Beware The Annual Growth Rate Trap

In the world of startups, we are bombarded with news every day of high growth companies and skyrocketing valuations. We enter every budgeting and forecast process with the weight of the expectations of our board, our employees, and even ourselves to deliver high growth revenue targets that will inspire and excite.

When a company is in a growth phase where everything is up and to the right, it can be easy to deliver on those expectations.

But when you hit a few rough quarters…and you will hit a few rough quarters…the annual growth rate comparisons can lead you into a trap.

When is 10% annual growth an aggressive goal? 10%? It’s barely double digits!

In the simple example above, to deliver just 10% of annual revenue growth, you need to be able to deliver 70% year-over-year growth in Q4. Possible? Maybe. But you had better really understand what is driving that level of growth. What are the assumptions around the KPIs that will shift momentum? Are they reasonable? Where is the risk, and what happens if you fall short.

I don’t have hard rules around growth rates in budgets. When a company delivers a few quarters of revenue that is sequentially down, at some point you have build in assumptions that will point to a turn in momentum to get back to even modest levels of growth.

But you need to build those plans with your eyes wide open.

First, don’t get pushed into more aggressive annual growth rates when the quarterly numbers don’t make sense. It’s very easy for a board member or investor to scoff at 10% growth. But it can represent a huge accomplishment when it represents a real shift in momentum from quarterly declines.

Second, be prepared for your turnaround plan to fall short, and don’t risk the company on the one big swing to start growing again.

You might be just a few tweaks to your execution plan away from the world of high growth.

Or you might be back on the product-market fit journey. Until you know, watch your KPIs, focus on great execution, and lean in when you know the flywheel is starting to spin again.

Don’t frontend load all of your investment on the big bet of that fourth quarter growth. Because if that growth doesn’t materialize, you want to be sure you have the cash in the bank to continue to work the problem.