Modeling What Startup Growth Actually Looks Like
Y Combinator recommends that startups focus on maintaining a growth rate of 6% per week.
“A good growth rate during YC is 5–7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.”
— Paul Graham, YC Co-founder
http://www.paulgraham.com/growth.html
People are intuitively bad at understanding exponentials and compound growth. For this reason, it’s a good exercise to model out and visualize how small changes in something like growth rate have a very dramatic impact on startup outcomes. I put together a very basic spreadsheet model below to illustrate what 6% growth looks like. You can make a copy of the model and tinker with your own business assumptions to get a better intuitive grasp of how startup growth numbers work out.
Below find a link to the model with a few preset assumptions. These are the assumptions for a startup I’m considering working on: I estimate I would make 10$ revenue per user, hold a 6% growth rate, and I’d have 50 users at launch:
https://docs.google.com/spreadsheets/d/1ueaywzDMwayFs2gkkD-mISoBs_FWpZoImhOfbU0J2no/edit?usp=sharing
To edit the model with your own assumptions, feel free to make a copy:
File -> Make a Copy.
Here’s an Excel version of it too in case you want to download instead:
https://drive.google.com/file/d/0B7X_GJYtylnkUHc0WTV1NGhmRmM/view?usp=sharing
Helping Big Co’s Understand Startups
The spreadsheet originally came about when I was modeling a business opportunity for a larger company. I recommended that they hold the spin-off startup to the same 6% growth standard that YC recommends to its new companies. I knew that the executives at the larger corporation might get antsy when the first few months of the business weren’t producing the type of revenue numbers they’re used to at a public business of their size. As simple as it sounds: things start small … and then grow big. Pressure to make profits now often results in not giving new opportunities sufficient time to grow. To assuage their concerns, I wanted to convey what sort of expectations they ought to have for the early stages of the startup, and how something that seems small, like a 6% weekly growth rate, really adds up over time. My hope was that the model would communicate to them that while the new business may not generate revenues that considerably impact their financials in the first year, by the second year it would be producing numbers that could start to change their bottom line in an impactful way. If the 6% weekly growth goal is being met during the first year, they should “Keep calm and carry on”.
As you can see, the model is very basic. It lets you change three assumptions:
- # of users at launch
- growth rate
- monthly revenue per user.
Given the values you set for these variables, the model will show you where your business will be at the end of Year 1, and at the end of Year 2.
There are two important take aways from this model:
Early On, Exponential Growth Feels Shabby
In the first year your numbers may not look great, but holding a 6% weekly growth rate for 2 years produces substantial results. Consider that a 6% weekly growth rate means multiplying your revenue 20x / year, or 400x within 2 years. If you make 500$ in your first month, and you hold a 6% weekly growth rate, you’ll be making roughly $200,000 / month at the end of your second year…
Chris Dixon had a great blog post a while back on how exponential growth feels gradual and then sudden.
This lesson has personal significance for me. In the early stages of my first startup we were easily hitting 6% growth per week. The issue was we didn’t understand that in the early stages exponential growth looks insubstantial… but over time it really adds up. We got discouraged because we didn’t understand what startup growth actually looks like.
Small differences in the growth rate have huge effects over time.
Try it out yourself — tinker the growth rate in the model from say 6% to 8%. At 6% growth rate, your business multiplies 20x / year (400x over 2 years). At 8% it multiplies at at roughly 54x / year (3000x over 2 years). The difference between 400x and 3000x is pretty substantial.
In the study of economics, the realization that growth rates have such a dramatic impact led economists to shift their intellectual attention to growth economics. Growth economics is focuses on explaining the differences in growth rates between different countries. As with startups, a small difference in annual GDP growth rates between countries leads to dramatic shifts in which countries have large GDPs a few years down the road. If you can figure out ways to increase the growth rate of a country it’s going to have a substantial effect. For a country, 6% annual growth is considered a great rate.
Keep Calm, Carry On.
The takeaway should be that early on you should stick with something, even if it feels like it’s growing slowly. Remember the 6% rule. Things take time — stick with it.
