Growing Too Fast
When you’re waiting for your startup to achieve the hockey-stick growth, so you can ring the NASDAQ bell in a hoodie, it might seem impossible to grow too quickly. However, there are some serious possible negative consequences of too rapid growth using the wrong metrics, i.e. vanity metrics.
A household brand that we can point to for growing too quickly is Starbucks. Schultz, when he was on his 8-year hiatus from the CEO role, wrote a letter criticizing the Seattle-based company for growing its global chain of 13,000 coffee shops too quickly. He stated that as a result the company was commoditizing itself and losing much of its soul. Upon his return to the CEO role he took actions to close over 600 of these stores. Not only are situations like this harmful to the brand but all those stores employees were negatively impacted as well.
At AKF, we deal with hyper-growth companies every week and sometimes we get to keep up with them over years. The growth of most companies is not steady but rather it is sporadic. When a company has grown too quickly based on the wrong metrics, trouble ensues.
At Quigo (our previous company acquired by AOL) traffic growth would move along steadily until we brought on a large customer and then it might double overnight. But traffic isn’t revenue. Making money on that traffic lagged by weeks or months. Had we celebrate the increase in traffic rather than the really important business metrics (revenue & profit), we might have grown too rapidly. Some of the bad things we’ve personally seen with companies that grow too rapidly based on vanity metrics include:
- Organization – bringing employees up to speed takes time and it is easy to get behind or ahead of the demand curve. Hire too slowly and customers might be impacted but hiring too quickly means either too high of a burn rate or having to lay people off. Growing rapidly in year one and then laying people off in year two causes credibility issues. This in turn might give potential new customers pause and will certainly result in hiring difficulties in the future.
- Valuation – interest, from an investment perspective, in particular types of technology companies waxes and wanes over time. Online advertising companies were hot in 2007 but now it is a much more competitive environment. Social networking was hot before the FB IPO but now people are concerned. Raising money at too high of a valuation, unless it’s the last round, will make future rounds more difficult and painful.
- Office Space – along with hiring too many employees comes building out or leasing too much office space. Obviously this causes excessive burn rates but it also can have morale implications. With too few employees and too much space the team is reminded every day that they haven’t grown fast enough to fill the office. They also might gravitate away from each other (often heading for the available offices) and lose the power of sitting beside each other.
- Hardware – while you might have to buy or lease hardware based on a vanity metric like web traffic, this doesn’t mean you should forget how much revenue and profit this traffic is generating. Traffic that might not bring in the expected revenue should be treated as such. We’ve argued for an R-F-M analysis for storage costs which can be extended to processing as well.
Are you growing too fast or have you seen companies grow to fast?