Amidst the obsession with fast growth and excessive venture funding, we need a more sustainable approach towards growth to build lasting, valuable businesses.
Every startup wants to establish sustainable growth, as quickly as possible, to build a great company that will last, whether they’re looking to keep running it or step away in a few years. Unfortunately our society and media culture have developed an obsession with fast growth, and bigger and bigger funding rounds. It’s easy for any company founder, myself included, to get carried away by the energy and opportunity in a startup, and interpret these as the success metrics to aim for. This often leads to taking short-cuts or relying on excessive paid advertising to speed up growth, which often causes companies to implode.
My team and I have been fascinated, motivated and sometimes disillusioned by this world ourselves over the last ten years of working for and with some amazing startups. Building on our experience we have developed a different model of growth that is much more likely to lead to sustainable growth, large valuations and lasting companies.
"Slow Growth thinking is the attitude of taking the necessary time to build a repeatable, profitable growth framework, which is based on the fundamental metrics that will create the success of a business, rather than those that reflect the success of a business."
Slow Growth thinking is the attitude of taking the necessary time to build a repeatable, profitable growth framework, which is based on the fundamental metrics that will create the success of a business, rather than those that reflect the success of a business. Fast growth reflects a successful business, but it alone doesn’t create one. If the fundamentals of growth are right, the business will benefit from fast growth and high valuations, rather than the other way around. Once a company has determined the fundamental metrics for growth, they set their targets based on the internal capabilities of the company, rather than on external factors. With this framework in place, companies can choose to scale up this machine by re-investing profits or taking on external capital, but on their own terms, leading them along the path to becoming a large, profitable business.
So, it’s time to slow down and re-focus on what matters to company success. For the vast majority of startups, Slow Growth thinking is the fastest way to make progress.
I’ll be sharing the fundamental principles of Slow Growth thinking and why they lead to faster progress in the short-run, and more resilient and valuable businesses in the long-run. I’ll address some of the inevitable concerns around this way of working, and finally how it affects startup marketing strategy.
1) What is Slow Growth thinking?
Committing to take the necessary time to establish a profitable growth framework
Most companies want to get bigger and more profitable, but many founders and marketers get lured into taking shortcuts to artificially increase their revenue, customer numbers, team size or number of sites. They use excessive paid advertising, heavy discounting or large amounts of venture capital to try scaling before having proven a profitable business and growth framework on a smaller scale first. This often causes companies to crash, downsize or become reliant on external funding.
Instead, using Slow Growth thinking, startups should establish the foundations of repeatable, profitable growth no matter how long it will take, before investing more into scaling and building a large profitable business. This requires a combination of keeping the big long-term goal front of mind, while being fully committed to making the fundamentals of the business and growth work. Such a focus usually leads to the fastest progress towards the goal of building a resilient and highly valued business.
Most companies already know they’ll need to prove how they can grow profitably. Unfortunately many don’t recognise that they need to build a system for growth that works on a relatively small scale before expanding it, no matter how long this process takes. This kind of system isn’t the same as having a set of marketing channels, even though that’s part of it, but it also relies on optimising for the fundamentals of your business success and setting the right targets. It’s not easy or cheap to do this - it usually takes months and some significant investment - but it won’t be helped by taking on millions of external funding without a profitable way to invest it yet.
Just to be sure, the logic applies whether you are looking to take on additional funding to grow or aim for company profitability. Investors will appreciate a drive towards sustainable growth and long-term thinking, as it will increase the value and resilience of your business. And if you can establish profitability and make funding an option rather than a necessity, you’ll be in a much stronger position to make the capital work for your business.
"You should have the option to grow through reinvesting revenues or raising more equity or debt funding to make your growth engine work for you."
Shopify, Mailchimp and Braintree are just a few examples of startups that only raised funding when they were running significant profitable businesses, and then used the extra capital to scale a framework that’s already working and get to hundreds of millions of dollars in revenue. It’s also very viable to raise a relatively small amount of funding to establish the product and growth framework, at which point you should have the option to grow through reinvesting revenues or raising more equity or debt funding to make your growth engine work for you. Many startups raise too much money, too quickly, forcing them to scale before they’re ready.
Fast growth is not a strategy, it’s an outcome
It’s great to achieve fast growth, but only when it’s the result of getting the fundamentals of your business success right - these will define the metrics you need to optimise for. And there are good reasons why startups would want to achieve fast growth and a certain scale very quickly. They might be in a ‘winner-take-all’ industry, or they’re committed to testing their business hypothesis quickly to decide whether it’s viable at a large scale.
Many startups are in highly competitive spaces which makes it understandable they’re looking to cement their position as a market leader as quickly as possible. They might need to reach a larger scale than their competitors to offer a better or cheaper service. But in most sectors there’s plenty of opportunity for a number of successful companies, so the goal of market leadership can cause unnecessary stress and sets the wrong goals.
