Startup Growth: The Good and The Bad

Finding the perfect middle ground is essential to the long-term health of a startup.

Series A Investors are constantly on the prowl for growing businesses. Startups 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. Startup 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. Scale is important to Series A investors. Companies with investors waiting in line have all or most of these qualities:

• Positive Unit Economics occurs when the revenue generated per user is greater than the cost of acquisition and delivery.
• Customer Understanding is knowing the benefit provided by the customer base.
• Elevated Referral Rates bring in new potential customers.
• High Net Promoter Score shows that the company is loyal to its customer base.
• Loyal Customers keep coming back for more.

All of these characteristics are great for startups to have. They show a tendency towards good quality growth. On the other hand, poor growth quality appears in these ways:

• Unprofitable Key Channels inhibits sustainable growth.
• No Path to Positive Gross Margin from Main Product prevents the company from attaining self-funded growth.
• High Return Rates raise the alarm that customers are not happy.

Startups growing fast and furious in these poor qualities suffer from 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.

When growth comes through natural processes, it is happy times all around. Unfortunately, natural growth often takes time and patience. Startups with money in the bank can afford to wait, but founders that must raise funds contort the growth process to meet their needs. Due to this, founders often find themselves in bad growth habits either through deliberate choices or inaccurate margin assumptions.

Occasionally, a company will raise money by skirting from one poorly sustained growth spurt to the next and eventually find an exit ramp into sustainable growth. This is not the normal outcome. More commonly, startups will experience an embarrassing flame out. No matter the cause of bad growth, the first step to attaining good growth is to identify the problem and define a solution. Contact us for more information about good startup growth.