Paul Graham. In pursuit of growth. Part 2

We continue to publish our version of the translation of the Paul Graham article . Since the first post caused a heated discussion, we hasten to share with you the second part. In it, you will learn what growth is for a startup, how to effectively develop your project, and why it is important to properly assess your strengths.
Still, we insist that the article - must read!

So part two:


How fast should the company develop in order to be a startup? There is no single answer to this question. Rather, it should be reformulated in the following way: "How fast is the SUCCESSFUL startup developing?" For the founder of a business, this is rather a philosophical question, equivalent to the question “Am I on the right path?”
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According to Paul Graham, the development of a successful startup, as a rule, has 3 stages:

1. The germ and slow growth stage when the founder tries to figure out which direction to go.
2. Stage of rapid growth, when the founder finally finds and creates a product demanded by many people
3. The stage of transition from a successful startup to a large company, when the development of a company slows down due to market restrictions

If we depict these stages as a graph, then the slope of the curve is just the growth rate. This is the main indicator of a startup. Without having calculated the growth rate of your company, you will never understand whether you are on the right path.

When you communicate with startups and ask them a question about growth rates, they usually respond with something like “one hundred new customers per week”. This is wrong, because growth is not measured by an absolute number, but is a proportion of the growth in the number of new customers to existing ones! If you have a stable absolute identical number of new customers from month to month, time to sound the alarm - you do not develop!

Y Combinator offers its startups to measure growth in the weekly cycle: firstly, because they have not much time before Demo Day, and, secondly, startups need frequent feedback to be able to adjust the course of development. If we talk about numbers, then 5-7% growth is a good result. If the percentage reaches the mark of 10, then you have impressive progress, if the growth is only 1% - most likely, you have not yet decided where you are going. As a rule, the best equivalent of growth is revenue. In second place is the number of active users / clients.

Typically, incubators and accelerators offer start-ups to analyze their capabilities and choose the growth rate that they can consistently maintain every week. The key word here is “stable.”

Focusing on the achievement of goals in terms of growth rates for the week, in general, has a positive effect on the development of a startup and narrows the range of problems from multifaceted and complex to one-one. You make a choice, based only on the achievement of indicators, everything that gives you growth is the desired solution to the problem. Do you need to go to the conference? Should I hire another developer? Should you pay more attention to marketing? Whether to look for many small clients, or to concentrate all efforts on one large? Do everything that leads to growth!

A weekly growth appraisal does not mean at all that you should not evaluate a longer-term perspective. One day, without reaching the goal and experiencing a sense of frustration, you begin to perform actions for future success. For example, a new programmer can hardly instantly help you achieve short-term success. However, it may also be the key to your future success, in a month, by introducing a new product, optimizing the program code, etc. There is, however, an opportunity to fall into a cunning trap and, thinking too much about tomorrow, miss the situation of the current day.

Theoretically, such a “climb uphill” policy, when you purposefully achieve the planned indicators, can lead to a total stagnation, but in practice this has never happened. In 10 cases out of 10, any action is always better than inaction: where many people spend days on detailing the strategy, successful entrepreneurs act at random, on intuition, and fall into the very apple!

A little bit about numbers: it is easy to calculate that a startup that grows by 1% per week will grow 1.7 times per year, while 5% growth per week will give you 12.6-fold growth per year. In the first case, earning $ 1000 a week, in 4 years you will earn $ 7900. In the second, an initial income of the same $ 1000 will result in a much more impressive $ 25 million a week in 4 years! Impressive numbers, isn't it?

Growth rates, as well as risks, play a decisive role in assessing the attractiveness of a startup. Think about it: with an expected income of $ 100 million, a 1% chance of success is still equivalent to $ 1 million! And with a group of enterprising, educated and capable entrepreneurs, the chances of success clearly exceed 1%. It becomes clear why today many start their own projects (while business owners from another category lament “why are startups always in the spotlight ?!”).

Summarizing the above: the process of constantly following the planned growth plan helps to identify and sometimes even modify a startup. In fact, this is the main “limiter”, in the broad sense of the word, which guides the startup in the right direction. Drawing a parallel with the usual business, you can give an example of how geographical location determines the style and audience of a bar or restaurant.

As Richard Feynman said, one of the greatest physicists of the twentieth century: "The imagination of nature has always been richer than the imagination of man, therefore, following true knowledge, you can discover things that are much more amazing in reality than in any of the imaginary worlds." The growth rate, in this case, is just that “true knowledge” for a successful startup!

Strong connections

Why are investors so fond of startups? Why do they invest their hard-earned money in instagrams, instead of large business with high turnover? The reasons are different.

Risks are an indicator of investment attractiveness in this case. Startups deserve the attention of investors, if only because, being an adventure, in case of success they return invested resources in multiple sizes. However, this is not the only reason.

The second aspect is the principle of investors' work: they receive large bonuses in the event that they return the money invested. As you understand, the chance to replenish your balance in the event of a successful launch of an IPO is too enticing. A start-up enriching itself enriches the investor: all transactions are fairly transparent, and therefore easily traceable - the founder of a startup has few chances to hide his income and his profit.

Now let's see, why does a startup need investor money? Of course, this is, again, growth. The relationship between growth and a good idea is very strong. If you have a good (not necessarily scalable) idea, but there is no rapid growth, competitors will leave you behind. Slow growth - suicide in start-up business.

Any company needs capital to begin with. Sometimes, startups attract investment, even without the urgent need. For some, selling a share in their company at a price that is obviously lower than in the future (if successful) may seem silly, but such a move is no less justified than life insurance. Everything is very simple: the additional funds received as a result of attracting investments help to accelerate growth.

In fact, investors need startups as much, and sometimes even more than startups in investors: developing for their own money, a startup, although it puts itself at risk and slows growth, however, still has a chance to survive. In turn, an investor, without investing in potentially successful startups, simply goes out of business! This fact leads us to the following conclusion: any more or less successful startup can attract large sums from investors on deliberately favorable conditions.

In addition to investments, successful startups often receive offers to fully buy out shares from another company. Why? What leads to such thoughts of the leaders of the elite echelon of large business?

And here the answer is on the surface: the share in a fast-growing company is a tasty morsel: when eBay bought PayPal, it was clear that in exchange for money the company would gain control over the transactions, and therefore the profit. In addition, an important reason for buying startups is the fear of competition. A startup, expanding, gradually begins to claim the market shares of large companies. Even if the company is not afraid of the startup itself and its products, top management clearly fears how competitors can apply their technological innovations in the event of a takeover. That is why companies often pay for the redemption of startups of an amount even greater than their real value.

Believing or not believing Paul Graham is your own business, but in the world each article becomes a de facto standard, good luck with the growth of your start-ups!