Good Growth and Bad Growth

If there is one metric the VC community seems obsessed about, it is probably growth. In fact, at times it seems that everything is measured with the famous “X” – 2x growth, 5x conversion, or the much coveted 10x, which is simply referred to as an “order of magnitude.” 

This is, of course, very much understandable. When you start a business with a small team and a big idea, competing against incumbents that have 100x (there we go again) your resources, it is only natural that you want to catch up as fast as possible. After all, we can think of incumbents and fintech startups as being in a race: startups are trying to get to get to scale before the incumbents figure out how to deliver digitally native, intuitive, and seamless user experiences.

But one thing that sometimes gets forgotten in this quest growth is that not all of it is created equal – there is such a thing as sustainable and unsustainable growth. In fact, nature offers us a lot of interesting parallels here given that most living things are in a life and death race for existence, and all things being equal, natural organisms, much like startups, are trying their best to grow exponentially at the early stages of their existence.

Consider for example early embryonic development. Once a zygote is formed, an eight week long embryonic development process starts, with the cells in the zygote doubling (that’s exponential growth for you), until a fetus is formed eight weeks later. If all goes well, this process then continues with the fetus developing further, until a baby human is born around 40 weeks after the zygote is first formed! The cell division that underpins this process is of course very much sustainable, according to a grand plan, and one that all of us have experienced though we certainly cannot remember it. 

Now consider a much less pleasant topic, and hopefully one that nobody reading this will ever have to experience – malign growth of tumors. In the early stages of tumor growth, cells also divide exponentially, creating two daughter cells each time. This, however, is very much an unsustainable form of growth, which if left untreated leads to the collapse and breakdown of its host environment, the human body. 

The analogy for startups is that you certainly want to make sure that your growth is of the sustainable kind, and one which will result in a fully developed and independent organism at the end of the journey, and not one that is at odds with the environment in which you exist.

The key to achieving this is complex, and involves several aspects, from human resources to finance, and from product to technology. We will touch upon two particularly crucial ones here, sustainable unit economics and the right human resource infrastructure. 

First, let us consider the business model and finance side. If your growth is not underpinned by solid unit economics, you can grow, but will forever be at the mercy of what can be very fickle capital markets. Yes, funds may want to come and invest in you in one round after the other as long as you are delivering your “X”s, but if you cannot manage to solve the simple equation of “revenues minus costs is greater than zero” eventually, you will never be able to control your own destiny.

In fact, back in the early days of scaling Capital One, we used to say one sometimes has to “go slow to go fast.” This referred to the fact that we would conduct tests on certain segments of the population, and then wait for as long as twelve to eighteen months for that data vintage to mature so we could get an accurate read of the risk characteristics of that segment. However, once a particular segment was proven, we would go from a test on two thousand customers to a full roll out on millions of customers overnight. That was going slow so that we could later go fast, and it was all about having a plan and about sustainability.

In fact, many of our UK investments have also utilized this very framework: ClearScore spent its very early days perfecting its model and assumptions, and once the team saw the path to sustainable unit economics, they scaled from a standing start to ten million customers in little over a couple of years. Similarly, Capitalise who is positioned as the super platform in the SME space, first fine-tuned its unit economic model, which then enabled it to not only survive the shock and dislocation of Covid in the SME space, but in fact come out of it stronger, with more customers and exponential growth in revenues. 

The second and equally important element of sustainable growth is on the human resource side of the equation. Setting up the infrastructure for hiring the right kind of people is of paramount importance, and never as easy as it looks from the outside. To use one last saying from the early Capital One days, we were “not in the consumer finance business, but in the people hiring business.” The whole organization at Capital One, from the first year analyst to the division VP, all spent a very significant part of their time recruiting, scouring college campuses for talent. 

And hiring is not just an exercise in throwing bodies at a new opportunity – it has to be done in a very deliberate and thoughtful manner, making sure the right people get allocated the right roles. Diversity is of paramount importance here, and as I touched upon in a prior blog, more diverse organizations also make for more resilient organizations. Sometimes surviving an unexpected but existential crisis is even more important than growth, and the kinds of organizations that have been able to cultivate an environment where people from very different backgrounds can flourish are much more likely to demonstrate such resilience. 

Growth is essential, but it has to be balanced with a solid master plan and a sustainable model for it to fulfill its true purpose: creating new businesses and industries that exist in balance with their environment.