Why Hypergrowth Isn’t Just Hype

The past several years have been a rough ride for a concept that was once a true tech darling: hypergrowth.

Before the sink in capital markets and the rise of scripted, cautionary dramas about the public foibles of companies like WeWork and Uber, hypergrowth was the go-to strategy for startups of all stripes, who eagerly followed the template of true disruptors like Amazon and Netflix by tabling the issue of immediate profitability in favor of pursuing sheer scale as a means of changing broader consumer behaviors.

But with the stumbles of a few high-profile adherents, the term has gone from pitch deck must-have to a verifiable meeting-ender. And while it may be convenient to label hypergrowth as an excess-soaked sign of the times in the tradition of junk bonds and subprime mortgages, doing so would be to completely misunderstand what the concept really means.

In fact, hypergrowth remains a highly effective business strategy for both founders and investors that will continue to launch countless successful startups, spur numerous interesting pivots, and create some of the most powerful companies in the world.

But every entrepreneur on its frenetic path should also be aware that hypergrowth is not a synonym for “growth at all costs,” is not supposed to last forever, and could lead to a very painful transition as their company matures.

The roots of hypergrowth

Before diving into hypergrowth, it’s important to understand why it’s a thing in the first place. This starts with an acknowledgment that capital markets tend to value companies in one of two ways: their performance or their potential.

A large, established performance company is judged mainly on turning in consistent and predictable cash flow, delivering money to the shareholders through dividends, and doing it all over again the following quarter. Every early-stage entrepreneur obviously aspires to graduate their company into this category, but they will likely first spend years being judged – as most aspirants in life are – on their potential. And the best way to be valued on your potential when you’re a young company is to grow really, really fast.

Enter the concept of hypergrowth, an elite category made up of smaller, generally earlier-stage ventures that have achieved a compound annual growth rate (CAGR) of at least 20%. While this number is generally considered a solid benchmark, CAGR rates for hypergrowth companies can actually reach much higher. For example, a good company with under $100 million in revenue can readily achieve a CAGR in excess of 40% based largely on the small numerator involved.

Let me stress that this rate of growth is not a bad thing; it’s the whole point. After all, nobody wants to invest in a mediocre-growth company. However, it is also not a sustainable strategy. In fact, once your company starts to generate hundreds of millions of dollars of revenue, your growth rate will naturally slow unless you have a radically good product market fit and an ultra-scalable business.

A slowing growth rate is fine – even expected. World-leading companies like Apple or Google may not sport massive quarter-over-quarter revenue leaps, but they obviously have hugely profitable businesses that have flourished in the wake of the same transition all successful early-stage companies will eventually have to make: from hypergrowth to sustainable growth.

From potential to performance

If they’re interviewed in the early days of their company, any entrepreneur is likely to answer that they're setting out to grow fast and build a sustainable, profitable company. After all, everybody wants hypergrowth that's truly sustainable in the way everyone wants a car that can go 150 mph AND gets amazing mileage.

But trying too hard to be sustainable on day one severely inhibits an entrepreneur’s ability to learn if they have the potential to be a run-away hit, which is what everyone signed on to your business for in the first place. It may be an imperfect analogy, but you don’t win a game of Monopoly by sitting on your stash and hoping you magically land on a vacant Park Place-Boardwalk combo in successive turns. You do it by buying up as much of the board as you can (not the utilities, btw) and taking control of the game to any extent you can. Is it expensive? You bet. But in the early stages of your business, cost is a vastly secondary consideration to discovering the potential of your endeavor.

This is why hypergrowth and sustainable growth are best employed as distinct and separate strategies designed to solve two fundamentally different challenges.

When you first start a business, you’re looking to answer a single existential question: Will people use your product? And the best way to determine this is through hypergrowth, which allows you to scale your thesis against the widest sample size possible.

If your business passes this test, you must then transition to answering a second question: Will your business work? And you do this by transitioning into sustainable growth.

Hypergrowth is intended to push the accelerator to the floor so you know how fast the business can go based on testing the limit of its product-market fit. And once you get a clear read of the tachometer, you drop your speed and shift to a sustainable growth strategy that involves finding the perfect cross-section between speed and efficiency that will help you win the long race ahead.

Can you compete without testing your limits in this way? Sure, but in essence you'll be going into the big race without any idea of what your engine is really capable of.

A sometimes painful transition

Hypergrowth doesn’t inherently mean “irrational and reckless” any more than sustainable growth automatically means ”predictable and profitable.” In fact, companies in both categories can be managed responsibly and rationally and achieve amazing results. 

The transition from hypergrowth to sustainable growth must be handled in a similar spirit, as it represents a very real opportunity to change your footing and keep the existing flywheel of your revenue and existing customers turning, while simultaneously making serious decisions about the long-term future of your business.

But this moment will not be fun. Seemingly overnight, you'll no longer be valued on the promise of your business model and your impressive team, but on a comprehensive set of rigorous KPIs related to how you operate the business.

Founders will exit, people will leave, and teams will turn over because a whole new race is about to start that involves lowering your burn rate, capital expenditures, and possibly even your headcount. You may experience layoffs, new leadership, and an entirely new set of goals centered squarely on achieving your new goal: profitability.

These are the agonizing, but sometimes necessary consequences of playing by a new set of rules that can demand vast operational and organizational changes in your business. Often, the full-body shock of this transition is mistaken for bad news – and it certainly can be if you fail to address the new paradigm in front of you.

But if you’re able to navigate the new rules driving your business while enduring the initial system shock, the move from potential to performance will represent an important strategy shift that leaves you well-positioned for a long and profitable future.