?? The Myth of Hypergrowth & How to Define Your Growth Formula | #12

Good morning, fellow founder! ??

Welcome to another edition of FounderForge. Your Europe-focused startup digest - just because we do things a little differently here! ???????

If you missed our last issue, you can still read it at the link below! ??

?? The Lack of Exits (IPO & M&A) & How to Approach M&A | #11

Today's topics are all about GROWTH:

• The Myth of Hypergrowth ??
• How to Define Your Growth Formula ??

???Data Dive: The Myth of Hypergrowth

You can find it in almost every pitch deck: the legendary hockey stick. ??

Almost always it's just a highly squeezed horizontal image, and sometimes... sometimes it's something more. ??

In mathematical terms, hypergrowth = exponential growth.

You start with 10 customers, then they become 100 (factor 10), then 1.000, then 10.000 and soon millions.

But is hypergrowth something that really exists? ??

Exponential vs Quadratic Growth

In this data dive, we will explore why quadratic growth is a more realistic (long-term) growth scenario. ??

?? Although you can have finite exponential growth!

Quadratic growth - compared to exponential growth - just adds a factor to some.

So you start with 1, then 2 (factor 2), then 4, then 8, then 16, and so on. ??

Exponential Growth Is a Myth

If you think about the big guys like Facebook, WhatsApp or Slack, you would probably think: "Wow, these guys had real hypergrowth!” ??

Yeah, well, maybe a little bit.

Let's better take a look at the data. ??

Nope. No hypergrowth here. ??

Neither does Slack… ??

Compared to Microsoft Teams, Slack's growth looks almost sad. ??

And let's not forget: Slack was long the fastest-growing enterprise software company of all time, going from $0 to $10 million ARR in its first 10 months, and from 0 to 10,000,000 active users in just five years. ??

It's also a "viral" product - organizations invite their members, who then create their own Slack groups and invite others.

If you think these are just "random examples", think again...

Dropbox… ??

Trello… ??

Lyft… ????

And the same story goes on and on...

But why is that?

Let's look at Marketing, Products and Markets. ??

How Marketing Works

One reason you can't have sustainable hypergrowth is that no marketing campaign is going to be exponential for very long. ??

Most marketing campaigns follow an elephant curve.

At the bottom of the curve, we have launched a new campaign, but it's not yet effective. We still need to figure out the best strategy for this particular channel. ??

Sometimes we never figure it out and abandon the channel altogether.

But when we do figure it out, the A/B testing phase begins as the traction grows and grows. Hypergrowth! ??

But only until it reaches a plateau.

Conversion starts to stagnate because the people who have not yet converted have already seen the ad too many times.

Or ad spend gets out of hand due to Pandora's box bidding algorithm. ???

Whatever the reason, over time the channel begins to slow down and the hypergrowth stops. ??

Fortunately, marketing campaigns rarely come alone.

And these campaigns are at different stages of maturity.

If you stack the campaigns, you will (surprise surprise) get a quadratic growth. ??

What About Products?

Can't a product just go viral and create exponential growth?

- A hopeful founder

In theory, yes. ????

But even in this case, you will eventually reach a plateau as soon as the market is saturated.

A great example is Apple's revenue growth.

Products like the iPod or the iPhone create exponential growth for a period of time. ??

In the long run, however, the stacked product lines led to quadratic overall growth. ??

Growth in New Markets

The sad reality: Exponential growth is a short-term phenomenon. More like a "hype”.

While hypes can lead to huge revenues in a short period of time, they are always finite. ??

Another hack to continue having hype growth is to enter new markets.

A great example of this was (or still is?) the introduction of the Internet. ??

Whenever the Internet was introduced to a new market, it grew exponentially.

But only for a limited time and a limited market. Overall, we see again - quadratic growth. ??

Interestingly, because markets are finite, growth even becomes logistical. ??

Since you can't reach more customers than the market has to offer, growth will plateau at some point.

A great example is Netflix. ??

The Big Lesson

Hypergrowth is always finite. Period.

You can play with Marketing, Products, and Markets, but you will ultimately always end up with quadratic growth.

The more mature you are, the more your growth will be quadratic.

And that's OK! ??

Just keep it in mind and plan with it. ??

If you want to learn more about this concept, check out the blog article below. Most of the content and insights come from here, and it's simply an amazing read. ??

The Elephant in the room: The myth of exponential hypergrowth

?? Founder's Toolkit: How to Define Your Growth Formula

Somehow growth always seems to be this magical thing that nobody really understands, when in fact it's just simple math. ??

Growth itself is just the result of many small variables in a big-ass formula. ??

The only question is, what is the formula?

The Growth Formula

With the Growth Formula, we try to identify every little screw that has an impact on our success metric, or in other words:

What numbers make or break our North Star metric? ??

Let's look at some popular examples: ??

1. Ebay: Gross Merchandise Volume Growth = Number of Sellers Listing Items × Number of Listed Items × Number of Buyers × Number of Successful Transactions
2. Amazon: Revenue Growth = Vertical Expansion × Product Inventory per Vertical × Traffic per Product Page × Conversion to Purchase × Average Purchase Value × Repeat Purchase Behavior

Too abstract - right? ??

At Coinpanion , we went through the exact same exercise and created our own growth formula based on our North Star metric: Net-Deposits*???

We did some reverse engineering and came up with the following formula: ????

Then we went one step further and put this neat formula into a nice Excel spreadsheet (which we unfortunately cannot share). ??

The power of putting your growth formula into an Excel spreadsheet is twofold:

1. You can easily understand which variables have the greatest impact on your success metric. ??
2. You can start doing targeted growth hacking initiatives to improve specific variables and thus the overall success metric. ??

Growth hacking is not about throwing ideas against the wall as fast as you can to see what sticks, it’s about applying rapid experimentation to find and then optimize the most promising areas of opportunity. - Sean Ellis

Now it's time to come up with your own growth formula and start tweaking it until you get some juicy, juicy growth! ??

*We wrote about Coinpanion's North Star metric in a previous FounderForge issue here .

???Founder's Library: Curated Resources

A collection of random reads that the FounderForge team enjoyed.

• How to Design a Referral Program by Andrew Chen
• How to Launch on Product Hunt by Marc Lou
• Growing from 0 to 1 Million Users in 9 Months by David Park
• Your Guide to Product-Led Onboarding by Kyle Poyar
• How to Model Viral Growth at Your Startup by Alexander Jarvis
• Building a Startup in a Tough Funding Environment by Catalina Daniels and James Sherman
• Lower Valuations, Higher Bar: What It’s Like To Raise A Seed Round In 2024 by Gené Teare

This edition's links are mostly focused on growth - to help you build your hockey stick!

???Meme of the Fortnight

Studies show: 99% of startups would welcome a new hockey stick design! ??

?? Your Thoughts on Today's Edition

• ?? It was great!
• ?? Meh - it was okay.
• ?? Not interesting to me.

That's all for now!

If you find this newsletter valuable, share it with a friend!

Cheers,

The Founders Blacksmith ??

Issue #12 | 22. February 2023