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Sifting through the successful hyper-growth startups

When I ask candidates what the “perfect” opportunity looks like for them, I usually get the same response: “I want to work at a growing startup that is doing something disruptive and could be the NEXT BIG THING.”

But how do you pick the next big thing from the next big bust? And what if the glamor of working at the next big thing hides the reality of what it’s like behind the scenes?

In this post, I’m going to explore the positives and negatives of working at a hyper growth company and offer a few tips on how to find a startup that is right for you.

What is a hypergrowth company?

These are often companies that receive large investment and see employee count boom from tens to hundreds in just a few months or from hundreds to thousands in just a few years. Often a hypergrowth company takes a novel approach to an old business model and promises to change the industry forever.

There have been numerous hypergrowth companies in the past several years. Many of them are "unicorns" - companies with +$1B valuations. They include Slack, Stripe, Box, Airbnb, Uber, and Lyft. As you might expect, there’s an entire website dedicated to finding these companies

Having an early stint at one of these world renowned companies can be a huge boost for your resume. But not every hypergrowth startup pans out. Zenefits and Theranos were once revered, but are now seen as examples of Silicon Valley’s hubris and thoughtless growth.

Takeaway: being an early employee at a hyper growth company can have an incredible impact on your career; however, rocket ships can fall just as quickly as they rise.

Types of Growth

When you hear someone refer to “hyper growth,” keep in mind they could be referring to a few different types of growth. These include:

A. Fundraising

This is what you most often hear about. Companies that raise a lot of capital in a short period of time are considered "hot" and receive a ton of fanfare—which creates a self-perpetuating cycle of fundraising growth.

No VC wants to miss out on a brilliant idea that could lead to billions. But that doesn’t mean every “hot” startup will turn out to be a winner. VCs can be herdlike. Sometimes they invest large sums in charismatic CEOs and sometimes they simply miss the mark.

Take Juicero for example, which was in the attractive IoT smart-home market. Juicero raised over $100 million without having true product differentiation, The team grew without strong business fundamentals, then shut down 18 months later.

Slack, on the other hand, raised a ton of capital but then delivered on the expectations. They solved a fundamental business issue and were able to create network effects through their product.

On the flipside, a small fundraise does not necessarily mean that the company is not thriving. Companies like Mailchimp and Basecamp focused on profitability from an early-stage and built lasting, high-impact businesses.

In fact, many of the most successful entrepreneurs intentionally said no to additional funding because their businesses were already profitable. They preferred to grow at a rate they knew would be sustainable - plus they wanted to maintain additional equity value for their investors and employees. Outsiders might think that the smart play is to take all the money you can get but that’s not necessarily the case.

Takeaway: It’s important to keep an open mind to thriving cash-flow-positive businesses that have only raised a small amount of outside capital.

B. Employees

Employee growth is connected to fundraising growth. If a company has found true product-market fit, they should scale employees in order to grab market share before competitors. However, if an otherwise profitable company starts hiring too many, too soon, they run the risk of operating at a loss. In fact, hiring too quickly can be one of the biggest predictors of startup failure.

Often, companies hire additional employees before narrowing down their processes and determining specific responsibilities for each individual or team. This leads to confusion and wasted time on projects that go nowhere.

When I was at my last startup, we hired too quickly at times, wasting precious engineering resources on building features that the customer did not ultimately need or want.

We “needed to build” and we "needed to put capital to work." So we hired engineers. But we hadn’t yet settled on “what to build.” Engineers and PMs spun their wheels trying to create a product simply for the sake of having a product. We ultimately got the product that we needed but it took a much more painful and circuitous path.

Zenefits is certainly guily of overhiring. They raised a ton of capital and then went on a hiring extravaganza to scale an enormous sales and support team. Unfortunately, their product team was not keeping up with what the sales team was offering, the company cut regulatory corners, and when this all came to light, the layoffs began.

Zenefits headcount over time

C. Revenue

Revenue growth is the most powerful form of growth. If a company is raking in profit in a legitimate fashion, then the sky's the limit. Very few early-stage companies see this form of growth, but those that do are almost surefire hits.

One example of this is Carta (previously eShares), a company that sells equity management software to companies and VCs. Their software has a network effect: the more companies who sign up, the more incentive VCs have to join the platform, and then recommend it to even more companies. Carta has been seeing double digit monthly revenue growth for a number of years because there becomes a higher necessity to use them as the industry standard.

