"We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is "just." If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered, and should be correspondingly alarmed."
I'm curious if PG encourages a "discovery" stage where they don't have growth targets but rather are learning about the market/customer and building a product? And if so, how long of a "discovery" stage is encouraged?
The sixth footnote appears to address this a bit. You of course need to have something that could possibly grow before you can hope to achieve growth.
During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they're doing. [6]
...
[6] This is, obviously, only for startups that have already launched or can launch during YC. A startup building a new database will probably not do that. On the other hand, launching something small and then using growth rate as evolutionary pressure is such a valuable technique that any company that could start this way probably should.
In other words, if a startup hasn't launched yet they quite sensibly don't measure growth rate--but it's a good idea to launch early so you can measure growth and optimize for it.
Another option is if you need time to build your product, you can launch another "something"... like the legendary mvp video from Dropbox or the finance blog from Mint.com they used to draw in signups several months before launching.
I gotta say, "a company designed to grow fast" is not only more concise, but broader and more on point than Steve Blanks' definition ("an organization formed to search for a repeatable and scalable business model"[1])
An epic essay with tremendous depth. Love the ending:
"A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity."
I love this essay... but I'm concerned that the emphasis on growth so early on will cause some new startup founders to put their focus on vanity metrics, as opposed to spending time to talk with users and build a product that has true product-market fit and organic growth.
PG did state what are good metrics to focus on:
"The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users."
While the definition "a company designed to grow fast" makes his point clear, it's not as accurate as Blank's. There are lots of companies "designed to grow fast" that are not at all startups. The "search for a business model" is essential to the definition of a startup.
I gotta say, "a company designed to grow fast" is not only more concise, but broader and more on point than Steve Blanks' definition
I would prefer just to say that the definitions are "different" :-)
Blank's focus is on startups that are discovering their business model. PG's focus is on startups that are designed to grow fast. Those two groups of organisation overlap, but are not identical.
No, I'd say PG's definition is simply more narrow. Blank is covering the "grow fast" part of PG's definition by "repeatable and scalable".
Though I highly doubt PG would in fact define "startup" as "a company designed to grow fast". Pretty sure he would agree there's also a "search for a business model" aspect to it.
Hmmmm... I don't think just that PG's definition is a subset of Blank's.
Unless he's changed his tune in the latest book (The Startup Manual is still in my to read pile) then under his definition the company stops being a startup once you have achieved the "repeatable and scalable" bit. Then it's just "a company" :-)
For Blank Startup == being in Customer Discover/Validation phase. Once you're out of there and in Customer Creation & Company Building you're no longer "a startup" - you've found your business model and are busy applying the heck out of it.
Under pg's definition the bit that defines the startup is the "Customer Creation" stage when you've found your business model and and are growing fast (to quote "Together these three phases produce an S-curve. The phase whose growth defines the startup is the second one, the ascent.").
Under Blank's definition you've stopped being a startup at this point - you've found your scalable business model. Under pg's definition you would still be a "startup" in the Customer Creation & Company Building stages as long as you're growing and haven't hit internal/market boundaries that slow your growth.
Also PG's focus on fast growth doesn't seem to be present in Blank's work.
I'm think Blank would be happy to call the early days of a new retail organisation like Ulta Salon a "startup" (they found a new repeatable and scalable business model for retail, taking the beauty counters out of the larger stores and sticking 'em as stand alone stores on cheaper real estate).
I get the impression that their very impressive growth (for retail) of 92% since 2006 wouldn't count as "startup" under PG's definition... or maybe not.... I don't know.
I think seeing it put so clearly, it's convinced me that I don't even want to found a startup. I'd like to own a business, but that's different, and I should behave accordingly. That might make it the most useful thing I've read in years.
Question: w.r.t. weekly revenue growth, are we talking about growth rate of monthly revenue run rate (assuming billing happens monthly) or something else? For instance, something like this: new signup revenue in the current week x historical conversion to paid divided by revenue of paying customers + sum of estimated revenue of recent previous weeks who haven't yet hit the date of conversion? (if that makes sense)
I'd love to hear thoughts on how to calculate the referenced number.
