We need to change the way we think about growth
The extreme growth of some of the world’s largest companies has everyone fooled.
In the last 20 years, the very public growth explosion experienced by big technology companies like Facebook, Google, Apple and Amazon has changed the way we think about the idea of “growth”.
All these businesses have achieved enormous scale in a relatively short amount of time, especially when you look at their company on major stock exchanges.
They’ve been able to do this, especially In the case of Facebook and Google, by capturing a never-before-heard-of amount of human attention, one of the world’s most valuable commodities.
As well as being phenomenally successful at gaining more customers and more revenue, they’ve paved the way for a new kind of business - the type of which was pretty much inconcievable as late as the 1980s.
I’m talking about the tech startup, of course.
Some of these startups have been incredibly successful at making money (AirBnB, Facebook), some of them have been incredibly successful at gaining customers while spending other people’s money (Tesla, Uber) and some of them have been scams (Theranos, WeWork).
These tech “unicorns” and their meteoric rises (and in some cases falls) have totally changed the way entrepreneurs at every level of the start-up curve think about making money (In other words, growth).
30 years ago, the focus of the entrepreneur was cashflow - and how they could drive positive cashflow as quickly as possible. Positive cashflow grows working capital - which you can then invest In new resources (people, equipment, debt to finance equipment) that grow a business.
Nowadays, many businesses skip the positive cashflow step. Why? The emergence of venture capital (and angel investors etc).
I’m not saying VC money Is a bad thing, but it has had a fundamental effect on the way we think about doing business.
Many entrepreneurs place getting an investor at the top of their business’ strategic priorities, when we should be focusing on generating positive net cashflow.
The reason we don’t?
It’s easy to figure out how to solve a problem at scale in a spreadsheet and ask for someone else’s money to do It. It’s much harder to build something from the ground up, with your own money, and all the risk on your balance sheet.
In our minds, it’s a choice between Ferraris (or Teslas) and living at home with your parents. One of those choices Is much sexier (believe me!). It’s just that it comes with some downside.
That downside? The return that that money expects is HUGE.
The expectation of return
A bank will offer an investor about 3% interest on their money. It’s about as safe as an investment gets, but it’s not going to spin your wheels if you’ve got cash to spare.
The better the return, the riskier the investment – or the riskier the investment, the better the return needs to be to make it attractive.
And startups? They’re as risky as it gets.
Let’s say a VC invests $1,000,000 in each startup it funds. Let’s also assume one in ten startups actually succeeds.
This means that VC needs to drive $10,000,000 in return from the one startup that succeeds – just to end up back at $0. For this amount of risk, they’re not looking for 10 times return on investment – they’re looking for at least 20.
All this focus on scale at all costs often means we ignore the realities of growing a business – the right product/market fit, profitable and attractive pricing, and a whole load of elbow grease are often what we need to build great organisations.
They just might not be ones that can deliver 20 times return on investment for a Venture Capital firm.
We need to change our expectations
Instead of expecting every business to be in high-growth mode, we need to prioritise sustainable, consistent and profitable growth as our guiding light.
The purpose: to encourage businesses to grow in a way that enables them to use their own resources (capital/knowledge/labour) to prove that they can solve the problems their customer faces in a way that is commercially sensible.
If a problem is worth solving, it’s commercialisable in a sustainable, consistent and profitable way – we just have to think differently about we do it.
At Proposition, we call it good growth.
There is no reason that good growth can’t tick all these boxes:
· For the world – leaving the planet a better place than you found it
· For the business – enabling the business to expand naturally, rather than needing huge amount of external capital
· For the customer – delivering a product or service that’s good for them and that they can continue to engage with
· For your people – growing in a way that enables your team to grow with you, without worrying about their livelihoods
· For suppliers – enabling them to become sustainable business partners, rather than transactional adversaries
· For connected stakeholders – recognising the external impacts your business has, and endeavouring to make as many of these as positive as possible
· Predictable – the ability to plan for growth, and know what impact investing more in growth will have
· Replicatable – experiments that are planned and measured, so that successful activity can be easily replicated
· Systematised – backed by the right systems that fit your business’ needs, making growth easy to manage and automate
· Tested – each new growth experiment should be tracked and reviewed against pre-test hypotheses
· Analytically driven – activity that is driven by learnings from analytics that aren’t overruled by “human gut instinct”
· Strategically led – activity supports the business’ overall strategy, and is justified by the range of initiatives outlined by leadership in company strategy
· Financially – obviously
· Personally – growth that enables the people involved to achieve their goals (not always monetary)
· Short term – to pay the bills
· Long term – to build a legacy
· Holistically – a focus on maximising utility at an acceptable level of profit
· Strategically – growth that advances as many of the business’ strategic objectives as possible
Over the next few weeks, I’ll look at what’s going on in the growth world and dig into some examples that highlight why we need to change our approach to growth.
I’ll also dig through good growth and the concepts involved and how you can apply them to your business to build and implement a sustainable, consistent and profitable growth strategy.
If you’d like to talk to me about good growth, head over to proposition.co.nz and flick me an email!
October 21, 2019