Tuesday, February 16, 2016

The Startup experience: Linear vs Exponential

When you are starting a company, the week by week growth rate is important to track. Initially, it will be very chaotic. Hopefully, early on, you will find a way to make your revenue process predictable. Investors are looking for evidence of this predictability. They are also looking for something else. They are looking for evidence of growth. When they are thinking about growth in revenues, they are looking for a percentage growth on a week by week basis. More data points can help you get a handle on the foundations of your business model. 

Looking at the curve above. This company starts with $1000 Monthly Recurring Revenue (MRR). The blue line represents an initial growth rate of $100/month, which is 10% growth in the first month. The Orange line represents a Monthly growth rate of 10% a month, month over month. While the Red line represents a 5% month over month growth. 

All of these start out at the same point, but the 10% month over month growth quickly outstrips the linear growth. At the end of 3 years (36 months) , the 10% growth represents a 5X increase compared to the 5% growth curve. 

More interestingly, while the linear growth started at 10%, by month thirty, it has crossed over and is the same as the 5% curve. 

When you are looking at your growth oriented startup, you should be looking at at least kind of exponential growth. That is growing at a regular X% growth month over month. 

If you have a 10% month over month growth, your company is approximately a 3X company. If you have 20% month over month growth, then your company is a 9X company. If you are aiming at a 10X company, you need to reach 22% month over month growth on a sustained basis. 

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