Secondly, there’s a temptation for startups to find out as quickly as possible whether the business will work or not - if it fails, better fail quickly and move on to the next thing. While it makes sense not to waste time or drag out an impossible business, we’ve seen many cases of startups prioritising fast growth, rather than the metrics that will lead to fast growth. This can kill a business with huge potential. The better way is to set your goals based on the metrics that actually matter to your business and the team running it, and that lead to a resilient, sustainable company.
The right set of metrics should always include the number of customers and how many you can acquire, but on its own these are insufficient to generate sustainable growth. Similarly, the common route of contrasting customer lifetime value to customer acquisition cost (LTV:CAC) is too simplistic. Instead it’s crucial to focus on the determining factors of these metrics: customer satisfaction, brand awareness, the effectiveness of your growth marketing setup and share of non-paid growth.
"Generate positive economies of scale for growth - the stronger the brand and customer relationships, the more cost-effective growth will be."
Assessing and maximising these metrics will eventually put companies in a position where they generate positive economies of scale for their growth - the stronger the brand and customer relationships, the more cost-effective the growth will be. This is the only sustainable way to achieve fast growth.
Empirical data from Jim Collins’ Good To Great research shows that growth follows as a result of establishing what he calls a Hedgehog Concept, using a company’s core strengths to provide value to its customers in a repeatable way. This requires deep knowledge of the company’s capabilities as well as the nature of the relationship with its customers: ‘Over two thirds of the [less successful] comparison companies displayed an obsession with growth without the benefit of a Hedgehog Concept. [...] In contrast, not one of the good-to-great companies focused obsessively on growth. Yet they created sustained, profitable growth far greater than the comparison companies that made growth their mantra.’
Growth targets defined by your business, not the market
Startups often run into trouble with continuously hitting their growth targets and resort to discounting or expensive advertising which are the only short-term solutions in that case. But this can be avoided with the right foresight - the reason is that many startups set their growth targets in the wrong way, and often far too late.
"It’s essential to be clear on the capacity of the business to serve and acquire customers profitably, and then use this bottom-up approach to set ambitious but meaningful targets."
It’s tempting to look for ever increasing numbers of new customers or revenue, to prove how much demand there is for the product or service and secure that next round of funding. The process of setting goals is highly emotional and notoriously difficult, especially when there’s no past performance data. But once a company has committed to a set of goals, especially with external investors, there’s huge pressure to do everything they can to hit them. And not even the most experienced or hard-working marketer can magically make this happen when they’re behind. The results can be heavy discounting, being forced to buy customers through paid advertising, and causing the team to lose faith.
Startups need the right customers, at the right time. Everything else is either vanity or outright dangerous for the survival of the company. The right customers are those that stick around, recommend a product to others, and are profitable to acquire. The right time is given by how well a startup can acquire customers profitably - going too fast could increase costs and ruin the economics of the business. And it likely won’t be able to make up for this; if a startup can’t acquire customers profitably at a small scale then it won’t be able to replicate that at a larger scale. So it’s essential to be clear on the capacity of the business to serve and acquire customers profitably, and then use this bottom-up approach to set ambitious but meaningful targets.
2) Why should most startups adopt this way of thinking?
Get your company in a very strong position to secure external funding
A growth setup that’s proven to acquire valuable new customers profitably puts your company in a very strong position. You might be able to fund your growth entirely through revenue and become independent of external investors. The obvious benefits are that control of the business stays with founders and the team, and that it massively reduces your cost of capital. Whether you choose to take on more funding or not, it should be exactly that - your choice.
Taking on external funding is a crucial part of scaling a business though and in the right circumstances can have a hugely beneficial impact. With a strong growth setup you’ll get a much better pick of investors and terms. As Josh Kopelman, founder of First Round Capital said, ‘The best time for follow-on funding is when you don’t need it [...]’. There’ll also be more options for types of funding, beyond just venture capital, which can significantly reduce your costs: Equity funding and especially venture capital are often the most expensive sources of capital. With early revenue and a strong growth framework you could open up debt funding that’s much less expensive and won’t involve giving up any control. Your existing equity investors will be happy about it too, a healthy mix of debt and equity can increase your capital efficiency and hence everyone’s returns. Whilst this often isn’t an option for very young startups, it’s worth keeping in mind that the venture capital industry is not as inevitable a choice as many people seem to think.
We’re also convinced the venture capital landscape is changing after the debacles of scale-ups like WeWork and Uber failing to sustain their unrealistic valuations and growth plans. Add to this the extreme slowdown in spending due to Covid-19, and we’ll be in for a big change in the approach of many investors. At least the more serious ones have already started putting much more emphasis on the resilience of a startup and the ability to show a clear path to profitability. Two recent examples are David Sachs advocating for higher capital efficiency and Kristina Shen from a16z making a case for ‘efficient growth’. Times like now are opportunities to re-focus on your long-term growth opportunity, and to strengthen the foundations of your business which will stay with you well beyond this quiet period.
