How fast should a cloud company grow?
Explaining the three ideal scenarios for growth
When talking with entrepreneurs, I am regularly asked the question, “How fast should I be growing?” Often this is because the CEO is trying to understand market expectations, but in the best cases, it’s because the CEO has a number of dials she or he can use to alternate between growth and cash consumption.
There are a couple of easy answers, such as, “as fast as you can,” or “your competitors were able to grow at 75 percent at your stage.” However, there is a much more complex answer for this straight forward questions.
You should grow as fast as you possibly can while 1) keeping the company structurally sound for the long term, and 2) maintaining favorable unit economics.
Here, we’ll address these two issues in order for companies to maintain long-term stability. I’ll also share how you can scale your business with profitable unit economics, and then, demonstrate how to determine where your company is along the growth continuum and what you need to maintain your momentum.
How to keep your company structurally sound for the long term is seemingly obvious, but it includes much more than just keeping the wheels on the car at high speeds. This is all about your core vision for the company and the big swing you’re trying to take.
The technology world is all about market dominance. It’s no fun to come in second place, and therefore you constantly need to be driving for the long term opportunity, even if it comes at the expense of short term customers or revenue.
You can often satisfy short term customer demands by working outside of your core product, save a few hours this week by not focusing on key management hires, or making a few extra bucks by squeezing your partners, but seldom are these the right long term decisions for the business.
Similarly, as a CEO you need to be extremely cognizant of the bandwidth and capabilities of your team. Even if your marketing team is able to scale lead generation by 10x with only triple the budget, it may still be wasted if the sales team can’t handle the volume.
Your pipeline may suggest you should hire up 10 more sales reps, but it could actually be destructive to the current team if you don’t have the proper management and onboarding process in place.
Your team may be working on events that flood your product with inbound interest, but the net result could be massively negative if it goes down under the load. When thinking through the upper bounds of growth for your company, it’s critical to understand the key bottlenecks of your business and therefore the practical limits of your growth.
This scalability analysis of your company is the business equivalent of what good network and product architects undertake routinely. They are typically focused on technical constraints, whereas in this business analysis the weakest links will typically be personnel related. The lead times needed to thoughtfully solve these issues will vary considerably, and some of them can be solved by throwing money at the problem, often through either service providers or hardware. Some of these issues will require focus and time, such as reworking core product architecture that can only be done by the most experienced members of your team. Through this level of analysis a CEO can get an internal gauge on what growth rates are theoretically possible with varying degrees of heroic management work.
When it comes to scaling a company and knowing what’s theoretically possible, it’s wise to temper those goals with realistic expectations. Keeping your company structurally sound during growth plays a large role in how fast a company can grow. This is why it’s so important to identify your company’s growth opportunity, what you need to maintain that momentum, and if that fuel and cost is feasible and worth it.
Knowing when to ramp up on growth is nuanced decision, but we typically see the most promising companies fuel growth when they’ve reached one of the following three scenarios:
Freemium and organically driven SMB and enterprise businesses can often find themselves enjoying a very low cash burn or even positive cash flow early in their life.
Many of our portfolio companies have literally struggled to respond to the flood of inbound demand or return all of the voicemails from prospects trying to place orders in their early months. This is the best kind of demand, but unlike many consumer internet businesses, the bad news is that this “free demand” almost always hits a plateau before $25 million in annual recurring revenue in the enterprise world.
B2B gravity tends to set in eventually, and some form of professional sales and marketing is almost always needed. Amazon’s AWS group avoided it until they were much larger, and a few SMB/freemium companies like Survey Monkey appear to have thus far avoided it altogether for small businesses, but we struggle to find examples at the mid-market or enterprise levels.
At some point, the early adopter inbound demand will almost always need to be supplemented or replaced entirely by outbound sales and marketing efforts to continue high rates of company growth. Our strongest advice to companies still in the vortex of inbound demand is to hire up world-class sales and marketing team members early, even if you think it is a bit overkill, and begin professionalizing the functions of marketing, sales, account management, and support.
Hire up world-class sales and marketing team members early, even if you think it is a bit overkill.
If you hire them too early or somehow happen to be the very first B2B SaaS company in history to get public without needing outbound sales and marketing skills, you will still benefit from having strong executives on the team and this “insurance policy.” However, if you wait until growth has already slowed to make these moves, the negative effects compound as it will be very difficult to raise capital at premium terms and to attract world-class talent into these key executive roles.
This can apply to businesses that supplement their organic customer demand with paid sales and marketing, or only focus on paid acquisition. Although inbound demand is preferable, the next best thing is to have predictable, scalable, and profitable paid customer acquisition strategies.
Often these businesses have proven the core models, but have been capital constrained and therefore unable to fully invest behind their compelling unit economics, but they should. If you can raise capital at attractive terms, you are leaving significant value for your competitors by not capturing the full opportunity and investing more aggressively.
Often times with “big vision” businesses, it can take a while to work through the product/market fit to move the company into the aforementioned first or second bucket. The important thing here is to be patient and to continue to tune the product and business model to find that right alignment, allowing you to fully invest your resources behind the model that will ultimately scale. Quick, inexpensive, honest market tests are most important here, as you want to miser every penny to have it in reserve for the “step on the gas” moments that will hopefully come later.
To learn more about building enduring companies, dive into the 2019 State of the Cloud where we offer founders a way to calculate their G.R.I.T. Score.