Introducing some old school thinking to define, measure and achieve growth while building your startup.
Originally published by Abijit Aji on Dec 5th, 2019
When I first heard the term “Growth hacking”, I honestly thought I misheard it. In my experience, growth has always been a process. Whether at a startup or in an established business, growth is meant to be an outcome of sustained actions that overcome challenges. It is this process that helps mold the idea, project or company. So, why does one have to hack it?
Wikipedia defines growth hacking as a relatively new field in marketing focused on the strategies to acquire as many users or customers as possible while spending as little as possible. So “growth” in today’s parlance seems to be getting as many users for a startup’s product or service. It is now useful to understand what “hack” means.
The Webster dictionary defines hacking as “To cut or sever with repeated irregular or unskillful blows”. It comes from the old English root word haccian, which means to cut or sever. We know that the original use of the term in industry (and pop culture), was in the field of computer programming. A hacker identified loopholes in a system and “bypassed” a process to achieve an objective. The objective could be ethical or unethical, but it involved breaking through walls and by-passing a process.
This brings us to understand that the use of the word hack in the context of growth, is to bypass a natural growth curve and acquire as many possible customers. In recent years we have seen a few such startups that have focused largely on this form of growth. These companies have almost always raised more capital than required and every customer they continue to on-board is non-profitable. The operational rigor needed to sustain an increasing customer base is not there hence leading to organizational challenges. As an analogy, these companies remind us of the hormone fed genetically modified chickens of a well known fried chicken company. The birds grew disproportionately to a point they could not stand on their feet. Are we doing something similar in creating such modified startups?
But before we get deeper into the subject of what could or should define growth in the world of innovation, let us turn to life for more examples of what growth was meant to be. Growth by nature’s definition was meant to be a natural process. A seed grows into a plant, a caterpillar into a butterfly, and a human embryo into a human being. Of course, in the process there are the struggles and jubilations attached with growth, but that is how evolution meant it to be; a process. It is also a mechanical and an arduous one with a time factor to it. For example, a butterfly starts of as a struggling caterpillar that must break through its cocoon to release itself, or a chick must hatch the egg and come out of its shell. These are the very “operational processes” that, in the chicks example for instance, help it with a toughened beak and strengthened legs that support it for life. Hacking growth in nature’s terms would be similar to breaking upon the egg and allowing the chick to bypass a natural process. What might result out of this is either a weak deformed chick or a dead one.
In the history of entrepreneurship as well, startups that started in a garage have evolved and moved onto to become well valued and respected companies. Companies like Microsoft and Apple, while bringing innovation had strong systems that focused not only on revenue expansion & market share, but also had strong IP protection, accounting systems of cash/profitability and the intent to build long term enterprises. Importantly, they took years to grow even though these companies were practically disrupting their industry with something genuinely new. Off late however, growth has meant “maximum customer acquisition at minimum cost”. To make butterflies directly out of an egg, entrepreneurs are encouraged to create these modified startups that seem to have grown on paper but without a strong foundation. This culture of profit-less growth is prevalent. The main reason for this departure from the norm of growth are not only because of the definitions of growth but also the metrics by which growth is measured.
Why are we doing this? One of the primary reasons that the definitions and metrics of growth have changed over the years is an interest to create early exits for these startups. Rapidly acquiring customers leads to robust operating profit growth and with the metrics for valuations (these days) being operating profit multiples, unprecedented operating profit (a.k.a EBITDA) offers unprecedented valuations. By not looking at more robust metrics of growth (and of valuation) we are creating unsustainable enterprises.
So, is there a solution? There is nothing wrong with the kind of innovations, ideas and enterprises that are being created all round the world. It might however be useful to bring back some of the old school thinking that defined business growth for centuries. Some of this thinking is incorporated in the suggestions below. These measures are particularly useful at early stages of a company where a typical CEO is faced with the daunting task of resource allocation.
1. Build barriers to entry: Building genuine barriers to entry early on allows you to have a run-way to gain market share. Barriers could include strong IP strategy, strategic partnerships, right advisory team, industry knowledge, tech know-how or expertise. “Raising a lot of money” is really not the right way to create these barriers.
2. Robust business model and go-to-market strategy: Time-test the business model. Pivot when required, and have a go-to-market strategy that is fastest to cash. Market share is a “work in progress” not the end goal.
3. Strong value proposition: Resist the temptation to build your company around a hype or a fad. Value has to be clear and quantifiable. For example, a more efficient air conditioner is a more efficient air conditioner, whether climate changes or not. The product reduces electricity costs, increases customer happiness and does not have to rely on a theme.
4. Efficient use & planning of capital: When raising capital always have a “source and uses of cash” sheet to ensure that investor capital is not the only source of future cash in-flow. Contingencies are a must, but your customer should be your source of profit in the medium term.
5. Build operational rigor: Kaizen! Small and consistent changes yield long term sustainable results. Increase the chances of success by building operational efficiencies in the business.
6. Use other forms of capital: An eye for cash allows your startup to attract other forms of capital beyond venture capital, thus offering both operating and financial leverage. Venture debt, corporate revolvers, asset based financing are all fair game if assets are created while growing your company. Lesser dilution offers more control.
7. Investor Returns: Exiting and/or offering exits are only one way of providing returns to the investor. Investor value can be created by building sustainable enterprises and offering a more gradual return on investor capital. If the innovation is powerful, exits or partial exits will always make its way.
8. Build a great product: Take time to build the product or service. A genuinely new product or service has a natural growth curve that enables it to disrupt and genuinely change the market landscape.
Time and time again, life has been a great teacher. Just like one cannot grow a mango tree with an apple seed, or that a human baby takes nine months to develop, entrepreneurs needs to focus on sustainable growth. Some or all the above techniques mentioned, if incorporated, will increase the success of the startup in the journey to building a well-respected and valued company.