Startup icon Paul Graham once distilled down the incredible complex world of entrepreneurial companies into two simple words: Startup = Growth. In his brilliant, sweeping 5000+ word essay, Graham unpacks this idea by defining startups as those entities which are designed to grow fast. His first paragraph lays the groundwork for his argument:
A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.
The fact that startups are designed to grow rapidly impacts every single aspect of their being – it is the driver of the attitudes, behaviors and, ultimately, the outcomes of the entrepreneurial ecosystem.
I think a lot about growth, given my association with more than a hundred companies that aim to be Startups in the Grahamian sense of the word. And I work for a Startup, provided one is willing to allow a service business like Square 1 Bank to claim capital “S” Startup status. In re-reading the essay last week, it caused me to reflect on a couple themes related to growth.
First, the Startup game is one that only makes sense by looking at the outliers. Much of the romanticism of doing a Startup is the notion that you create the next billion dollar business from scratch. This return possibility is one of the things that drives Startup activity. Yet the very fact that these occurrences are extremely rare means that the path one travels to Startup glory is littered with the corpses of ventures which were the outright failures, average and even above average early stage ideas.
But because the outliers are a necessary function in order to make the ecosystem work, we are inevitably biased towards thought frameworks which allow for the possibility that our Startup will be an outlier. This manifests itself not only in thinking that we can create the next Twitter or Instagram – neither of which had a reasonable business model early on, right- but that the time from formation to exit may in fact be Instagram-esque as well.
In reality, I believe there is a bit more nuance to the return dynamics of high growth ventures than is proposed in the essay. While having a successful Startup will never be a game made for the median, there are very good outcomes to be had – though not the very best – for Startups in the upper deciles of the ecosystem. What this often requires, however, is a great deal of time to achieve the desired result. Successful Startups are often “overnight successes”, many years in the making.
What complicates this reality is the typical growth curve of a Startup. Graham describes it as a S-curve, with an initial slow period of “figuring it out, a period of rapid growth, and a general slowing as a company transitions into maturity. This S-Curve is easily visualized with growth on the y-axis and time on the x-axis.
While every early stage pitch deck shows a hockey stick revenue curve, the number of companies with actual steep slope, “up and to the right” growth curves is quite small. And even when rapid growth does occur, things aren’t always as they seem.
As I look back at the publicly available FDIC filings for Square 1 from March 2007 (two months after I started) as compared to March 2013, it brings me great pride to think about how we’ve grown the business over the years. Our loan portfolio is more than 4.5x larger and we’re more than 5x as profitable! In fact, during 2012 the Bank generated more than $24MM in income before taxes. By all accounts we are up and to the right, and our growth curve looks very attractive. It’s been a fantastic ride. Yet, one could get a much more realistic picture of Startup growth life if you were to magnify the S-curve graph while on the upward slope and were somehow able to quantify what the experience of growth feels like.
When you’re in it, the ride feels much more like this the image below; messy, up and down, a day to day if not hour by hour roller coaster. Even if things are generally trending in the right direction, Startup life still feels like the messy S-curve almost all the time.
I think this is because Startups are inherently messy. They’re new creations with no embedded rules of order or function. This is awesome in the early stages when there is the freedom to create at will and “figure it out” with a small team. The bumps along the way are managed either because everyone is drunk on the Startup energy or the company is so small and agile that it can handle the rises and dips and keep moving forward.
As you build a Startup there’s a tendency to try and immediately identify the things that are broken so you can fix them. Startups are created by fixers: people who find problems and choose to fix them. So the process of a Startup is to build, identify problems, iterate, rinse, repeat.
And there are so many things - everything – that could be better.
At times it can feel like you’re constantly yo-yoing up and down and there’s a danger that you become so focused on what to fix that you lose sight of the fact that you’re so much higher on the S-curve than you used to be. You look up one day and you’re 5x the size you used to be and think, “how in the world did this happen? I thought everything was broken.”
And that’s the beauty of reality that Startups = Growth. Everything can be broken and expanding at the same time.
In light of this it’s vitally important, as growth happens, to ensure that the expanding team is aware of how the business is growing and how special it is to be a part of a Startup. One aspect of this is accomplished by helping everyone in the company understand the drivers of your business model. At Square 1, we try and educate our entire staff – front line bankers, client service professionals, senior management and beyond – about things like the venture capital industry, how startup financing occurs and the various ways that a bank makes money. And we are completely transparent about the bank’s financials and show exactly how we’re performing to plan every month in an all hands-on meeting. The hope is that everyone in the company can get passionate about how we help startups while also understanding how we’re growing our Startup.
The other key is to take the opportunity at points in time along the way to stop and refocus the team on the accomplishments to date. Creating a Startup is a formidable and admirable endeavor. Growing a Startup is just as formidable a task but there is less of the cache that comes from being in the trenches early on. It’s imperative to figure out ways to get the moments of clarity where the team can hop off the rollercoaster and admire the view from various points on the growth curve.
In summary, Startups do indeed = Growth. They’re messy and can take a long time. But there’s no other job we’d rather be doing.