What is a hypergrowth business?
Lots of people talk about fast growth companies–but what what is “fast” exactly? At best, it’s relative to what you’re used to. I don’t credit my University of Texas MBA with much but I will say this: it drilled in a logic framework for thinking about business building. One of the simpler lessons was on anticipating growth rate. Each type of business model has an inherent growth rate–just like different types of animals mature at different rates. The DNA of your business model, its basic structure, dictates the zone of growth your business can sustain. Where this gets confusing is that most new companies started today are heavily tech oriented. If it has an app, is it a hypergrowth business? Not necessarily.
Different DNA: service, product and software
For example, a services firm like the Atlanta PR agency I founded or Valor, which like all VC firms should be a services business first, can grow around 15% per year, sustained, as a max growth rate because of the inherent friction of recruiting, hiring and managing talent. (If you think about it, the primary engine of services company is talent put through process). It really doesn’t matter if you order your PR retainer on an app, or invest in the fund online, the work in both cases in truly dependent on people.
It’s similar with product companies. You may configure your product online, but if it’s produced, it’s rare for it to be able to sustain hypergrowth. Product companies have fewer people per unit of production, and so their growth rates under great management can be sustained at 20-30%. Classic product and service companies have lots of options when it comes to growth capital, including Amex or bank debt options, secured debt on equipment, lines of credit and outright business loans.
Venture capital is designed to back hypergrowth.
It’s not stated in the missing venture capital manual :), but the truth is VC is a type of capital designed for the unique needs of hypergrowth businesses. So if hypergrowth isn’t fast growth, what is it? Hypergrowth has two key features:
Hypergrowth Trajectory. Hypergrowth is 30-50% organic growth for 3 or more cycles. It’s not buying traffic and conversion to spike the numbers–it’s the real growth. How do you know real from unreal? You can sustain real without outside capital at least for 3 cycles before the wheels come off.
Hypergrowth Sales Engine. A hypergrowth company may or may not have a services or a product component in the mix; regardless, the engine of new customers coming onboard does not require physical intervention to sustain hypergrowth. Physical products in the process must be practical commodities not to impact growth. Examples of hypergrowth companies with a commodity in the mix? Marketplaces like Uber and AirBnB or Valor’s portfolio firm Kandid.ly. If the core offering is at a distribution and saturation dense enough to make delivery frictionless, it can be a commodity and thus hypergrowth is possible even with a service.
There’s nothing inherently superior about building a hypergrowth business.
The world’s problems need all kinds of solutions and all kinds of entrepreneurs. I have favorite entrepreneurs in all these categories. Is someone who builds a great mapping app a “better” entrepreneur than someone who starts a successful preschool or restaurant, or designs a super cool new pantyhose? Hardly. It’s good to know what “good” is though for your business model and what’s possible for growth. Any other thoughts on business models and growth approaches?