Why 'High Growth' Isn't as Desirable for Companies as You Would Think
Though America’s biggest tech companies have sprawling Silicon Valley campuses and Madonna-level name recognition, few of them operate in the world’s most populated country. Google’s China search engine launched in 2006, and folded in 2010. In mainland China, Facebook is blocked by what some call “The Great Firewall,” a play on the Great Wall.
This is particularly noteworthy because these companies worship growth, and nothing is better for growth than a billion new users. But cultural differences, a foreign regulatory environment and a heavily censored internet make growing market share in China practically and ethically complicated. Google, for instance, often clashed with the Chinese government over censorship.
None of this phased Uber, though. The ride-hailing app launched in China in 2014, and founder Travis Kalanick was personally invested in making China work. In Chinese markets, Uber faced entrenched local competitors: Kuaidi and Didi, a Chinese taxi service whose name is meant to sound like a honking cab horn.
But “Kalanick relished the coming fight,” Mike Isaac wrote in his history of Uber, Super Pumped: The Battle for Uber.
By some measures, he won it too. Uber grew like wildfire in China. By 2016, China was the company’s largest market, the Financial Times reported. But it was also the market where Uber lost the most money. The company hemorrhaged cash on passenger subsidies and driver bonuses, trying to build market share and compete effectively with Didi, which had merged with Kuaidi.
In 2015, Isaac reports, Uber spent $40 to $50 million on subsidies in China per week.
In 2016, the Financial Times wrote, “With no net revenues and no profits, Uber China’s worth is hard to assess.”
A few months after that story, Uber sold its Chinese operations to Didi in exchange for a 20 percent share of the Chinese ride-hailing company. Uber described this as a merger, but the press described it as Uber pulling out of China. The causes were complicated: low profits, internal turmoil at Uber HQ and new federal rideshare regulations that legalized Uber’s business in China, but also gave the Chinese government access to ride data.
More relevant here, though, is that Uber’s Chinese operation was a success in terms of growth. Right up until the company sold it off.
Unicorns and Zebras
“Growth” and “success” have become synonymous in the tech scene. But what, exactly, does “growth” mean?
It depends on the context. This New York Times story about Uber’s recent growth focuses on revenue — not profit. The growth team at Facebook has long focused on growing the platform’s number of unique monthly users. Zillow’s growth team has focused on unique monthly users, too, but it’s also focused on mobile growth, specifically, and boosting channel-specific conversions.
Growth — once growth hacking — is all about running frequent, small-scale experiments, with the aim of boosting a metric core to the overall business’s health. Which metric that is, exactly, varies based on industry, company maturity and a host of other factors.
The tech scene’s focus on quantifiable growth and effective growth teams coincides neatly with the interests of venture capitalists, who fund much of the American tech sector. It’s a thriving industry, so this works for investors, and it also works for startup founders, in the sense that they need capital and rarely have access to traditional loans. Besides some laptops, startups rarely have substantial collateral.
Venture capitalists are less worried about collateral than about growth, though. Specifically, growth in the company’s valuation. One early Uber investor put $5,000 into the company, Mike Isaac reported in Super Pumped; by 2017, his equity was worth about $20 million – roughly 3,300 times its initial value. This is a venture capitalist’s dream.
One early Uber investor put $5,000 into the company, Mike Isaac reported in Super Pumped; by 2017, his equity was worth about $20 million – roughly 3,300 times its initial value.
It isn’t Mara Zepeda’s dream anymore.
The founder of Portland-based community engagement platform Switchboard, Zepeda raised an initial round of seed funding, but she no longer seeks venture capitalist funding or Uber-style “hypergrowth.” Instead, she hopes her company can grow slowly and sustainably.
“There’s nothing wrong with growth,” Zepeda said. “But if you look at growth in nature, there is contraction that’s inherent in [it]. We misuse the word.”
Lasting growth, she said, mirrors the four seasons — in certain spring-like phases, you’re “growing like gangbusters.” In wintry phases, not so much.
“The fallow field makes growth possible,” she said.
In the short term, venture-capital funded growth stars rarely make time for the reflection and renewal, though, and their unnatural “hypergrowth” often isn’t sustainable. In fact, it’s only really possible in the first place for companies disrupting and dominating entire industries. Plenty of successful companies, like Patagonia and Trader Joe’s don’t fit this mold and, probably relatedly, reject the growth-at-all-costs model. (Patagonia, in fact, takes an “anti-growth” stance.)
That’s rare among successful tech companies — but Zepeda seeks to change that. She’s one of the co-founders of Zebras Unite, an international organization for startup founders and techies seeking alternatives to VC funding and unicorn aspirations.
To Zepeda, it’s worth noting that the unicorn is a mythical creature. Though Uber was a real one — a unicorn startup is worth more than $1 billion, and Uber’s IPO put it at an $82.4 billion valuation — plenty of alleged unicorns don’t live up to the hype, or implode entirely.
Founders showing venture capitalists hockey-stick growth charts, Zepeda said, aren’t always forecasting realistically. Their “hockey-stick” growth projections usually flatten out over time.
“They’re writing fiction,” she said. “Zebras Unite is really interested in businesses that are telling the truth.”
Hence their mascot, the zebra — a real animal. “Zebra” companies, Zepeda and the Zebras Unite co-founders argue, set realistic long-term goals; unlike unicorns, they seek “regenerative growth” and “sustainable prosperity” rather than “hockey-stick,” “exponential” growth. Their focus is on the long term.
But venture capital is not a long-term game.
Meet Venture Capital, a.k.a. ‘Jet Fuel’
Venture capitalists step in at a very specific stage in a startup’s life cycle — the stage when founders have an innovative idea and need money to scale it.