Ask yourself: what's the most important thing a user of this product can do? Pick one thing. It might be "sign up", or it might something way more specific like "run a report" or "receive a fax". Drive growth in that thing.
"For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people"
Very valuable insight.
However, (b) in its own right, can serve as a fast growth business model - where the delivery or "clearing" of value between those who demand and those who supply is the value proposition itself - because everyone wants delivery (making it, by default, a big market).
Most banks work on this principle, in an abstract sense. A business like FedEx or UPS is a more physical example of this.
Online takeout-ordering services are examples of this - the customer wants the food and the "online ordering website" startup does not produce food - but what it produces is "clearing" ie matching demand to supply.
This - as an idea, in my experience, always scales and grows fast as well while falling into the category (b) that pg mentions.
If you write software to teach Tibetan to Hungarian speakers, you'll be able to reach most of the people who want it, but there won't be many of them.
It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them.
For example, I've been using Evernote and Dropbox for years, but haven't had the need to buy a premium account. I believe there are many others like me who are happy with the free (or open source) software that does solve an itch. Are these "fast startups"? Is their business model (freemium) scalable?
It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them.
That is the exact point of the essay. An average niche business makes more money than an average startup, but a successful startup makes many orders of magnitude more money than a successful niche business.
You might mean: a median niche business makes more money than a median startup.
Average is much higher than a median for startups because it includes the most successful startups which are by definition have a high growth rate over an extended period of time so they are very big.
Niche businesses in this context have a low growth so their average is closer to the median. The growth is constrained at the top in absolute terms (otherwise it would be a startup) so the average is lower than the one for startups.
So, is "b) reaching all the people in the Market" a function of converting a decentralised market to a centralised model?
Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it.
Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair.
So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model.
I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs
Indeed, this cogent essay has been a long time coming and should be a pre-requisite for anyone thinking of getting in the game. "A barbershop isn't designed to grow fast. Whereas a search engine, for example, is." Brilliant.
One of my favorite pg essays of all time. Loved this:
"Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster."
Took me awhile to realize this as a founder.
Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.
Same here. I figured out that one can turn into an optimization problem her user satisfaction and that it was key to get a successful product and then key for the company, but it's even funnier: can be turned into an optimization problem the whole process of founding a company.
This is a tough sell to young entrepreneurs. Its hard for them to understand that buy giving away some portion now will make their equity more valuable when they are able to scale to mass market.
Until this past week or so I've been highly skeptical of VC funding and much more inclined towards bootstrapping. I love that DHH video someone else posted in this thread. I think it's silly to focus on users and vanity metrics if you don't have a clear business model (even if it's not implemented immediately).
But this essay makes an amazing case for why outside funding is helpful, even crucial. And it's encouraging that he's emphasizing revenues, not just users.
I'm also encouraged because I was at the YC event at MIT this Wednesday, and didn't hear anything (even when I asked directly) about investor drama.
self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
Amazon of course not only raise venture capital but also raised an enormous amount of money after that. They didn't get to where they are today by constraining their access to capital to their float.
They also reinvested their revenues very aggressively. It was years after IPO before they became profitable, and even now they're remarkably low-margin.
> Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Books are fantastic for other reasons: easy to ship, relatively non-perishable, mass-produced, and even affordable. Webvan, for instance, would always have a harder time because groceries fail at least three out of these four criteria (as well as the two you cited).
Amazon is trying its hand at groceries now, of course, but even they're having a hard time at it.
The other insight Bezos had about books was that the extent of the market was limited by a physical constraint in how big a store could get. It was a perfect product to exploit unmet demand for long tail titles. Groceries don't seem to suffer this problem to such a degree. Most of what people want to eat is available in local stores.
Is that actually true? I remember my dad always complaining that the supermarket had stopped carrying his favorite snacks & meals. And I can think of a few of my childhood favorite foods that are only available in New England, and I very much miss them now that I'm out in California. People do home-cooked meals all the time that combine ingredients in ways that store-bought food doesn't have, and they have family recipes handed down through generations for things that can't be bought in stores.
