Understanding your business growth type will impact strategy and profits.
Recently, I was fortunate enough to work with a rapidly growing business that grew by over 100% compound annual growth rate (CAGR) over three years. Anything over 40% CAGR can be considered hyper-growth, so this was incredible to witness.
Being in a hyper-growth company can be an exhilarating ride. Lots of new customers, new employees and new international markets to tap into – it was a whirlwind of globetrotting, Zoom meetings and fighting to stay alive. We scrambled for every dollar, and we always felt like we were just a few months away from losing it all.
I learned a few things about the relationship between growth and profitability.
Hyper-growth
This type of growth is normally experienced by young businesses (or industry disruptors) as they mature through the scaling phase of business development. Defined as the steep part of the growth curve, counter-intuitively, this type of growth is high-risk. The cost of new customer acquisition and onboarding multiplied by growth rate will always exceed net operating margins, meaning there’s a lot to potentially gain, but you’re also teetering on the brink of losing it all.
For these businesses, new customers significantly exceed existing customers and recruitment within the customer success team lags new business. This can lead to bad customer experiences, which ultimately increases customer churn and slows down new sales.
Typically, this type of growth will attract funding as an investment in operations will resolve the scaling issues for a post-revenue business with proven customer fit and sales conversion.
So, once we secure funding, we build the team and the profits will flow, right?
Not necessarily. Depending on the type of business and market reach (is it global?), the business may remain unprofitable for many years if the CAGR remains high. The business will continue to attract funding on the promise of profits being realised at some point in the future.
It’s common for listed start-ups to rapidly grow and lose money for decades before they become profitable.
So, when does this type of business achieve profitability?
The answer: When growth slows.
At some point, the business will achieve optimal market penetration (slowing growth rate) and operational efficiencies (reduce costs to acquire and service customers). Slowed growth with increased profits indicates maturity. Depending on the type of business, when it matures, it may enter a phase of profitable linear or episodic growth.