So, What is Business Growth ?
At the time of investment, investors not only have to evaluate the past potential and the future projections but consider the other market forces to determine the levels of revenue and timeline of growth .
Businesses are unpredictable , more so the reason for the entrepreneurs to have a strategy and vision and actionable plans . Past actions can provide a fair idea of the results and gaps but are highly unlikely to deliver the same.
So, What is Business Growth?
In simple terms , it can be classified as:
1.Linear growth - has the characteristic of growing by the same amount in each unit of time
2.Exponential growth - is a pattern that shows sharper increases over time.
Typically, large businesses struggle to maintain linear growth. Owing to large size and lack of agility, large businesses are unable to achieve exponential growth.
The case is opposite for start-ups. Start-ups due to small size and agility can achieve exponential growth.
This exponential growth potential in the start-ups led to a new class of investing – ‘Venture Investing’.
How to achieve exponential growth ???
The exponential growth does not come organic. Start-ups intentionally and continuously work towards achieving the exponential growth by:
2.Allocating resources (Men, Money & Mind) to marketing and sales
4.Onboarding mentors, advisors, industry/domain experts
Implications of exponential growth
Many times it is observed that the valuations for the fund raise do not coincide with the existing financials.
As against the case of companies with linear growth, start-ups display exponential growth potential and thus their valuation is derived by discounting the future growth potential to present than just present and past financials.
What can go wrong??
Founders tend to forecast current trends into financial projections without considering ‘what got them here will not take them there’.
J curve is half the story (even the alphabet has a bar on the top ‘J’). Exponential growth is not for perpetuity, sooner or later the J curve tends to turn into S curve, known as flattening of the curve.
From an investor’s perspective one must identify the market forces and timelines that flatten the curve.
Discounting based on the above, yield more realistic valuations as compared to the case where the growth rate, margins and other elements are extrapolated using the same trends.
Eg. A start-up can grow from Rs. 1 Lakh monthly revenue to Rs. 2 Lakhs the very next month. But for a business to grow revenues from Rs. 1 Cr. to Rs. 2 Cr. over a month shall be difficult and to grow from Rs. 50 Cr. to Rs. 100 Cr. a month would be a hell of a journey.
The illustration above depicts that the curve flattens with growth. During the period of flattened growth marketing spend, resource deployment and best of the professionals can help maintain the flattened growth or push towards linear growth but rarely do the succeed in achieving J curve.
At this point of time, what is required is not ‘Improvement’ but ‘Innovation’.
General Motors besides top-class resource pool has more than $1 Billion as its annual sales & marketing budget, amongst the highest in the world, yet the market capitalisation of Tesla has grown larger than the rest of the global auto industry.
That is the power of ‘Innovation’.
The growth curve flattens and every time it flattens, increasing marketing spend, offering discounts or changing leadership team does not improve the condition, rather deteriorate.
‘Think, Innovate, Adopt, Implement and Repeat!!!’ – the cycle goes on…..