I suspect that most of what people want to eat is in local stores only because their wants are constrained by what's available. Typically, people don't continue to want what they can't have for long periods of time, because it just makes them unhappy. I suspect that if you solved the perishability problem, there'd be a huge untapped market for long-tail foods.
> If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model.
That 1% difference per week makes a huge difference in a year. A startup growing at 7% a week it is 34x bigger at the end of the year, but at 8% it is 55x - or 62% bigger. And at 10% it is 142x - or over 4 times larger than the 7% growth rate.
>> no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Not true, since a company takes the VC money to achieve the higher growth rate, will catch up precisely because of the exponential impact of that 1%. With a 10% growth rate they will be far ahead of you, and capture a bigger slice of the market, even after starting later than you.
The typical metrics are DAUs and MAUs, with attention paid to DAU:MAU ratio, and then some gauge of activity within each session. For some companies that means length of session, but for other companies you'd want something else (e.g. services that actually want users to leave, like search engines).
One of the things that impresses us in pitches is when the entrepreneur has really thought through what the best metrics are for that particular service.
- customer lifetime value / customer aquisition cost
Having more than one is hard, so optmizing for one is much simpler (don't kid yourself, it is hard on any of them, and not all business can pick all of them).
This essay highlighted something for me, you actually end up having a 2x2 matrix for "work for" vs "invest in" and "startup" vs "non-startup."
For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups.
For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win.
For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.
Yes. Every startup guy must save and invest in traditional stocks to mitigate risk.
One other investment that a startup guy should consider is investing time into building good a freelancing business as a side business from their startup.
Obviously I meant investment in the traditional sense, the deployment of capital with the expectation of yield and preservation of principal. Working for a startup is an "investment" in the figurative sense, since you are trading your time for equity instead of cash, but what I meant here was literally putting money into some asset or security to increase your wealth or income.
What I meant is that there is no 2x2 matrix like this. You can: work for/be a founder. And you can invest.
There are no 'figurative sense investments'. You can't 'invest time'. Nobody cares about your time. You can only invest money [or hours * your market rate, which is money].
I think you are just repeating my point and misunderstood my original description. There are people who invest in and work for startups, people who invest in and work for non-startups, people who invest in startups and work for non-startups, and people who invest in non-startups and work for startups. The interplay between time and money and risk and growth with these combinations became clearer to me because of this post.
There are founders [owners] and investors. Fact that there are people who 'work for' startup is irrelevant to the interplay between the investment risk/return.
True, one can be not-a-founder and work for startup. But this person would be just working for salary, and hopefully at market rate. So it is irrelevant to the investment risk/return equation.
Now if one is not working at MARKET RATE - here we have some muddy waters. Because this person would be essentially making a monthly investment. This investment would likely go towards COMMON [not restricted] stocks, WITH vesting/cliff, with NO CAP. If this is the case, one can just assume that startup would have an angel investor doing a monthly investment on these terms. This would go into risk/return equation. Again fact that somebody is working is irrelevant to risk/return.
That's why I've said that your 2x2 matrix doesn't make sense. Now, you can replace 'work for' with 'founder' and it would make sense.
And by the way, if you read the original pg article, he doesn't mention people who 'work for' startups at all. He is talking about founders and VCs.
Most people can't just invest in startups. You need to be an accredited investor, which rules out most people who haven't had a liquidity event or are independently wealthy. The restrictions on what your net worth needs to be are here: http://startuplawyer.com/startup-law-glossary/accredited-inv...
Right, I specified that when I said they were already likely wealthy. The point being however that even once you have had a liquidity event, it might not make sense to invest in startups, it might make sense to build wealth via another startup, but reserve your capital for less risky investments. I think there's a tendency for founders who have had an exit to immediately transform into angel investors. But, this only makes sense if you have a knack for picking winning ideas and identifying founder talent, which is probably only somewhat correlated with, if at all, with what is necessary to be successful at building a startup yourself.
Accredited investor rules only apply to US and Canadian companies. It's possible to angel invest in companies in the rest of the world without being a 1%er - in Europe at least it's very common to angel invest in friends' small businesses/startups.