Takeaway: It’s important to understand the business you are joining and get a sense of whether the revenue growth is coming from increasing prices, upselling existing customers, gaining new customers/users, or adding new products.

D. Users

User growth is another interesting metric to look at. Growing a company’s user base allows them to realize economies of scale and balance out overhead costs to a broader group. B2B companies oftentimes care more about growing contract size and moving upstream to work with bigger and bigger companies. On the other hand, B2C companies are all about acquiring new users at a reasonable cost. One of the most significant metrics that investors think about is CAC (Customer Acquisition Cost) and how that relates to incremental revenue. This, combined with user growth, can predict the success of companies.

While user growth is a strong indicator of success, be wary of companies that are simply spending capital to get more users without sorting out conversion and retention. This is called a “Leaky Bucket,” and it’s likely to lead to an unsustainable burn rate.

Homejoy suffered this exact issue. They were in the "service on-demand" & gig economy space with a mobile application allowing users to order cleaning services. Facing heavy competition from Handy, they spent a ton of money to acquire users. But when they were unable to keep those users on their platform, they eventually shut down.

E. Engagement

Engagement is a further downstream metric of user growth. Through cohort analysis, engagement levels can indicate if a product is becoming “stickier” over time. Engagement can either show that the product is becoming more effective or that the company is better at targeting the ‘right’ users, both of which are signs of maturity and long term success. That’s what makes it such a potentially powerful metric.

Engagement involves a number of key sub-measures including:

  • Conversion: from free trial users to paid users, or from basic software users to larger enterprise users

  • Retention: keeping customers using a product for many months or years, depending on the product

Both of these aspects are as important as simply growing a user base.

Takeaways about types of growth

There are two takeaways here:

First: don’t just look at a company’s fundraising history if you’re trying to predict future success. It’s more important to consider if the business fundamentals make sense to you and if they are growing in a sustainable manner.

Second: use your knowledge of these indicators to come up with hard questions you can ask in an interview—like what the company’s user acquisition growth rate been the past 12 months, or what their annual churn rate is. The more cryptic the answer, the more anxious I would be of what exists behind the curtain.

Positives and Negatives of Hyper growth

One final point to note is that while hyper growth might look like a bed of roses from the outside, things are rarely so simple on the inside. Typically, hyper growth companies experience growing pains.

That means things change quickly—from company re-orgs, to hiring/firing new executives. All of this creates a messy work environment. Some people thrive in those settings, others thrash.

Pros of hyper growth:

  • Opportunities for rapid career growth, as teams expand and early employees are given outsized responsibility

  • Opportunities to take on large and impactful projects

  • Ability to see what it takes to build a big business from the ground up

  • A deep sense of camaraderie amongst early employees who have been in the trenches together

  • If a company remains successful, it will usually hire exceptional talent

Cons of hyper growth:

  • You might spend more time putting out fires than doing real work.

  • Potential for organizational chaos

  • Potential for “wasted” work while the company finds its footing on product and processes—up to and including spinning up and then shutting down entire business units as the company figures out how to sustain hyper growth

  • Time “in the trenches” can lead to cliquey groups of early employees

  • Early employees given outsized responsibility could lead to a large volume of inexperienced managers

  • You may experience large volumes of work, with minimal structure

Takeaway: joining a hyper growth company can be incredibly rewarding or incredibly taxing, depending on your personality, how experienced the leadership team is, and the state of the individual business unit you joined.

The tortoise and the hare

Hyper growth companies understandably get all the media attention. But it might be better to work for, a company that is growing slow and steady, even if under the radar.

Some of the best Silicon Valley companies are ones you may have never heard of—like Wayfair (a leading home goods e-commerce company) or Sendgrid (powers the transactional emails for most of the biggest companies in the world).

If hyper growth companies are hares, these companies are tortoises. They have a different mentality: they care about smart growth, building the right team, and developing the right culture for long term success. If long-term success (vs. quick yet unsustained success) is something you want out of your next employer, you might want to find yourself a tortoise.

Takeaway: Joining a hyper growth company is a fine move that could prove remarkably lucrative in a hurry. But you should also recognize that some of the best companies in the world are focused on slow and consistent growth.

In Conclusion

In the end, what kind of company you join is entirely up to you.

But my recommendation is to avoid over-optimizing your job search for high growth companies, or you might be setting yourself up for failure.

Instead of potential, think about people. Find a team staffed by people who you think you’ll enjoy spending vast amount of time with, and who could teach you a few things along the way.

I certainly am of the mindset that “it’s not about the destination, it’s about the journey.”

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