Avoid getting hooked on paid advertising, which isn’t cheap anymore
My co-founder and I started our marketing careers in the first days of Facebook advertising during the last economic crisis of 2008. Google Ads had been around for a little longer, but the coming years turned out to be a feast for startups and innovative brands using these new channels to catapult themselves past their big brand competitors. Digital ads were cheap and not many people knew how to use them. A number of direct-to-consumer brands popped up and quickly gained momentum to scare even the largest consumer goods companies. But digital advertising has evolved, costs have soared over the last few years. So this game of arbitrage many startups were able to play successfully - hack your way to substantial growth through cheap ads and viral content - won’t work in the same way anymore. Despite the drop in media cost since the Covid-19 lockdowns started, we’ll likely get back to the previous level before too long.
Digital ad channels are absolutely essential for companies, and there’s still an edge to be found if you manage them properly. Tying them into an effective multi-channel framework, and setting your targets with a bottom-up approach, you’ll be able to use digital ad campaigns for new customer acquisition without costs spiralling out of control. But we’ve seen too many startups who need to keep expanding their advertising budgets just to stay on track to hit their acquisition target, because they’re aiming for fast instead of sustainable growth and set themselves unrealistic targets. As an unfortunate addition, and counter-intuitively, the more you spend on paid advertising, the less cost-effective the channels will become. And this applies between channels as well - going from digital channels to large traditional broadcasting like TV and outdoor will increase costs even more.
Instead, the goal is to apply Slow Growth thinking, to create a growth framework that’s built around a strong brand and customer relationships, to set realistic targets and then treat paid advertising as just one relatively minor part of your growth framework. It will work very effectively in this scenario.
Strong customer relationships drive the most cost-effective growth
Maximising the strength of your brand and customer relationships will make sure you don’t drop the standard of what you provide your existing and new customers with. It’s common knowledge that acquiring new customers costs a multiple of retaining your existing ones - it makes for much less exciting numbers to show but will make or break your company long-term. Happy customers are much more likely to recommend you to their friends which we’ve seen to be the most effective driver of growth for many startups, without the need for any financial incentives. It’s easy to put this down as a challenge for the product team, but customer satisfaction, retention and referral need to be built into your growth marketing framework from day 1.
Keep team morale high and stress levels manageable, by making people feel in control
One of the main responsibilities of a founder should be toward their team, alongside their customers and investors. Joining a startup, most people should know there’ll be pressure, a lack of structure and sometimes long hours. But these can very quickly get out of control and cause your team to be overstretched, demoralised or even burning out in many cases. As we said earlier, deciding your targets in the wrong way can set your marketing team up to miss expectations before they even get started. It doesn’t have to be that way. With a long-term view and the right process to set targets, people will feel in control; challenged, but with a clear goal and vision ahead. This will lead to a great working culture, and a highly capable and motivated team. No need to say this is the foundation for any great, lasting company. The extent to which this falls through the cracks in our current startup world is staggering. So any company and founder putting this on their agenda will have a major competitive advantage.
3) Fine, but….
I’d like to briefly address some common concerns about this approach from many startup founders and leaders.
- ‘I’m more ambitious than that’ - You should be ambitious! This has nothing to do with the size of growth you’re aiming at for your business, but with choosing the right metrics and the process of maximising them. In fact, you’re much more likely to grow a big company through a Slow Growth approach.
- ‘Investors need to see fast progress and trajectory’ - Yes, but only if it’s viable to keep up and profitable on a per-customer basis. Among serious investors there’s an increasing demand for resiliency and a path to profitability. Especially after the drastic cuts in valuations of some major startups over the last year, there’s an accelerating shift in attitudes.
- ‘I need to own my market before my competitors do’ - There are actually some markets where only one or two companies survive (e.g. ridesharing, food delivery, aircraft manufacturing, some high-end software). In your industry there’s probably space for quite a few successful players, and with a strong brand, and positive unit and growth economics it likely won’t matter whether you’re the biggest in your space or not.
- ‘I don’t have time to go slowly’ - There’s no reason to artificially slow down the growth process, but it’s crucial to optimise not for speed but for the fundamental metrics that’ll make your business succeed. If you create a strong brand, focus on your customer lifetime value and build an effective growth framework, you’ll progress very quickly as a result.
4) Now what? How does this approach affect growth marketing strategy?
"Whatever your ambition for growth, the underlying assumptions of the model are based on how many customers you can acquire and serve profitably over a given timeframe."