The part "and how to reach those people" should be written in bold.
It seems like the difference between lifestyle business and startup is sometimes (or in majority of cases?) just in figuring out scalable way to acquire new customers.
I think it's missing the idea of bootstrapping. I think it makes a much rougher environment for fledgling startups, but I think it should be considered more like a hot forge. The more the odds are stacked against you, the better you get. I guess people sometimes miss that when they are aiming for Twitter/Facebook level revenue accountability.
That's a little bit like saying the optimal strategy for running the Boston Marathon is to start running naked from the Arctic Circle three weeks prior.
Not a fan of praise for the sake of it either, but having said that, this is one of the most succinct and focused essays I've read on startups, in a long time, and hard to fault it's fundamental message.
As founders it's easy to do things other than push every day to get customers and/or active users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a 'growth hacker'. Let someone else deal with it... Yikes!
Grow is core to the startup's success, and happy to be reminded of it.
"If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too."
I don't understand this part: "For founders who are younger or more ambitious the utility function is flatter." Does flat mean O(1) or O($)? I'd guess the former, but the latter seems to fit more with the conclusion.
I think the intended idea is U($) = k*$, a linear relationship between dollars earned and utility, or (its derivative) a horizontal line on marginal utility. Typical economically rational adults have utility curves that eventually flatten out, with the marginal utility falling to zero.
What about in my case, where I run a free service that currently has served over 9.3 million requests in the last month? (That service is http://jsonip.com)
Its a utility service that a lot of people are finding useful and has a lot of traction, but no way that I can see to monetize it. Not even sure I have a desire to try and monetize it, since it costs me almost nothing to run.
I would love to be able to build that resource into something more, but I'm not even sure where to start. It has a lot of usage and growth, but its not something I would remotely call a startup.
Serving 9.3M requests is impressive and if you are looking to build it into something more, have you tried getting some feedback from users? What is the reason they are using your service? I think in general, one of many ways the growth can be actualized is via feedback from those who is actually using the product/service.
"It's the same with other high-beta vocations, like being an actor or a novelist. I've long since gotten used to it. But it seems to bother a lot of people, particularly those who've started ordinary businesses. Many are annoyed that these so-called startups get all the attention, when hardly any of them will amount to anything."
I see so many comments on HN poking fun at VC backed startups with underdeveloped business models. Sure, a lot of the criticisms are well deserved, but I wonder if a part of it is because people are bothered by the power law phenomenon.
I think that's true. I also think that the cliche of the venture-backed entrepreneur who goes for growth yet has no idea how the company will generate revenue is mostly false. Most of the smart entrepreneurs I know who are apparently pursuing that strategy actually know exactly how they're going to make money, they just don't say much about it up front.
But at the moment when successful startups get started, much of the innovation is unconscious.
-- This is an interesting bit. The notion of what is intelligence.
At any given time, there are 1001 questions that may be [intelligent]. But ask right question, and the answer is often [easy] to see. So Framing. Observation. Caring. Passion. Perserverence. Non-ovious. Yet invaluable. Forms of intelligence.
My favorites were the last paragraph and the last footnote.
How did those Russians get on anyway?
The only other thing I would add is that these high growth companies, so-called startups, are all utilizing the web. They are relying on what it provides. I guess that's implicit, maybe it need not be stated, but historically could older forms of media have supported the type of growth rates discussed? How popular was the term "startup" before the web? And did it mean the same thing?
The startup: 1. Trying to solve a harder problem than existing businesses are willing to take on. 2. Being equipped for rapid growth. 3. Utilizing the web.
A 'startup' is simply a new business. That's what the word means. You can't just take a word that has an existing meaning and say it means something else.
pg makes his point clearly at the cost of oversimplifying his definition. Scalability is a continuum. There is a continuum between barbershop and search engine.
VCs have every incentive to hit the far high end of the continuum. But a young, hungry entrepreneur probably gets higher expected value by not straying quite so far out.
There is no continuum. The point is that the startup values growth over all else, really limitless growth if possible. A "barbershop" is some business comfortable plateauing at a certain point, or confining itself in other ways (these being business for which growth is not the foremost goal). A barbershop could be a small chain of barbershops in a metro area, the analogy holds.
