Although we might hear the words “growth” or “scale” in the same business context, these terms don’t necessarily mean the same thing. Startup leaders looking to grow their companies sustainably must be highly intentional in their planning.
Leaders at startups should have a full-fledged view of their company’s performance to make better growth decisions and prepare for economic downturns.
Sustainable growth isn’t a one-size-fits-all concept – it looks different for everyone. Business leaders will need to determine what realistic, sustainable growth looks like for their company alone.
Companies misuse the word “scale” a lot, typically as shorthand for growing, expanding into new locations and gaining customers at lightning speed. In other words, it’s wrongly used as a synonym for fast growth.
In reality, scaling means bringing on new customers and, by virtue of that, measurably improving the company’s margins. If a company’s unit economics don’t improve as it adds customers, it hasn’t truly scaled – it has simply grown. If we head into an economic slowdown, as some analysts are predicting, this kind of reckless growth will shut down a slew of promising startups.
Scaling correctly requires a sustainable growth mindset. A company guided by a sustainable growth mindset knows it needs more than just a desirable idea or product. It doesn’t operate under the presumption that if it gets enough customers, it can figure out the cost side of the business and transform itself into Google. This mindset eschews the growth-at-all-costs drive that focuses on acquiring customer after customer.
Among startups, there’s a common sentiment that growth solves all problems, which might be why 70% of startups scale prematurely and why only one-third of the fastest-growing startups listed by Inc. magazine survive to their fifth year. This growth-as-panacea attitude is dangerous because it relies on growth as a constant and doesn’t account for the whims of the economy, like the economic downturn on the horizon.
The true issue is growth versus scale: Scaling companies might not grow as fast, but they’ll develop the necessary infrastructure and ensure they can sustain themselves financially. On the other hand, growth without that groundwork opens a company up to risk in terms of operating expenses, miscommunications and more that threaten the organization’s longer term viability.
The hallmark of a sustainably growing company is its plan for profitability. This perspective shift – from the pursuit of rapid growth to the cultivation of sustainable maturation – is essential for burgeoning businesses to protect themselves over time. Startups that want to implement this sustainable mindset into their practices should start with these steps.
Sit down and review the company’s performance.
Dedicate time to review your company’s financial performance: all levels of profit and loss. Don’t let yourself get so caught up in growth that you misattribute why your business is booming or forget what your operating expenses include. Determine whether you can quickly explain the major drivers in revenue, costs of goods sold and operating expenses. Dive in and understand the details of why operating expenses are so high, why they’ve changed and where they might be going.
For growth-oriented companies, this review represents a shift in perspective. It’s a crucial point: If you don’t understand where the company’s books are now, then you have no way of understanding where to go next. You might have a good product and be growing – when the economy is doing well. But once you get into a recession, your customers’ reduced spending could easily cut 20% off your growth. With your runway suddenly much shorter and your losses getting bigger, you won’t be able to hit the aggressive milestones you set to justify additional funding. But if you have built this comprehensive picture of your finances, you’ll know what to attribute to the market and what is happening within your walls. Then you can readjust your funding milestones and revenue goals as necessary.
The company I work for, Chewse, is in the food space. We’ve done well in the past year and have launched in many new cities, but to do that, we needed to build out our infrastructure, a cost-intensive undertaking. Because of changes in the investment environment, we’ve doubled down on our initiatives to improve margin and reduce operating expenses before expanding into additional cities. We’re focusing on the technology that helps us gain margin and cutting back on what previously allowed us to grow fast rather than sustainably. These adjustments have come from carefully reviewing the company’s performance.
Develop a vision for sustainable growth.
The definition of sustainable growth is consistent, but the implementation is different for each company. To determine yours, you need to clearly articulate – to yourself and to others – what sustainable growth means.
For guardrails, adopt the principle that growth means a clear line of sight to profitability in a reasonable time frame and then define what “reasonable” means for your company. For some, that could mean six months; for others, it could mean three years. That lead time is a function of the company’s funding cushion, and “reasonable” means giving yourself time to become profitable before you burn through your cash. If you get this wrong, you’ll choose the wrong strategies.
At our company, our vision for sustainable growth meant waiting for the existing markets to pay back a little more before we expanded into the next. We wanted to wait until our return was high enough to justify continued investment. Executing a vision for sustainable growth like this can be difficult: It can mean cutting off investments you’ve made in the past. Economics books remind you to think of past investments as sunk costs, but the heart reminds you of the energy and strategy you’ve put into them. That’s why creating and executing on the vision is crucial.
Shape a sustainable-growth culture by building up from small wins.
If you perform a full financial assessment and decide you can grow properly only through massive changes, you’ve missed the point: You need to value all the smaller indicators of growth. Creating sustainable growth is about the culture you create, and that culture needs to mark and celebrate the smaller pieces that make up the larger whole. This starts with painting a clear picture of the future at the company level. At ours, we then give teams the authority to evaluate what they can accomplish in a short period, such as a two-week window, and drive managers to prioritize initiatives based on time and impact. Within a few cycles, people get good at spotting high-return, low-investment opportunities.
Meanwhile, don’t ignore the small wins that signal sustainable growth as you go along. For example, an operating expenses win has an outsize value on cash burn: If you cut $10 from expenses, that’s the equivalent of gaining a $50 customer with a 20% gross margin. People often forget that gaining $10 in revenue is not equal to cutting $10 in expenses. Often, the smaller wins enable hidden gains and signal the organization to be thoughtful about not just costs, but also the strategies they need to execute for growth – and those reminders are genuinely valuable. This will protect you from making major changes based on external, temporary events like an economic slowdown.
Startups bent on growth at all costs sometimes succeed, but too often they’re just racing against time (and their burn rates). To avoid joining the 90% of startups that fail, companies need to protect themselves from the outset by developing a sustainable-growth vision that the entire company understands and shares. A company’s growth initiatives require all the numbers to support them – and that’s the bottom line.
Read more: business.com