup valuation. Leading investors have defined startups as entities chasing fast growth (and I can’ t agree more!) – the importance of this metric is well understood, having said that what I believe is not very well understood is what ‘growth’ means across the lifecycle of a startup. In my conversation with founders, I, more often than not, hear them chasing the same growth metric (most often revenue scale) across the startup’s lifecycle. I believe this mindset results in short term thinking and poor strategic decision making. The idea of this blog is to ‘double click’ on the very meaning of growth across the lifecycle of a startup which should hopefully culminate in the founder chasing the right growth metrics at the right time.

At the cost of oversimplification, there are 3 key stages of a startup (1) Pursuit of strong ‘product market fit’ (2) Finding a repeatable, scalable & profitable sales model (3) Hyper scaling. I would use the rest of the blog to define ‘Growth’ across these 3 stages.

               Defining ‘Growth’ in the ‘Pursuit of strong Product – Market fit’ stage 

‘First to strong product market fit rather than first to market or first to raise capital is likely to win’ – keep this thought in mind as you read below as I will come back to it.

The definition of ‘Growth’ at this stage is about proving out, via trackable key metrics, the value proposition of your startup (and not the revenue scale of the business) – in essence, you need to answer 3 key questions – what is the problem you are solving? How big is the market opportunity? And, how effective is your solution in solving the same?

Following is a painful real life example of how a smart well-funded entrepreneur learnt the hard way about choosing the wrong growth metric –

The company had an innovative B2C product and had raised boatloads of cash from some of the leading venture investors. The company focused on revenue scale rather than working towards proving strong product – market fit. The entrepreneur pushed paid marketing and found success as there were many first time buyers of the product (the market is large and the product is new!) – having said that the usage is low, users to traffic % is low, retention is not great and hence, word of mouth is not kicking in. Competition kicks in and paid marketing cost sky rocket overnight. Lack of usage resulted in low retention which meant that the company was heavily dependent on new customer acquisition for growth (which by now has become terribly expensive!). The entrepreneur cannot possibly show de-growth to, up till then very happy, investors or ESOP motivated employees – he pumps more marketing which results in higher burn. In a bull run market, the company’s top line metrics continue to find the company more financing but at the end of the bull run, the tide turns and the company is found swimming without their costume on – Growth stalls = shut down!

The above example, is a clear indicator that revenue scale, alone, is a poor indicator of growth at this stage of a startup.  For a  more extreme example, if I stand on the road to sell $100 bills for $ 98,  my revenue growth would be phenomenal but the business model is only sustainable in a bull run or If I have a another way of recovering capital from the users (which in this case doesn’t exist!).

At this stage, I also hear from entrepreneurs the fear of competition raising capital – which then overnight becomes the bedrock of all their decision making! Such a mindset drives entrepreneurs to chase vanity metrics to impress potential investors and invariably results in the situation mentioned above. Keep in mind the fact that, Facebook was not the first social network to launch (it had well-funded competition), and Google was not the first search engine but these companies for sure had deep understanding of the consumer pain point and had the best ‘product – market fit’ – which brings me to the ‘thought’ at the start of this section – ‘First to strong product market fit rather than first to market or first to raise capital is likely to win’

Growth at this stage means finding ‘strong product – market fit’

The questions mentioned in the first paragraph tend to be subjective in nature and the answer to the same can vary depending on who you are talking to and hence, choosing ‘trackable important metrics’ is key. I have often found entrepreneurs struggle to measure their startup’s product – market fit – the following blog provides a framework for the same  – Measuring ‘Product-Market Fit’ – Is your startup ‘CURWing’ in the right direction?

     Defining ‘Growth’ in the ‘Finding a repeatable, scalable & profitable sales model’ stage

So you have ‘strong product – market fit’ in a large market opportunity (please do reach me immediately!). The idea of growth at this stage is to do 2 important things –

• Finding 1-2 key customer acquisition channels that work for you – before we jump into this part it’s important to have a look at the following data –

The above table shows how some of the most successful companies scaled on the back of perfecting 1-2 channels. The idea of growth at this stage is to have 1-2 channels that work very well for you – ‘spray and pray’ approach does not work as you need to narrow down on your target customer segment, understand where you will find them and test what message works best – this should ensure efficient growth at the top of the funnel and keeping your cost per lead in check. On the other hand, you need to have a dogged understanding of your new customer acquisition funnel to be in the constant pursuit of plugging leakages through a combination of customer surveys, A/B tests, product revamps etc.  The aim should be to scale 1-2 channels till they saturate! Ideally, these channels should allow you recover CAC in less 1 year otherwise cash burn will be high and you will use up more cash for the same amount of growth = lower valuation!

• Figure out the right communication for the target customer – while this makes for another long blog, I have witnessed smart entrepreneurs discover the right communication by understanding how power users describe the product to non-users.

Growth at this stage means finding 1-2 channels that work for you (traffic, low cost per lead and high conversion (%)) and provide for a less than 1 year CAC payback period.

                              Defining ‘Growth’ in the ‘Hyper scaling’ stage 

The one word that defines growth the best at this stage is ‘Market Share’ – depending on the business model & competitive intensity of the industry the aim should be to bulk up on capital. If you are in a business which is winner takes most and you need to outspend competition to keep up your market share / maintain marketplace liquidity you should go for it (as long as there is a path to you recovering the cash from them at some stage). Depending on the cash in bank, you could open up multiple acquisition channels that have longer CAC payback periods (read higher ‘Cash Burn’) but enable you to garner market share. At this stage, you can afford 2-3 year payback period but ensure that Customer life time value >>> Consumer Acquisition Cost.

Growth at this stage means ‘market share’

Easier said than done! – Entrepreneurs and investors are swayed by market sentiments. And the market mood swings between ‘Growth at any cost’ to ‘Freeze mode’. Having said that, if you remain true to fundamental growth metrics which means cracking the right growth metrics at the right stage – I would be surprised that you don’t raise capital at your terms and more importantly, deliver sustainable growth year on year vis a vis those who found easy capital that funded easy growth and were painfully written off!

To summarize –

1. Growth means different things at different stages of startup lifecycle – do not use the same brush to paint growth across stages
2. ‘First to strong product market fit rather than first to market or first to raise capital is likely to win’ – product market fit is the foundation of your castle, make it strong!
3. Find 1-2 channels, early on, that work for you (large traffic, low cost per lead and high conversion (%)) and provide for a less than 1 year CAC payback period – avoid unnecessary cash burn by spraying and praying across channels.
4. Smart entrepreneurs do not sway from the fundamentals of growth metrics irrespective of market idiosyncrasies – there is light at the end of the tunnel
5. Everything starts from Nothing !