When the growth slows

In Startup = Growth, Paul Graham plots the life of a startup as an S-curve. In the first phase, you are exploring to find product market fit. Then you find it, and start growing exponentially. Finally, at some point, growth tapers and becomes linear or even flat. As PG explains, the length and slope of the middle part “determine how successful the company will be.”

Put another way: How fast you grow in the growth years, and how long the growth years last, determines the size of your outcome. If you’re Google, the growth years continue well past $10B in revenue and you become one of the greatest companies of all time. If they last just a couple years, you can become just another late-stage startup with no home that probably can’t go public. You may feel trapped into running this low-growth company indefinitely while you figure out what to do.

At my first company, the growth phase lasted about three years. We grew from $30k to $10M in three crazy years that are now all mushed together in my memory and in photos where we all look so goddamn young. I know we raised $35M in two great rounds of funding; that we grew the team so fast we outgrew three offices in three years; and that I was emotionally redlining from stress the entire time. 

Then the wheels came off. 

To be clear, there’s lots to be proud of from Periscope. But that’s not what this post is about. This post is about what happens when the growth tapers off. For us, it tapered quite quickly. One year we did over 3X ARR growth; the next year we did 67%. Importantly, though, this isn’t fatal. It doesn’t have to kill your dreams of building a huge company. It’s the mistakes you make next that are fatal. 

It starts off looking tactical. The first time the problem comes to you, it looks like a grid of numbers pointing to declining efficiency in a marketing channel or an underperforming sales region. It’s tempting to believe that one tactical fix will make growth go back up. By all means, try it. But cultivate a healthy paranoia that the real problem is deeper. 

The real reason is often erosion in product market fit. The truth is when you have product market fit, most things work. When you lose it, most things stop working. So if fixing growth problems starts to feel like whack-a-mole – if growth has been down for multiple quarters while you “fix” one thing after another – it’s time to take a big step back. Failing to accept that your problem is more fundamental than its symptoms is the biggest mistake founders make in this position. 

You will need to resize the company to a sustainable, efficient size. Addressing your eroding PMF will take some time, which means you need to make your new, lower growth rate sustainable. Your sales team isn’t paying for itself any more, which means you’re missing both your revenue and your burn targets. That must be addressed. Twenty AEs closing $4M of new ARR is a team in crisis. Four AEs closing $4M of new ARR is a strong team with a kernel of something that is working. It is your responsibility to take the pain and get the team into the second position. 

It is critical to separate your personal self-worth from the growth rate of the company. This is advice for all seasons, but it’s easy to ignore when the growth is strong. When you’re the hot company, you get invited courtside to Warriors games and to speaking engagements in Lisbon. You may think this means you are hot shit. It does not. If you let it go to your head, then when it evaporates, you start to feel like you were a fraud the whole time. The evidence that you are a worthy person is and always was in the eyes of your loved ones. Your company will not start to turn it around until your head is on straight, your habits are healthy and your heart is full. The year Periscope found stable footing and eventually an outcome is also the year I lost 50 lbs. Those two things are connected.

You can’t solve the morale problem until you solve the business problem. Slowing growth leads to a wave of departures, and groups of employees going to the bar to complain about the idiot management that got us into this mess. If you’re like me, you take this personally and vow to double down on morale events and engagement surveys. You might even, in a moment of weakness, give some out-of-band promotions just to placate some people. None of this works. What works is putting the business back on strong footing. Focus on that.

Be honest and transparent with the team. Just tell people what’s going on. Straight up: We have a challenge in our business. We are not growing as fast as we used to. This has happened to most great companies at one time or another, but we do need to fix it, or we will not be able to accomplish the long-term goals we all came here to achieve. This won’t solve all your morale problems, but it will add some remarkable clarity and alignment on the team. 

Find the smaller thing that’s working and focus the team on that. Once the team is aligned on the new reality and the challenges that must be solved, everything gets clearer. It’ll be easier to see which part of the product users still love, or which market segment is still killing it for you. Get the whole team focused on that, successful in building and selling it, and then re-learn how to scale it.

At Periscope, our core market segment (startups) had gotten saturated and competitive, decimating our win rate and killing our growth. But we had a small cohort of big companies who loved the product and paid a lot more for it. It was still competitive, but at a much larger deal size, we could afford the type of sales team and product investments necessary to win those deals. So we called a meeting of the whole company, and we wrote “Move Upmarket. Operate Efficiently.” on posters all over the office. 

Startups go through bumps in the road all the time. If you zoom in on the middle part of the “S” curve of any great company, you’ll see all the wiggles and reaccelerations they went through along the way. Your goal is to make this moment one of those little wiggles in your long journey, and not the end of the growth years. To do that, you need to see the problem clearly for what it is; rapidly put the company on footing where this moment is not life-threatening; and get the whole team aligned behind solving the problem.