“Science fiction does not remain fiction for long. And certainly not on the Internet.” – Vint Cerf
By Ed Emerson
Running an online services business? Then grow fast or die slowly.
The insights of Eric Kutcher, Olivia Nottebohm, and Kara Sprague at McKinsey & Co are a boon to high growth business leaders in this space, including:
- Looking at growth as an endgame
- Sustaining growth is really hard (no surprises there), and
- There’s a recipe for making it work.
The Growth Endgame
It should not come as an eyebrow raiser that growth yields greater returns. McKinsey’s worldwide research on the lifecycles of circa 3,000 software and online-services companies between 1980 and 2012 revealed much the same.
What might come as a surprise is that growth rate predicts long-term success, and that high growth companies (10% growth and above year-on-year over a three year stretch) deliver an average 5x multiple return to shareholders. Additionally, those deemed “Supergrowers” (a growth rate of 60% and above year-on-year when they have achieved $100 million in revenues) are 8x more likely to reach $1 billion in revenues than those growing at less than 20%.
First, the facts aren’t pretty. According to the research only 28% of internet-service companies make it to the $100 million revenue mark, and the cull gets steeper as just 3% percent reach the “Unicorn” $1 billion mark. And that success is fleeting. Almost 85% can’t maintain their growth rates, and once it’s gone it’s hard to recoup – less than a quarter were able to do so.
The Growth Recipe
McKinsey’s research found that growth occurs in three critical phases described as the prelude, act one and act two, with five enablers for high level and sustained growth, including:
- Picking The Right Market – The “limitless” audience with millions of potential product end-users
- The Monetization Model – Start with foundations that can be scalable without having to be changed later – that will help avoid huge customer disruption in future
- Rapid Adoption – Don’t focus on “the whale” accounts and get caught up in their demands, drag the ocean you’re fishing with the net you brought from the prelude stage. If it doesn’t work, get a new net
- Stealth – Paranoia is a virtue. Keep things quiet when you’re product testing and don’t bet the house on IP protection. Bigger businesses have bigger legal budgets, and
- Incentives – Keep your leadership team committed, in terms of both culture and cash.
This is the phase where you are testing the fit between your product and the market. The goal is to find an offer, business model and the processes to support it that appeal to a clearly defined customer audience. Like the point above about growth yielding higher returns, this should come as no surprise and a great deal of research has been done in this area.
Here’s where things get interesting, but only if the prelude is executed effectively. In truth most companies fall down at the above stage without ever even realising it, and then fight for growth for years without properly revisiting the offer, model and business process. It’s a death-knell struggle where ten years on owners wonder why they can’t pull off steady year-on-year profit growth or a more than regional business presence. In the prelude, frustration through business blindness reigns supreme.
Those that make it to act one then laser focus service offerings to the customer base and scale those offerings by proving the business model in market conditions. This is often when founders turn to an IPO for global growth financing as expansion moves the product/service base to new geographies. During this phase the adoption curve often reaches its natural conclusion, and that’s when the second offer – and second act – is a requirement for continued growth. It’s also the space when founders jump ship.
Now the tide turns. And the key to growth success is how you manage the transition. While your marketplace footholds are established, they are still only that; footholds. When factors like natural market size and share limits come into play, three successful strategies can assist your business in getting through these boundaries:
- Expand Act One – New/more geographies, outlets and categories for those whose target markets are truly “limitless” as described above
- Adjacent Markets – Usually by acquisition, extending the existing business model into a market linked to the current product/service offering by adopting/merging/buying into another business(es), and
- Your Ecosystem – This when the initial product/service offering becomes a platform from which multiple additional product/services can be launched. Timing the transition from act one to act two requires good advice and a years supply of your favourite heartburn cure
Awareness leads to success. High growth company leaders should always keep these three questions in mind to accelerate business growth:
- How fast does the business need to grow and how quickly does that growth need to happen?
- Do I know how much space remains for the business to grow in our current markets?
- What are the remaining product/service opportunities there?
Broad Brushstroke: The Online User Market
Over the last 10 years the number of worldwide internet users has grown to nearly 3 billion people, with expectations of of an additional billion by 2017, largely from mobile devices in emerging markets.
The charts below show the rise in the number of internet users globally from 2000 to 2014 (in millions – as at 2014, internet users worldwide topped 2.9 billion, up from 2.71 billion in 2013), internet use by geography and the top 25 regions.
(Image Courtesy: Statista)
(Image Courtesy: Internetworldstats.com)
Global Internet: The Top 25 Regions
(Image Courtesy: Internet Live Stats)