Michael Natkin

This Is (Not?) The Startup You Are Looking For – Part One: Revenue Growth

There are many reasons why you might consider working at a high growth startup – the opportunity to have a big impact, work with amazing people, move fast and learn fast, tilt the world on its axis a bit – and hopefully, in the process, build a valuable company and share in the rewards. 

There are also many aspects to evaluating which startup is right for you. But one is absolutely fundamental yet often ignored. A high growth startup has to actually grow. 

Let’s take a look at how to evaluate startup growth and keep an eye out for some big gotchas. Great people are in high demand and, whether they aren’t being totally honest with you, or because they have started to believe their own hype, leaders may mislead you. The onus is on you to separate growth fact from growth fiction, lest you pour your soul into a company that never really stood a chance. You want to find a company that shares your values and has wonderful people, and you also want to find a company that’s not going to go up in a puff of bankruptcy next year.

This article won’t talk about early-stage companies that haven’t yet found product-market fit. For a company that small, there is no growth to evaluate. You have to look at other things, including the track records of the founders and investors, the team they have assembled, and the prototype products. Basically, you are evaluating the likelihood of a successful product multiplied by the probability that these are the people that can build the company to deliver it.

You want to find a company that shares your values and has wonderful people, and you also want to find a company that's not going to go up in a puff of bankruptcy next year. Click To Tweet

Likewise, I’m also not talking about “startups” like Uber or Airbnb. They were startups once, but now are large companies that have more in common with Microsoft or IBM. If you work there, you’ll get paid well to be a tiny piece of something huge. It can be rewarding, but you will never have the visceral, day-to-day kind of impact that you can have at a mid-stage startup where your work can literally make or break the company.

Let’s talk about that meaty middle. Well, tofu-ey middle – I’m a vegetarian. That tofu looks like companies that might have, say, 50 to 500 employees and at least one product in the market for a few quarters with hopefully at least a few million dollars in revenue. They will likely still be spending more than they make, which is totally ok, but dollars ought to be flowing in.

When you interview at a company of that size, it isn’t unusual to hear a lot of talk about TAM – the Total Addressable Market. Let’s not mince words. TAM is complete and total nonsense. Ok, it’s not, if you are trying to disrupt a product that already exists. If the company has invented a really awesome new avocado slicer and hypothesizes it can capture 10% of world avocado slicer sales, well, world avocado slicer sales is a knowable thing. And maybe their product is so remarkable they can also grow the size of the pie, not just take a bigger slice of the… slicer market. (Sorry, if you read my posts, you are just going to have to put up with the occasional Dad joke.)

But for most genuinely revolutionary products, the market doesn’t exist yet or is so niche that the current size is meaningless. Any back-of-the-envelope calculations that try to tell you how many people might eventually buy a head-mounted barbeque are so fraught with potential error as to be meaningless. Worse, even if the world wants it, this company has to be able to execute to create it and outrun a partnership between Oculus and Weber. I’d go so far as to say that a lot of talk about TAM is a red flag – a way to focus you on a big number that doesn’t represent their actual business.

What we are looking for is an actual track record of sales. They may not be willing to share the data in great detail, but you should at least be able to find out if they have been trending down, flat, growing linearly or exponentially, and if they have been noisy or consistent, highly seasonal, etc. If you can only get an evasive answer, that isn’t a good sign. 

For example, at Glowforge, we are delighted to brag that we’ve had eight consecutive quarters of double-digit sales growth. We’ll talk your ears off about it because that means that we keep getting to make a meaningful difference in the lives of tens of thousands of customers that are creating amazing things, teaching kids, or starting small businesses.  When you have that kind of exponential growth, it implies a couple of really great things:

  • The potential market is large relative to your current sales (see TAM, above). If you were anywhere near saturating the market, sales would be slowing down, not speeding up. Exponential growth means that there’s a lot of growing left to do.
  • Your strategy is compounding and, therefore, sustainable. Compounding growth means that the more you grow, the bigger your growth becomes – and that only happens if your customers are driving your sales. As each new customer acquires your product and falls in love with it, they are telling their friends. This works exactly the same as compounding interest, and it’s the secret behind everyone from Facebook to Slack to Calm.
Exponential sales growth means the potential market is much larger than current sales, and that your strategy is compounding. Click To Tweet

However, and this is a big however, there are ways exponential growth can be faked, at least for a while. Sometimes a long while. They all pretty much fall into the category of “buying” artificial, unsustainable growth. For example;

  • Terrible margins. Expected profit margins vary in different industries, so be sure to understand the appropriate benchmarks. But if they are barely making anything on each sale, or worse yet – as the old joke goes, losing money on each sale but making it up in volume – then the revenue is never going to translate into profit. And although it may be unfashionable to say so, profit is ultimately the point.
  • Deep discounting. You know how with some companies it seems like you can always find a 40% off coupon code? Discounting shows up in the margins, so this is just a special case of the first bullet point. Still, if you see that they are caught up in an endless cycle of giving out bigger and bigger deals, trying to pull sales forward into the current quarter, it is a sign of desperation, and the sales growth is artificial.
     
  • No direct sales. It is perfectly fine, great in fact, to have multiple channels to sell your product. But for a startup to not have a significant portion of their sales be direct from their own website is concerning. Direct sales generally have much better margins, and more importantly, if you are totally beholden to retailers or resellers, they can snap your business like twig whenever they want.
  • No connection to the customer. If the company’s finest moment is taking the customer’s money and bidding them a fond farewell, then they haven’t created any lasting value. When you buy a t-shirt from The Gap, there’s no reason to buy your next pair of jeans there. When you buy a bike from Peloton, though, you’ll be connected to their service. And that ongoing relationship means you will consider them when you are ready for a treadmill. Or whatever amazing thing they make next.
  • Out of control advertising costs. The cost to acquire a customer (CAC) is a core metric for any business. If you don’t care how much you spend on Facebook and Google ads, you can balloon sales for a few quarters. But those balloons eventually pop as the price to reach new audiences goes up, existing audiences are bored with your ads, and engaging new content gets harder to make. Great companies most definitely spend money on ads but should see CAC decrease over time as more of their sales come from word of mouth and referrals.

So there you have it. In summary, if you want to join a high growth startup, make sure it is (1) actually growing and (2) that growth is real and sustainable, not “one weird trick” they are using to stay ahead of the wolves. If you find the right company and join them when the curve up and to the right is getting steeper each quarter, you could be in for a heck of a ride – or really, you get to build that ride!