The Three Ways to Grow

I like to dramatically oversimplify important concepts. It helps when processing totally new situations and businesses.

When it comes to growth, I bucket businesses into one of three models: virality, paid, or headcount

First and the best is virality. This is where you get companies that are growing 1000% off of a base that is already in the tens of millions. And, you can at least post years of 100% growth off of a base in the hundreds of millions. Think about ripping growth like a social network on the way to $1B.

Second is paid. Your growth is a function of the amount of capital you can deploy. It’s a self serve or consumer product. You’re like a Kayak and can raise $70M to deploy it tomorrow.

Third is headcount. You need people, like salespeople, in seats to add more revenue. You’re probably selling to people in seats too. So, people in seats probably occupies a key line in your model. Keeping up 100% growth for two years is a big deal in this model. LinkedIn grew as a function of headcount. If you don’t have a defensible product, you’re probably going to end up with a fragmented market in a headcount-driven growth model.

Ramp Speed

The rate at which a test ramps generally equals the rate at which unintended consequences reveal themselves.

This is why I always like to ramp with a small (but statistically significant) test… even when you’re confident… and it’s your test 😃.

It pays to ramp small but measure quickly. The onus is on the analytics team when launching now!

Seriously, Your Metrics Already Predict Failure

Your metrics are more expensive than you realize. Your team spends time analyzing them. When they move unexpectedly, the team spends time understanding why. The design and product teams make decisions every day based on the metrics discussed at the company level. You have limited time with your investors, and that time is wasted discussing metrics which are not fundamental.If you had to simplify your company’s operational model to a few variables, or even two variables, what would they be?

Is there a big drop off between downloads and paying transactions? That is a sign you are focusing on the wrong level of the business. Do MAUs (monthly active users) actually drive your revenue? If not, they are a vanity metric. Is GMV distorting your traction? If you do not monetize all of that GMV, you have not really measured customer adoption. Customers love getting a service below cost. In my experience with startups, price is almost always the biggest determinant of elasticity – outweighing speed, experience, and service quality.

If you have refined your model and are tracking the right metrics, every movement in a key metric should result in a directly proportionate change in business value.

Vanity vs Key Metrics

Michael Moritz’s Rules for Venture Investing

Michael Moritz has shared many insights in his interviews and writings, but my favorite is his list of rules for venture investing from a 2004 profile in Fortune.

  1. Avoid capital-intensive businesses.
  2. Take measured steps.
  3. Never underestimate the difficulty of changing consumer behavior.
  4. Don’t begin a rollout until you’re sure the recipe is working.
  5. A business Wall Street is prepared to throw hundreds of millions of dollars at is not one he should be in.