The Elephant in the Room — The Myth of Exponential Hypergrowth

Jason Cohen (A Smart Bear) on why the exponential-growth story companies tell about themselves is mostly a myth — and what the curve actually looks like underneath.

Notes

• A startup is growing fast, the journalists marveling at its “meteoric rise.” But don’t meteors fall?
• But “exponential” is an incorrect characterization, as we’ll see in real-world data, even for hypergrowth, “viral” companies like Facebook and Slack.
• The Compounding effect of multiplication causes the numbers to grow slowly initially, then skyrocket. The compounding effect gets journalists and VCs justifiably excited.
• Compound interest is the most powerful force in the universe.” —Albert Einstein
• Facebook is the definition of hypergrowth—getting to $50B in revenue faster than any company in history.
• Slack was the fastest-growing enterprise software company ever, going from $0 to $10M ARR in their first 10 months, and 0 to 10,000,000 active users in just five years. It’s also a “viral” product—organizations invite their members, who then create their own Slack-groups and invite others. So surely Slack has exponential growth?
• Hubspot’s revenue curve is astonishingly consistent, despite hitting multiple inflection points in their business:
  • e.g. launching new business models like selling through agencies instead of only directly, launching new product lines like sales CRM on top of marketing automation tools, and scaling the number of customers and employees by 10x
• The consequence of this conclusion is important for operators and analysis and investors. These are all people trying to understand—and possibly change—growth drivers. Getting the right language, and the right model, will lead to right analysis, and right action.
• Scan your eye across the top of this kaleidoscopic cake, and you trace a wavy quadratic. This makes sense mathematically, because each campaign is essentially linear after it gets going, even if it sags during decline. “Adding more linear things over time” is the definition of a quadratic.
• Hubspot didn’t just add new marketing channels, however, but also layered on new geographies and new products. Do those activities have the same effect as marketing campaigns?
• It is rare for a second product to dramatically outpace the first; even juggernauts like Google, Amazon, and Facebook never achieved that.
• It’s well-known that growth—as a percentage—naturally declines with scale, even when there’s nothing wrong with the company.
• This law of nature has been given a name: Growth Decay (or sometimes Growth Persistence). Because of the traditional insistence of talking about growth as a percentage, the concept is articulated this way: If a company grew X% last year, it’s likely to grow a bit less than X% this year. With this formulation, the question becomes: How much less?
• In theory, theory and practice are the same. In practice, they’re not.” —Benjamin Brewster
• Some products don’t grow proportionally with marketing and sales, but instead self-propel with a mechanism that theoretically ought be exponential.
  • Virality. When each user invites on average another aaa users, then each of those aaa new users bring in another aaa new users, so we end up with a2a^2a2 more.
  • Word-of-Mouth. All products have some word-of-mouth component, but here we’re referring to products that are primarily driven this way; this creates a growth process that is similar to viral.
  • Hot Trend. Products that “everyone” (in some well-defined market) is going to buy. For smartphones, that might be half the population of the world.
• Products cannot grow forever, for the obvious reason that markets are finite. The Facebook virus spread to billions of people, but not infinite. Smartphones have been purchased by billions of people, but not infinite.
• This suggests a curve that starts exponentially, but then slows as it runs into the soft back-pressure of more demanding customers, and finally flattens out completely as it runs into the hard limit of the size of the addressable market.
• Why do we keep seeing this pattern, even at the scale of Facebook, one of the most “viral” products of all time? **Because mathematically, things that look like an Elephant Curve, even if the logistic “trunk” is elongated over time, are linear for nearly their entire lifetimes. **Everywhere except the very beginning. Adding up linear things definitionally creates a quadratic.
• This is why at-scale companies are willing to spend billions of dollars increasing the size of the market—it’s one of the few ways to create growth other than raising prices. So Google spent billions on Loon—a subsidized service to bring low-cost internet to remote areas of the world. Its problem-statement is the first text on its website: “Billions of people across the globe still don’t have reliable, affordable access to the internet.” Or, put another, way “Wifi balloons is a kooky idea but how else are we going to increase the carrying-capacity of the ‘global internet user’ Elephant Curve?”
• Or Facebook with its “Free Basics” system that (in their words) “Helps people discover the relevance and benefits of connectivity with free access to basic online services.” Except actually it’s only a few, hand-curated websites, all of which just happen to be western consumer products companies that are large Facebook advertisers, and the only available social network just happens to be Facebook. And there’s no email, so I hope you like Facebook Messenger. In other words, a digital colonialism whose purpose is to increase the carrying capacity of Facebook MAUs and the advertising that goes with it.