How Fast Is Too Fast For Your Startup To Grow?
“We are going to grow our earnings by one penny per share per quarter,” Jack Gifford, Maxim Integrated Products founding CEO, regularly said to public market sell side analysts. And every quarter, like a clock, the company grew earnings at one penny per quarter or better.
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It sounds boring doesn’t it? One penny per quarter growth in earnings. However, those bottom line numbers compound. Soon, your earning grow pretty quickly.
Investors that held the stock long term were richly rewarded. With this strategy Maxim’s stock grew in value over 20,000% in a ten year span. That means if you invested $1000, your investment would have been worth $2,000,000.
Controlled growth is one of the greatest lessons I ever learned.
I had a front row seat as a key member of the team Gifford built to grow Maxim into a greater than billion dollar revenue company. There were so many great lessons I learned during my ten plus years at Maxim. One of the greatest lessons was the concept of controlled growth.
The concept of controlled growth is simple to understand, but it’s hard to implement. Once you hit “scale”, you want to grow your top and bottom line in a predictable manner.
In Maxim’s case, it meant growing revenue a 30–50% clip every year. Before you know it, a $100 million revenue company becomes a billion dollar revenue company.
You should see increased profitability as your revenue grows.
Your gross margins and your profitability should start increasing as your revenue increases. Or, if you’re not profitable, then you should hit break even at some point as your revenue increases.
Where you hit break even depends on the type of company you’re building. In my world of analog semiconductors, you should hit break even revenue around $20 million.
Your costs will determine where you hit break even.
However, I’m involved with another company in the semiconductor space that will not hit break even until revenue exceeds over $100 million per year. The reason is there are significant costs involved in building their business.
And, there are some businesses that will never turn a profit. Look at Uber, for example.
Uber, as of the end of 2021, has revenue over $17 billion. Yet, it is still losing money. In fact, the company has lost money since it started with no end in sight.
This is not a business model I’d recommend for anyone to emulate.
You keep the quality of your team high when you control your growth.
The silent killer of startups, in fact any company, as they scale is keeping the talent level high. The faster you grow, the more difficult it is to keep the talent level high.
Who hasn’t been in a company where you’re saying to yourself, “We would have never hired ‘that person’ in the early days?” Controlled growth prevents, or at least minimizes, the risk growing faster than you can add quality talent.
Your ability to add quality content should be the constraint on your growth.
Remember I made the “we would have never hired ‘that person’ comment earlier. Well, Maxim fell into the same trap when it grew from $500 million to $1 billion in revenue.
The talent dipped as the push for growth increased. It’s the law of bigger and bigger numbers. You have to hire an ever increasing number of high quality employees each year, and we couldn’t keep up.
That’s only the beginning of the problem. The real problem is the latency effect when you hire less than top talent.
It takes two years or more for dilution of your talent to hurt your company. By the time you realize the problem you’ve created, it’s almost too late to fix the problem.
Your best people start to leave. Your revenue growth and profitability has slowed. And, it becomes harder to hire great people.
That’s why managing your growth in a controlled way is so critical to your company. Do it right, and you’ll experience long term success. Do it wrong, and you’ll crash and burn.