Overlooking Opportunity By Default

Summary: Teams can quietly default to cautious or incremental, bottom-up thinking, which is out of step with the urgency and ambition needed to build a high-growth business. To counter this, test growth assumptions and ambition from a top-down, not bottom-up perspective. e.g. If money was no object, what’s the market’s true capacity for delivering exponential growth, unconstrained by your capacity to capture it today?

In almost every aspect of running a business, exercising caution is a sound philosophy. However, when building a fast-growing company, playing safe at the wrong time will definitely cap your growth prospects, and it may even kill your business.

This was one of the biggest changes I noticed when I moved from running and managing large, mature and mostly slow-growth software businesses — sub 10% compound annual growth rate (CAGR) — into the hypergrowth club, where the yearly membership fee is a sustained CAGR above 40%.

When building your team, the first thing you’ll have to contend with is the likelihood that most people you’ll be hiring will ship with a default setting for proceeding with caution because, from the earliest stages of our careers, we have it drummed into us that we should learn and develop skills and competencies carefully; start small, don’t draw too much attention to yourself and slowly but surely work your way up the ladder.

Note: Professional attitudes to risk or failure can vary by country and society, which is an added complexity you’ll face if you decide to operate in more than one region.

However, exercising high caution is absolutely the worst approach for many hypergrowth situations where urgency is an ever-present factor, such as when you’re setting growth targets for a new product or service or perhaps a revenue budget for the year ahead.

It’s often the case that you won’t have a complete picture of the potential growth opportunity because you lack sufficient market intelligence, or you don’t have much time, or it just doesn’t feel right to waste precious capital on a bet about which you’re not 100% confident. So, a form of career survival instinct quietly kicks in, and most people default to playing it safe.

Note: This is particularly common in businesses where a blame culture is prevalent, and people fear making mistakes.

To compound the cautious mindset problem, unless they have direct experience working in a hypergrowth setting before, people coming from more traditional, low-growth business contexts — which is likely to be the majority — will often have developed a habit of planning from an incremental or bottom-up perspective, e.g. take what you did last year and use that as the baseline for your growth assumptions for next year — last year +x%.

This approach to planning can also be hugely problematic if your business model relies on revenue that’s recurring or subscription-based, where instead of customers paying you a large lump sum up-front, you receive smaller portions of revenue each month (Monthly Recurring Revenue or MRR), for as long as your customers remain subscribed, that is.

While you can slow or smooth the negative effect of subscription cancellations to an extent, you can’t prevent them completely, and so revenue leaking or churning out is an ongoing growth suppressant you’ll need to contend with if that’s your chosen revenue model.

In simple terms, say you have 1,000 customers, and we’ll assume your annualised churn rate is 20%; then, even before you’ve switched on the lights on the first day of the new year, your task isn’t just to build upon the opening customer count of 1,000 because you’ll also need to cover the loss of 200 customers. Worse still, this requirement to outpace the negative growth effect of churn is a pernicious one because it compounds as you grow.

I’ll dig into this in more detail another time, but in short, you may need to invest significantly more than you realise in go-to-market or Customer Acquisition Costs (CAC) to offset the drag effect that churn has on growth.

At a basic level, there’s nothing wrong with grounding growth assumptions in some measure of certainty or fact, such as last year’s figures, but if that’s where your planning process begins and ends, then there’s a very good chance that this is where your hopes for hypergrowth end, too.

Here’s a simple example: you’ve asked your go-to-market leader to pull together a headcount plan for next year. After giving it consideration and doing some spreadsheet modelling, they confidently conclude you should recruit another 10 sales & marketing heads for next year, assured by the fact you added 5 in the current year it’s been a solid year, your best ever in fact, so doubling that feels like a good bet — and after all, that’s 100% more than the prior year.

Note: Seeing triple-digit growth rates in a spreadsheet cell can sometimes trick us into thinking we’re pushing the boundaries when we’re not.

Besides all that, your talent recruiter, Mike, will probably struggle to hire more than 10 on top of all the engineers and customer service people you also plan to recruit, so you should be realistic.

On the surface, these seem like sensible arguments, and your business may still grow next year, but cautious, bottom-up thinking has just instantly capped any potential for growth beyond your team’s self-limiting beliefs.

In a year’s time, you may still celebrate the respectable growth you delivered; nobody died, and nobody got fired, but the fact that the market could have delivered you 300% growth wasn’t even considered.

Even worse, you may have also created an enormous problem for future growth, now lying in wait in subsequent years.

Audacity on its own will probably kill your business

By the way, I think it’s essential to qualify here that this isn’t just about being more audacious. Without a comprehensive plan validated with data, audacity on its own will probably kill your business, too.

It’s not only tasks like financial planning and modelling where relying on incremental or bottom-up thinking is a problem; therefore, as a leader, you need to be alert to the risk of this mindset silently propagating across every aspect of your business.

What if money was no object?

When coaching your team to avoid falling into the bottom-up planning mindset, a simple device you can employ is to ask the question, “What if money was no object?”

This is a helpful framing because it encourages the team to consider a much more optimistic reality; a reality where they’re unconstrained in terms of capital, and in the case of my example, the recruitment team’s capacity is also infinite (bonus points if nobody gets blamed for failure); and if this was the world you found yourself in, then what level of growth in your GTM headcount could the market hypothetically justify next year?

In simplistic terms, top-down thinking.

Two for the price of one

Suppose, after further exploration and more market research, your team identifies that your product's hypothetical capacity for growth next year was, in fact, so ample and attainable that the correct answer was not to hire 10 but 100 more go-to-market people, which would, of course, return accordingly much greater growth.

Plus, it would grab more available market share, which would otherwise be left for your competitors - another drag on future growth.

So, as an old colleague would say, when you get two positive outcomes for the price of one — “A twofer!”

Note: If this was the case and you were convicted about the argument for hiring 100 additional heads, then why wouldn’t you work night and day on the business case and find the extra capital required to fund it?

OK, who’s been taking crazy pills?

Now that the team has fully explored the unconstrained side of the planning ledger, even if you don’t end up shooting for the Crazy Pills optimistic version, the practice of asking the question will instantly improve the integrity and, most likely, the quantum of your previous bottom-up growth assumption.

The least of what this simple framing method does is to enable your team to take the original bottom-up number and the top-down number and then diligently rationalise them to some midpoint position in between. This almost always improves upon the initial assumption.

Note: Doing this diligently is important because over-optimistic high-ball assumptions are just as bad, if not worse than over-cautious low-ball assumptions.

In the absolute worst-case scenario, even if you end up working all the way back to your original assumption, then at least you’ve tested and validated it top-down.

So, the next time you’re working with your team on next year’s growth plans, the question you should not be asking is, “Are ten heads enough?”

Instead, the question you should be asking is — “Why not a hundred?”