The Myth of "Hockey Stick" Growth

Investors won't fall for those fanciful growth charts that are typical of startups. Here's the disconnect that dooms pitches

Written by David Crow

“The only essential thing is growth. Everything else we associate with startups follows from growth.”
€“ Paul Graham, programmer and investor

It often seems that entrepreneurs are obligated to include a hockey-stick growth curve in their pitch deck to potential investors — regardless of the actual traction or revenue growth. You know that investors want to see momentum. They are looking for data that demonstrates a startup is moving up and to the right.

The challenge is that most startups have traction that looks like Paul Graham’s startup curve.

The reality is that there is no “right” number that makes investors throw money at startups. What matters most are not the numbers you use in the pitch, but your understanding of the key aspects of the underlying business.

The specific numbers an entrepreneur pitches when describing her early stage business are completely made up. €“David Hornik, August Capital

So it doesn’t matter if you fake it before you make it. What matters is that you document your assumptions about customers, customer acquisition costs, pricing, monetization and the marketing. Investors need to see that entrepreneurs understand what factors drive their business.

What assumptions about the business is the entrepreneur making? Are the assumptions valid? Does the data validate the assumptions? How much will it cost to acquire a customer? How long is a typical sales cycle? How many web visitors convert to trial users? How many trial users convert to paid users? How long will it take your team to engineer and deliver functionality?

A startup is a search for a repeatable and scalable business model. €“ Steve Blank, author of The Startup Owner’s Handbook

The problem is not that entrepreneurs use projections, but that they present models disconnected from the minute data they have collect. At each stage, a startup seeks to formulate and test hypotheses related to its business model. This data should be used to provide insight and validation about all aspects of the business model.

David Skok, a serial entrepreneur turned venture capitalist, summarizes startup business models as trying to answer two questions:

  • Can you find a scalable way to acquire customers?
  • Can you then monetize those customers at a significantly higher level than your cost of acquisition?

So next time you pitch investors, remember that you’re using the traction and momentum numbers to convey the validity of your underlying assumptions about the business opportunity. I’d rather see a smaller number built on a foundation of assumptions that have been verified than a large number that you’ve pulled out of thin air. The growth curve does not always need to be a hockey stick, up and to the right.

David Crow (@davidcrow) is an entrepreneur focused on marketing automation products, in particular customer acquisition and product/market fit. He is a blogger and an advisor/angel for early-stage startups, including Upverter, Send With Us, Quantify Labs, TribeHR, Bunch, and HackerYou. He is also a Jolt mentor and the Evangelist-in-Residence at OMERS Ventures, the venture capital arm of OMERS. Prior to OMERS Ventures, David was the founder of Influitive, an advocate automation platform that allows B2B marketers to capture customer enthusiasm and use it to turbocharge marketing and sales efforts. He has held product and marketing roles at both startups and large companies including Microsoft, Reactivity and Trilogy. David holds a MS in Human-Computer Interaction from Carnegie Mellon University and a BSc from the University of Waterloo.

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