Growing Like Groupon: How NOT to Grow Too Fast

Growing Like Groupon: How NOT to Grow Too Fast

In today’s hyper-fast business world, we watch startups like Groupon go from zero to billions seemingly overnight.

It’s tempting to measure ourselves by these examples and to feel wholly inadequate. Personally, I have to wonder: Why isn’t my businesses growing as fast as these new-age juggernauts? What am I doing wrong?

Why the 'New Normal' Isn't

The truth is, Groupon-style growth is neither normal nor sustainable, and no “normal” company should worry about emulating it. The reason for this is two-fold:

1. Without VC money to flush down the toilet, you must fund you own growth
2. Your funding is mathematically limited by actual profits.

Let's take a closer look at this simple logic.

Calculating Sustainable Growth

Normal companies are profitable, not venture-funded. Not all businesses are venture funded (thank God), and not all entrepreneurs want to sell their souls to a VC. Although VC money powers rapid growth, 99.9% of companies will never see a dime of VC investment.

I’m guessing that your “normal” company is not funded by VC and instead relies on profits to fuel growth. (Groupon, meanwhile, has burned through almost a billion dollars of venture capital.)

Profitable companies have limits... Believe it or not, growth is naturally limited in a profitable company that is not venture-funded. Big companies figured this out decades ago. In fact, Hewlett Packard pioneered the term “Affordable Growth Rate” to describe the maximum speed of growth at HP in the 1950s.

HP's Affordable Growth Rate formula is a good (and easy to calculate) method that any profitable company can use.

...And that limit is the Affordable Growth Rate. Your Affordable Growth Rate (AGR) is the percentage that your sales can grow year over year. If your sales doubled, that’s 100 percent growth – that much is simple. But sales growth is limited by your ability to fund new sales.

So -- how fast can your business grow? Calculate your maximum AGR by dividing this year’s net profits by last year's equity. [More specifically, AGR = (this year’s after tax retained profits) / (Stockholders' tangible equity at the end of last year).]

Hewlett Packard used this equation to limit its own growth. Yes, that’s right, they wanted to limit growth.

Why? Because growing sales faster than the rest of your business is a sure way to get yourself into financial trouble. HP knew that sales have to be financed (computers have to be built, sales people paid, etc.), and financing comes either from your own assets (cash) or what you can borrow against those assets (loans).

Sustainable Growth Is Good Growth

There’s no magic formula for unlimited growth in a normal company. In fact, just the opposite. Your AGR is a rather good formula (perhaps not magic) to show why growth should be limited. You can only grow as fast as your profits (and equity growth) allow.

Not even Groupon can change the fundamentals of sustainable growth. (And a few rational investors have seen this in their analysis of the Groupon IPO.)

So whether you make lunch boxes or machine tools, websites or weed-whackers, take note. Make your best effort to grow – just be sure that the growth is sustainable by sticking to your AGR limits.

Dedicated to your (Growing!) profits,

David

By: David Worrell