How Things Work
Too Much of a Good Thing? How to Manage Hockey Stick Growth
April 26, 2022 |
The C2FO Team
Hockey stick growth can be a blessing and a curse. Here’s how to manage rapid expansion without ruining your company.
Hockey stick growth sounds like something practically every business on the planet should want. Who wouldn’t enjoy rapid, exponential growth?
And yes, it can be amazing for the companies that get to experience it — if they have the resources and knowledge to manage it successfully. Unfortunately, not every company does. High growth can put tremendous pressure on a business that isn’t prepared for it.
Why is it called hockey stick growth?
With this type of business growth, if you plot it on a chart, it looks almost exactly like a hockey stick.
The stick’s blade represents the period of time when a company is experiencing almost no growth.
But the importance of the “blade years” shouldn’t be underestimated. Generally, this is the time in which company founders and early employees work hard to fine-tune the reliable delivery of products and provide service to a steady rate of customers. They’re figuring out what does and doesn’t work, and they’re building all the pieces that will help drive growth later.
Business history is filled with “overnight success” stories of companies that have actually been around for years. Eventually, there’s an inflection point where the growth rate turns upward sharply.
Inflection is a change in direction
What causes an inflection point? The reasons are numerous and often unpredictable. On the customer-facing front end, the upturn could be caused by the introduction of a new product or service, or a sudden explosion in consumer demand. Maybe you land a major new enterprise customer.
On the back end, a company might have incorporated an advanced technology that improves production and operations. Or a change in government regulations opens up new markets and decreases trade costs.
As Investopedia notes: “If the shift occurs over a short period, it is important to determine if the shift is an aberration or if it represents a fundamental change.”
The problems of sudden growth
When most people talk about hockey stick growth, their focus is on the long, straight rise of growth. And not just inside the business. Surging revenues are noticeable from the outside, too. Venture capitalists, credit ratings analysts and the media watch these metrics very closely.
But, as exciting as rapid growth is, seasoned managers know that hockey stick growth could cause potential problems for their companies. It can be especially challenging for small businesses that may lack capital and expertise. For example:
Company owners may be forced to quickly make large investments without the proper due diligence to scale up operations and meet the growth in demand.
Expenses skyrocket along with revenues. Company owners may find themselves going into debt to keep up with unplanned costs.
The company may not qualify for extra funding. If hockey stick growth strikes very early in a company’s existence, lenders and investors might refuse to provide the funds the company needs to keep growing.
Set up strategies to manage hockey stick growth
With hockey stick growth, company founders must transform the sudden phenomenon of “surging growth” into a steady state of “consistent growth.”
From an operations perspective, some strategies to consider:
Upgrading your leadership
The skills required to start a company are often different from the ones required to manage skyrocketing growth. To successfully harness hockey stick growth, you may need to bring in a new CEO familiar with working at a larger scale. That person will probably have experience setting up larger systems and overseeing larger teams.
At Andreessen Horowitz, the famous venture capital firm, one of its general partners blogged about his own experience: “Each founder has to weigh their own situation, and their calculus could come out differently. For me, bringing in an external full-time CEO was an enormous win.”
Or, instead of swapping out the CEO, you could surround that person with other seasoned leaders.
MIT Sloan Management Review analyzed how Facebook handled its period of high growth. One key was bringing on a seasoned COO in Sheryl Sandberg: “The Zuckerberg/Sandberg story is a common one among high-growth organizations. Founders who possess the entrepreneurial skills to build a new venture may lack the competencies and judgment required to lead their companies through later stages of growth and complexity.”
Making time for resiliency planning
The past two years have made everyone an expert in resilience. Harvard Business Review writes: “It’s not surprising then that resilience—the ability to thrive under change—has risen to the top of many leaders’ agenda.”
By studying all the things that could go wrong — and thinking about how you could respond — you’ll give yourself a head start when facing challenging circumstances. Case in point: You might realize that your entire operation will shut down if one key supplier can’t deliver like it normally does. And that could lead you to finding other suppliers or making adjustments to your product.
Managing working capital for growth –– without growing debt
Working capital is the difference between a company’s current assets (such as accounts receivable) and current liabilities (such as accounts payable). Basically, it’s the resources that you have free and available to invest in your business, so you can continue growing.
You can increase your working capital by offering discounts to customers for early payments. To keep up with sudden growth, some companies turn to financing, such as asset-based lending and lines of credit. But taking more control of cash flow is faster and easier, and it usually provides a lower cost of capital than other sources of funding.
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The bottom line
Hockey stick growth can be — and should be — a great thing for a business. But companies must do what they can to prepare for a sudden surge in demand, whether that means developing contingency plans, building up working capital or even rethinking their leadership.