“More than 80 percent of the money invested by venture capitalists goes into building the infrastructure required to grow the business — in expense investments (manufacturing, marketing, and sales) and the balance sheet (providing fixed assets and working capital),” the Harvard Business Review estimated.
Once this initial, accelerated growth phase ends, venture capitalists hope to promptly recoup their money — many times over — through a “liquidity event,” which could mean the startup IPOs or gets acquired by a larger company. The keyword, there, is “promptly.” Like Zepeda, they’re aware that hypergrowth can’t last forever, but they hope to sell their equity before the company’s growth slows (or reverses). Venture capital is only meant to stoke short-term, early stage growth, after all.
Plus, venture capitalists are on deadlines. Their investors expect liquidity by a certain date.
“Generally the lifetime of a fund is between seven and 10 years,” Zepeda explained. “So that investor needs to [at least] make their money back in that period of time.”
This means VCs often push all-or-nothing business strategies, which can drive unicorn-style, multi-billion-dollar valuations and quick liquidity — but can also drive viable companies into the ground.
For instance, Zepeda explained, they might encourage a company to sink $100,000 into Facebook advertising to acquire millions of new members, even if a paid acquisition strategy is “fundamentally misaligned” with the company’s business model. They might encourage a company to focus more on selling units than user success.
“But if your business is trying to influence culture change or change systems, then the success of adoption is a really critical component to you,” Zepeda said.
Venture capitalists themselves acknowledge that it’s not a funding model for everyone. Josh Kopelman, a venture investor at First Round Capital, told the New York Times as much.
“I sell jet fuel,” he said, “and some people don’t want to build a jet.”
Some venture capitalists are reconsidering whether they want to sell jet fuel at all. Softbank, a prominent Japanese investment bank whose Vision Fund has invested in Uber and WeWork, has historically encouraged the companies it invests in to grow market share rather than stressing about the bottom line, according to the Wall Street Journal. Now, they’re taking a more cautious tack.
The tech industry may become more cautious now too, shifting away from the idea of “growth” as “growth of one North Star metric.” (Or, sometimes, a handful of North Star metrics.) Focusing on a few key numbers can help organizations unite around a common goal, but it can also produce a kind of myopia about growth’s pitfalls.
Uber’s China operation shows that growth can mask (and cause!) profitability issues — and that’s just one of many possible problems. As Facebook’s number of monthly unique users has grown, for instance, the company has struggled with data security issues and the spread of misinformation on its massive platform.
Meanwhile The Wing, a women’s coworking space, has struggled to create an inclusive culture as it has grown aggressively.
“There comes a time when your employees and customers know your business better than you do and when slowing down to listen becomes the smartest (and most strategic) thing you can do.”
“[W]e prioritized business growth over cultural growth,” The Wing co-founder Audrey Gelman wrote in Fast Company. “There comes a time when your employees and customers know your business better than you do and when slowing down to listen becomes the smartest (and most strategic) thing you can do.”
In other words: Slowing down and thinking about intangibles like “culture” may be the ultimate long-term growth strategy. Zepeda is certainly a fan.
Reimagining Startup Funding
Even though venture capitalists are investing more cautiously, this new approach to growth requires entirely new funding models too. Zebras Unite hosts events and festivals, functioning almost as a decentralized think tank for dreaming up new paths to liquidity and capital.
Zepeda names several alternative models that she’s seen zebra-style companies trying, including “exit to community.” This is an alternate type of liquidity event, where instead of exiting by getting acquired or going public, a startup’s founders sell their company to the people who value it most.
Nathan Schneider, who coined the term “exit to community,” explains:
Those people [who founders sell their equity to] might be users, workers, customers, participant organizations, or a combination of such stakeholder groups. The mechanism for co-ownership might be a cooperative, a trust, or even crypto-tokens. The community might own the whole company when the process is over, or just a substantial-enough part of it to make a difference.
This could turn into a worker’s co-op, or something a little more heterogeneous — it all depends.
Meanwhile, zebras and investors alike are exploring new ways for startups to access capital. Some zebras are experimenting with becoming nonprofits and fundraising that way. Investors, too, are trying out new forms of investment — like buying equity to get a share of the company’s future profits, rather than in the hopes of a prompt liquidity event. The New York Times reports that the handful of firms experimenting with this, like Earnest Capital, are drawing interest from startups.
Ultimately, Zepeda hopes that these alternatives give zebra-style companies room to thrive, collaborate and focus on their impact.
“Zebras are fundamentally concerned with solving problems, not selling widgets.”
Zebra-style companies “tend to be founded by people who are experienced in the problem space themselves,” she explained. “Zebras are fundamentally concerned with solving problems, not selling widgets.”
Zepeda herself has worked in journalism and higher education; now, at Switchboard, she helps newspapers and educational institutions build feedback loops with their readers and students, so they can better meet people’s needs.
“That’s just like a different orientation that requires a different type of growth,” she said.
At Switchboard, for instance, the focus is on growing “user success.” This is a broad umbrella term for a lot of different metrics. How many questions are institutions asking on Switchboard, and at what rate are their constituents responding? When institutions change their community engagement strategies based on Switchboard feedback, is that profitable for them?
More broadly, Zepeda said: “Are they seeing people engaging more deeply in their brand and coming back to give in time, talent and treasure because they feel cared for?”
In other words — are institutions seeing longer-term, more loyal engagement from the communities they aim to serve?
These questions all have measurable answers, but, ultimately, Zepeda hopes Switchboard doesn’t succumb to the “tyranny of the quantifiable.” She cares about qualitative issues too, like building trust and reciprocity between institutions and individuals on the client side, and, internally, about letting “people show up as themselves when they come to work.”
Although core growth metrics are trackable and useful, they can’t — and shouldn’t! — replace vision and values.