But limitless growth is never possible. Eventually you bump up against the limits of your market.
If a business is aggressively trying to grow in a $100 million market instead of a $100 billion market, they are "limiting themselves". But they're still functionally a startup.
Keep taking it down a notch. At what market size do they stop being a startup? It's fuzzy.
As your target market goes from "everyone" to "doctors" to "radiologists" to "radiologists at research hospitals", you may be intelligently trading off market size for lower competition, lower marketing costs, and better product/market fit.
What if you had a brilliant idea for a piece of software that would help discover oil deposits? I contend that you have all the ingredients of a technology startup, but it will be impossible to measure your business in the simplistic way the essay describes. There may be only a dozen customers in the world who are positioned to pay you what you're worth, and your growth is likely to be an impulse function: until the moment you get bought by an oil major, there's no growth to measure.
His ultimate distinction is fundamentally fuzzy. Eventually, every business stops growing explosively. It's only a question of at which size it happens. And that size is necessarily a continuum.
There really isn't a continuum in most technology markets. Startups that constrain their growth tend to get pounded into the ground by startups that don't. Try being a small search engine competing with Google.
If it's cited as an example of a startup that constrains its growth, of course its growth rate is going to be low. The real question is whether it stays in business and is a worthwhile investment for its founder.
That's a poor example, because "search engine" is the kind of business that is necessarily out on the far end of the scale.
If we start travelling down the continuum, next you'd hit something like "an app that makes lawyers more effective", then further than that "an app that makes patent lawyers more effective", etc. At each increment, you trade off market size and ultimate growth potential for less competition and lower marketing costs. Each of these niches can still be extremely lucrative (from the perspective of the entrepreneur, possibly less from the perspective of a VC who wants to make 100x).
What's more, individual businesses leap up the continuum all the time. The first McDonalds was a barbershop-like business.
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[ 5.2 ms ] story [ 131 ms ] threadThis is the gem.
During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they're doing. [6]
...
[6] This is, obviously, only for startups that have already launched or can launch during YC. A startup building a new database will probably not do that. On the other hand, launching something small and then using growth rate as evolutionary pressure is such a valuable technique that any company that could start this way probably should.
In other words, if a startup hasn't launched yet they quite sensibly don't measure growth rate--but it's a good idea to launch early so you can measure growth and optimize for it.
An epic essay with tremendous depth. Love the ending:
"A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity."
[1] http://steveblank.com/2010/01/25/whats-a-startup-first-princ...
I would prefer just to say that the definitions are "different" :-)
Blank's focus is on startups that are discovering their business model. PG's focus is on startups that are designed to grow fast. Those two groups of organisation overlap, but are not identical.
Though I highly doubt PG would in fact define "startup" as "a company designed to grow fast". Pretty sure he would agree there's also a "search for a business model" aspect to it.
Unless he's changed his tune in the latest book (The Startup Manual is still in my to read pile) then under his definition the company stops being a startup once you have achieved the "repeatable and scalable" bit. Then it's just "a company" :-)
For Blank Startup == being in Customer Discover/Validation phase. Once you're out of there and in Customer Creation & Company Building you're no longer "a startup" - you've found your business model and are busy applying the heck out of it.
Under pg's definition the bit that defines the startup is the "Customer Creation" stage when you've found your business model and and are growing fast (to quote "Together these three phases produce an S-curve. The phase whose growth defines the startup is the second one, the ascent.").
Under Blank's definition you've stopped being a startup at this point - you've found your scalable business model. Under pg's definition you would still be a "startup" in the Customer Creation & Company Building stages as long as you're growing and haven't hit internal/market boundaries that slow your growth.
Also PG's focus on fast growth doesn't seem to be present in Blank's work.
I'm think Blank would be happy to call the early days of a new retail organisation like Ulta Salon a "startup" (they found a new repeatable and scalable business model for retail, taking the beauty counters out of the larger stores and sticking 'em as stand alone stores on cheaper real estate).