Set growth targets on the basis of your capacity to grow, rather than the total market size or other misleading factors
Whilst it’s very important to estimate the size of the market you could serve, it has no relation to your ability to reach a certain share of that market. The result can be to come up with targets that are only possible to meet with large amounts of expensive capital, bad unit economics and team burnout. We recommend using a bottom-up approach to creating your growth targets. Whatever your ambition for growth, the underlying assumptions of the model are based on how many customers you can acquire and serve profitably over a given timeframe. The magnitude of your targets will likely determine what kind of marketing activity is best suited for reaching them. Doing this early in your startup journey will also determine what kind of external investment is right for you. For example, institutional venture capital isn’t right for a lot of businesses and founders, whereas angel investment or debt capital might not be enough for some others that need more scale. Being aware of this before you enter these relationships might make or break your startup.
Choose and optimise for the right metrics
As we have said it’s great to have the ambition to grow fast and big but companies need to understand, measure and maximise the factors that will help their company get there. The most important ones are customer satisfaction and loyalty, brand awareness, the understanding of the best routes to acquire and retain customers, the effectiveness of your growth framework and the share of growth from non-paid channels. Some of these are difficult to measure or have a long lag time, but that shouldn’t stop companies from taking them very seriously. Since digital marketing increases the ability to measure the outcome of marketing activity, many companies have fallen into the trap of paying excessive attention to metrics that can be measured immediately, rather than also considering those that will take time or additional effort to measure.
Look to optimise for customer lifetime value right from the beginning
We discussed the importance of keeping your customers happy. The main metric to measure from a growth marketing perspective is customer lifetime value, which needs to be optimised. It might be tempting to try to acquire customers first, and then look to keep them. But the much more effective route is to start building an understanding of the customer journey from first contact to being a long-time repeat customer, and then grow your marketing framework and product around this. The vast advantage of many modern businesses is their ability to build a direct relationship with their customers, whether that’s through email, social media or online communities. It enables them to know their customers, speak to them in a meaningful way, and analyse the engagements to look to find more similar people it can serve well.
Build a repeatable, profitable growth marketing framework
Identifying all the possible customer journeys - even including those that aren’t strictly measurable - is the crucial first step towards building an effective marketing framework. Based on these you can craft a combination of several marketing channels, digital and offline, paid and organic, that all play together to guide people through their ideal journeys. Any individual channel won’t be enough to maximise your customer lifetime value and to generate sustainable growth for your business. In the very early stages of a startup it’s a good idea to rely on word of mouth, personal connections or partnerships to find product-market fit. As you start scaling it’s important to systematise your marketing, even if it initially just consists of one or two paid channels, email and some highly targeted content. Over time you gradually diversify channels and increasingly focus on brand and content, rather than just increasing advertising spend.
Aim to make non-paid marketing channels the core of your growth framework
"If you continuously strengthen your customer relationships, content and community, you will build a highly effective foundation for growth."
In order to avoid becoming too reliant on paid advertising, it’s crucial for startups to factor in enough time and effort to build their growth framework around non-paid activity. This process should be reflected in your growth targets, because if you plan to grow too quickly you won’t have much choice than to cut corners somewhere.
Instead, firstly, focus on building strong customer relationships, to encourage referrals and higher retention. Secondly, ensure you develop a point of view as a brand, and prepare high-value content that expresses this point of view. Your original content should drive your SEO activity, rather than the other way around, to make sure you’re developing an authentic tone and opinion. This is less about frequent blog articles or social media updates but rather about having the right messaging throughout all channels. You need to understand your customers, their motivations and ambitions, and speak to them in a relatable way. That could be through advertising copy, your website, an email or a video about your product. And finally, enable your customers to become part of an active community, centred around a core interest connected to your brand. An online forum, regular events and promoting your community members are the most effective routes.
If you continuously strengthen your customer relationships, content and community, you will build a highly effective foundation for growth. It can be amplified by paid advertising but shouldn’t be led by it.
Investing more in good people generates a better return than advertising
The most important assets for your business are your team and the people working on it, your product or service, and the content you use to communicate with your customers. Having the right set of people, with relevant experience and attitude, will give your business the best chances to achieve whatever it sets out to. In marketing especially, it’s tempting to increase advertising spend or buy the latest software tools, but having highly capable people to lead your marketing, whether in-house or external, will be a much better investment and increases your return on ad spend.
It’s crucial for startups to allow themselves the time and effort it takes to build a repeatable profitable growth framework, that’s based on the metrics that really determine success, and centred around a set of targets based on the internal rather than external factors of the business. Adopting Slow Growth thinking, startup founders and leaders have a huge opportunity to make even better use of the talent and funding that have become more readily available for startups around the world. In this way they’ll have the real potential to build lasting, valuable businesses that make a genuine difference for their customers, their team, their founders and their investors.