The rate of growth in start-ups is crucial. Too slow, and the whole thing will implode - but growing too quickly will cause a massive breakdown due to lack of infrastructure. Finding the perfect middle ground is essential to the long-term health of a start-up.
Let's look at how to ensure your start-up's growth is sustainable.
What investors look for
Early-stage investors are constantly on the prowl for growing businesses. Start-ups projected to rapidly grow in scale over the next three to five years are ideal. However, not all growth is equal. Unsustainable growth is damaging. Start-up growth is only valuable in the long haul if it is self-funded.
Growth and momentum are imperative; several years of fast, reliable growth are the quickest way to reach scale in a short period of time - which is what early-stage investors are looking for.
Investment-worthy businesses have all or most of these qualities:
- positive 'unit economics' - that is, the revenue generated per customer is greater than the cost of serving them;
- a good understanding of their target market and customer needs;
- high referral rates;
- a high level of customer loyalty and repeat business.
All of these characteristics are great for start-ups to have. They show a tendency towards good quality growth. On the other hand, poor quality growth is characterised by:
- selling through unprofitable key channels;
- no positive margin on the main product (and no obvious route to make this happen);
- complaints and high return rates.
When start-ups grow fast and furious with these poor qualities, we call it "sugar growth". Sugar growth is similar to a sugar high, in that during the peak it feels great - but just as a sugar high is followed by a sugar crash, sugar growth is replaced by a despairing low point.
Avoiding bad habits
When growth comes through natural processes, it's happy times all round. Unfortunately, natural growth often takes time and patience. Start-ups with money in the bank can afford to wait - but those that need to raise funds can distort the natural growth process to appear more investment-worthy. Because of this, they find themselves in bad growth habits - either through deliberate choices or inaccurate margin assumptions.
Occasionally, a company will raise money by skirting from one unsustainable growth spurt to the next, and eventually find an exit ramp into sustainable growth. However, this is not the normal outcome.
No matter the cause of bad growth, the first step to attaining good growth is to identify the problem and define a solution - or risk an embarrassing flame-out.
Sponsored post. Copyright © 2018 Wesley Rashid, co-founder and CEO of The Accountancy Cloud