I get the impression that their very impressive growth (for retail) of 92% since 2006 wouldn't count as "startup" under PG's definition... or maybe not.... I don't know.
I'd love to hear thoughts on how to calculate the referenced number.
Very valuable insight.
However, (b) in its own right, can serve as a fast growth business model - where the delivery or "clearing" of value between those who demand and those who supply is the value proposition itself - because everyone wants delivery (making it, by default, a big market).
Most banks work on this principle, in an abstract sense. A business like FedEx or UPS is a more physical example of this.
Online takeout-ordering services are examples of this - the customer wants the food and the "online ordering website" startup does not produce food - but what it produces is "clearing" ie matching demand to supply.
This - as an idea, in my experience, always scales and grows fast as well while falling into the category (b) that pg mentions.
It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them.
For example, I've been using Evernote and Dropbox for years, but haven't had the need to buy a premium account. I believe there are many others like me who are happy with the free (or open source) software that does solve an itch. Are these "fast startups"? Is their business model (freemium) scalable?
Average is much higher than a median for startups because it includes the most successful startups which are by definition have a high growth rate over an extended period of time so they are very big.
Niche businesses in this context have a low growth so their average is closer to the median. The growth is constrained at the top in absolute terms (otherwise it would be a startup) so the average is lower than the one for startups.
Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it.
Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair.
So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model.
I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs
"Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster."
Took me awhile to realize this as a founder.
Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.
Same here. I figured out that one can turn into an optimization problem her user satisfaction and that it was key to get a successful product and then key for the company, but it's even funnier: can be turned into an optimization problem the whole process of founding a company.
Definitely awesome.
Until this past week or so I've been highly skeptical of VC funding and much more inclined towards bootstrapping. I love that DHH video someone else posted in this thread. I think it's silly to focus on users and vanity metrics if you don't have a clear business model (even if it's not implemented immediately).
But this essay makes an amazing case for why outside funding is helpful, even crucial. And it's encouraging that he's emphasizing revenues, not just users.
I'm also encouraged because I was at the YC event at MIT this Wednesday, and didn't hear anything (even when I asked directly) about investor drama.
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
Or are you saying they are trying to grow organically (other than their Kickstarter fundraising)?
Books are fantastic for other reasons: easy to ship, relatively non-perishable, mass-produced, and even affordable. Webvan, for instance, would always have a harder time because groceries fail at least three out of these four criteria (as well as the two you cited).
Amazon is trying its hand at groceries now, of course, but even they're having a hard time at it.
I suspect that most of what people want to eat is in local stores only because their wants are constrained by what's available. Typically, people don't continue to want what they can't have for long periods of time, because it just makes them unhappy. I suspect that if you solved the perishability problem, there'd be a huge untapped market for long-tail foods.
That 1% difference per week makes a huge difference in a year. A startup growing at 7% a week it is 34x bigger at the end of the year, but at 8% it is 55x - or 62% bigger. And at 10% it is 142x - or over 4 times larger than the 7% growth rate.
>> no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Not true, since a company takes the VC money to achieve the higher growth rate, will catch up precisely because of the exponential impact of that 1%. With a 10% growth rate they will be far ahead of you, and capture a bigger slice of the market, even after starting later than you.
Adding percentages makes no sense.
The rest of your argument is disproven by the number of VC backed companies that were late-comers but took over the market.
QTF. Reading this article made me smile.
Is is DAUs, MAUs, daily sessions, length of session, total signups?
One of the things that impresses us in pitches is when the entrepreneur has really thought through what the best metrics are for that particular service.
- virality index
- retention rate
- customer lifetime value / customer aquisition cost
Having more than one is hard, so optmizing for one is much simpler (don't kid yourself, it is hard on any of them, and not all business can pick all of them).
[1] http://www.deviantbits.com/blog/engines-of-growth.html
For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups.
For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win.
For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.
One other investment that a startup guy should consider is investing time into building good a freelancing business as a side business from their startup.
There are no 'figurative sense investments'. You can't 'invest time'. Nobody cares about your time. You can only invest money [or hours * your market rate, which is money].
True, one can be not-a-founder and work for startup. But this person would be just working for salary, and hopefully at market rate. So it is irrelevant to the investment risk/return equation.
Now if one is not working at MARKET RATE - here we have some muddy waters. Because this person would be essentially making a monthly investment. This investment would likely go towards COMMON [not restricted] stocks, WITH vesting/cliff, with NO CAP. If this is the case, one can just assume that startup would have an angel investor doing a monthly investment on these terms. This would go into risk/return equation. Again fact that somebody is working is irrelevant to risk/return.
That's why I've said that your 2x2 matrix doesn't make sense. Now, you can replace 'work for' with 'founder' and it would make sense.
And by the way, if you read the original pg article, he doesn't mention people who 'work for' startups at all. He is talking about founders and VCs.
I suspect Github would have done worse if they had taken early funding. There should probably be more businesses built following their model.
As founders it's easy to do things other than push every day to get customers and/or active users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a 'growth hacker'. Let someone else deal with it... Yikes!
Grow is core to the startup's success, and happy to be reminded of it.
"If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too."
Its a utility service that a lot of people are finding useful and has a lot of traction, but no way that I can see to monetize it. Not even sure I have a desire to try and monetize it, since it costs me almost nothing to run.
I would love to be able to build that resource into something more, but I'm not even sure where to start. It has a lot of usage and growth, but its not something I would remotely call a startup.
I made a short post a few hours ago about the current state: http://news.ycombinator.com/edit?id=4556711
I see so many comments on HN poking fun at VC backed startups with underdeveloped business models. Sure, a lot of the criticisms are well deserved, but I wonder if a part of it is because people are bothered by the power law phenomenon.
-- This is an interesting bit. The notion of what is intelligence.
At any given time, there are 1001 questions that may be [intelligent]. But ask right question, and the answer is often [easy] to see. So Framing. Observation. Caring. Passion. Perserverence. Non-ovious. Yet invaluable. Forms of intelligence.
My favorites were the last paragraph and the last footnote.
How did those Russians get on anyway?
The only other thing I would add is that these high growth companies, so-called startups, are all utilizing the web. They are relying on what it provides. I guess that's implicit, maybe it need not be stated, but historically could older forms of media have supported the type of growth rates discussed? How popular was the term "startup" before the web? And did it mean the same thing?
The startup: 1. Trying to solve a harder problem than existing businesses are willing to take on. 2. Being equipped for rapid growth. 3. Utilizing the web.
VCs have every incentive to hit the far high end of the continuum. But a young, hungry entrepreneur probably gets higher expected value by not straying quite so far out.
If a business is aggressively trying to grow in a $100 million market instead of a $100 billion market, they are "limiting themselves". But they're still functionally a startup.
Keep taking it down a notch. At what market size do they stop being a startup? It's fuzzy.
As your target market goes from "everyone" to "doctors" to "radiologists" to "radiologists at research hospitals", you may be intelligently trading off market size for lower competition, lower marketing costs, and better product/market fit.
What if you had a brilliant idea for a piece of software that would help discover oil deposits? I contend that you have all the ingredients of a technology startup, but it will be impossible to measure your business in the simplistic way the essay describes. There may be only a dozen customers in the world who are positioned to pay you what you're worth, and your growth is likely to be an impulse function: until the moment you get bought by an oil major, there's no growth to measure.
His ultimate distinction is fundamentally fuzzy. Eventually, every business stops growing explosively. It's only a question of at which size it happens. And that size is necessarily a continuum.
"Startups that constrain their growth..."
If it's cited as an example of a startup that constrains its growth, of course its growth rate is going to be low. The real question is whether it stays in business and is a worthwhile investment for its founder.
If we start travelling down the continuum, next you'd hit something like "an app that makes lawyers more effective", then further than that "an app that makes patent lawyers more effective", etc. At each increment, you trade off market size and ultimate growth potential for less competition and lower marketing costs. Each of these niches can still be extremely lucrative (from the perspective of the entrepreneur, possibly less from the perspective of a VC who wants to make 100x).
What's more, individual businesses leap up the continuum all the time. The first McDonalds was a barbershop-like business.